Recent unofficial reports that Estonia is working on a possible initial coin offering for participants in the country’s e-Residency programme have sparked a debate on whether EU law permits a country in the eurozone to offer a cryptocurrency.
Kaspar Korjus, managing director of Estonia’s e-Residency programme, posted a blog article entitled “Estonia could offer ‘estcoins’ to e-residents.” Although he was probably misunderstood and the article was initially mistaken for an official position on cryptocurrencies by the Estonian government, it raised a serious issue involving EU law. Whether a country in the eurozone can issue its own cryptocurrency generated lots of controversy as well as ideas for a potential solution. No one from the Bank of Estonia has confirmed any aspect of the conception described in the article, but the possibility of carrying out some of the ideas presented in the article is worth examining.
Estonia’s bold plan and its e-Residency programme
Estonia is one of the leaders in the European market for new technologies, particularly when it comes to implementing specific tech solutions and building a legal environment fostering the development of technology. (We wrote about anticipated Estonian regulations on artificial intelligence here.) The Estonian government’s most dynamic and impressive project is the e-Residency system, allowing any person, of whatever nationality, to apply online for the status of an Estonian resident, with access to a broad range of public internet services as a well-developed business environment. This possibility, combined with minimal bureaucracy and a transparent tax system, has made it popular for entrepreneurs to establish and operate businesses under Estonian jurisdiction regardless of the physical location of their operations. The programme has enjoyed huge success, and since its launch in 2014 over 26,000 people have become e-residents of Estonia. As Korjus argued in his article of 22 August 2017, this developed system could serve as the basis for issuing tokens via an ICO procedure.
The e-Residency programme has attracted many entrepreneurs involved in FinTech, blockchain and virtual currencies. And with its digital and legal infrastructure, Estonia is well-placed to issue and securely manage cryptocurrencies on a global scale.
The programme, which Korjus calls “Estcoin,” would offer virtual currency—estcoins—to e-residents in an ICO under rules similar to those currently used on the crowdfunding market. The proceeds of the offering would be devoted to further development of digital services, and the value of the digital assets would depend on the effectiveness of the measures pursued by Estonian institutions. The coins themselves could also be used to conclude smart contracts or create separate venture capital systems, and the offering could be conducted on the basis of a public-private partnership. Over time estcoins could be introduced into everyday circulation for private and public transactions, and could also lead to creation of a system of notarial services based entirely on blockchain technology.
The proposal presented by Korjus is a bold vision. Despite gaining the indirect support of Vitalik Buterin, the founder of Ethereum, one of the largest blockchain networks, it is not part of any official policy platform of Estonia, but only a nonbinding proposal. It has nonetheless sparked extensive debate and raised the question of the legality of the proposed solutions under EU law.
Estonian proposal and EU regulations
The clearest statement on the proposal was made by Mario Draghi, president of the European Central Bank, who said flatly, “No member state can introduce its own currency. The currency of the euro zone is the euro.” This position represents a continuation of the ECB’s scepticism toward cryptocurrencies.
This position is obviously consistent with EU law and follows from the current form of monetary union presented for example in the EU treaties. Under Community law, Estonia has no ability to issue its own currency. But the legal problem is entirely different from the issue considered by the ECB. It is does not involve the potential issue of currency by Estonia, but whether estcoins could be regarded as a currency at all. Under existing law, without clear regulation of virtual currencies, such a classification raises huge doubts.
The lack of clarity in the legal classification of cryptocurrencies is reflected in the European Parliament resolution of 26 May 2016 on virtual currencies (2016/2007(INI)). The resolution recognises that no “universally applicable definition” of virtual currencies has been established, but they are regarded as “a digital representation of value that is neither issued by a central bank or a public authority nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment, and can be transferred, stored or traded electronically.” This understanding of virtual currencies fully applies to the concept of estcoin, which in addition to serving as a payment instrument could also serve as the foundation for a system of smart contracts between e-residents. At the same time, under the proposal, estcoins would be distributed under an ICO procedure by a public-private partnership, which could also raise doubts whether this could be regarded as an issue of new currency in the traditional sense.
The absence of clear regulations was also confirmed by the ECB in its analysis of virtual currencies in 2015, recognising that in the current understanding of the term, virtual currencies do not fit within the traditional meaning of money or currency from an economic or legal point of view. Instead, the ECB suggests, “For various regulatory and other purposes, it is important to define or classify virtual currencies, but the definition tends to vary depending on the context, e.g. taxation, the registration and licensing of market participants or anti-money laundering.”
All of this indicates that it is not obvious at all that Estonia cannot create estcoin. It will depend mainly on the regulations proposed in the EU, particularly the legal definition of such assets. Given the lack of existing unequivocal regulations, Kaspar Korjus’s proposal may not be inconsistent with current EU law.
Adam Polanowski