The cryptocurrency trend is moving forward at a full pace. New crypto businesses are popping up everywhere. One of the biggest trends and business opportunities seems to be a cryptocurrency exchange, especially as some countries are banning or have already banned the business model, which gives opportunities for the newcomers.
If and when you want to start a cryptocurrency exchange, there are different factors that you need to consider. First, it takes a certain amount of capital. It cannot be done successfully with a very little budget, nor it can be done by one man team. It’s just not realistic.
Estonian Crypto Legislation
The activities related to the conversion of cryptocurrency against fiat currency (or other cryptocurrencies), and the provision of wallet services are regulated by the Money Laundering and Territorial Financing Prevention Act and requires obtaining two licenses issued by the Financial Intelligence Unit of Estonia, a branch of the Police Department:
- Virtual Currency Exchange Service License, which authorizes business to offer crypto to crypto or crypto to fiat trading.
- Virtual Currency Wallet Service, which authorizes to provide funds custody services, when the company generates keys for Clients or keeps Clients’ encrypted keys.
All companies that operate a centralized Exchange from Estonia (either incorporated in Estonia or through a branch office of an incorporated company elsewhere) require both licenses.
Both applications can be made simultaneously and remotely and must be submitted to the Register of Economic Activities in Estonia.
Usually, the approval or rejection takes one month after submission.
The process of building a cryptocurrency company
You need the tech staff and the software solution, be it a white label or developed in-house. Both options may work out fine, and both options require investment.
Additionally, you’ll need to have the compliance team and the compliance officer (a lawyer), a customer support team and marketing team for all the different markets you operate in. You cannot serve Chinese clients without Chinese customer support. In the same way, you cannot market to China market without China marketing expertise.
Then there are regulatory matters. You need to decide where your cryptocurrency exchange will be licensed and where the legal entity will be registered.
Due to the fact that Estonia is known as a digital nation with simple company setup procedures and favourable taxation. Estonia is also one of the few countries that have a specific license issued for cryptocurrency exchanges. This means there are no uncertainties towards the business model.
To set up a cryptocurrency exchange in Estonia you need to obtain the activity license for providing services of exchanging a virtual currency against a fiat currency. This activity license is regulated by the Money Laundering and Terrorist Financing Prevention Act and the supervision is done by The Financial Intelligence Unit of Estonia.
For the grant of an active license, your undertaking, a member of its management body, procurator, beneficial owner and an owner cannot have any unexpired penalty for a criminal offence against the authority of the state, the criminal offence relating to money laundering or another wilfully committed criminal offence.
As a foreigner, you have to be able to prove that you hold no criminal offences by submitting your criminal record together with the application of the Financial Services activity license.
Additionally, the description of the KYC/AML procedures and internal audit procedures of the company has to be submitted together with the application.
Once the application is submitted, you will receive an answer within 30 days. The state fee is 345€.
This, in short, is the description of applying for the cryptocurrency exchange license in Estonia. It’s relatively short and simple process compared to the most other countries.
Obtaining the bank account.
In all fairness, it can be quite complicated. There’s currently only one bank that works with cryptocurrency exchanges (Coinbase has an account in Estonia as well in the same bank), and all decisions are made on the management board level regarding cryptocurrency businesses.
With each case, we see the bank’s representative and talk it through case by case basis.
On the bright side, you can also work out a solution in Switzerland, which may ease the banking issue.
Also published on Medium.