Supreme Court subjects Bitcoins trade to money laundering rules

Aivar Pau
, tech journalist
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Photo: The Canadian Press / Scanpix

Yesterday's verdict put an end to longstanding doubts whether trades with the cyber money should be treated as economic activity requiring special permit or not – in a landmark stand, Supreme Court declared mediation of Bitcoins an economic activity subject to anti-money-laundering supervision. 

The case leading to the judgement had its beginning in March 2014 as a Dutchman residing in Estonia, Otto Albert de Voogd, launched web environment via which he offered the opportunity to acquire or sell the virtual currency Bitcoin. Mr Voogd claimed to mediate the money as his hobby; meanwhile, several signs pointed to intentional business activity – for instance, payments for the service were by cash or transfer.

-A court dispute of principle

And that vas the very thing that inspired a desire in Financial Intelligence Unit at police (FIU) to search it out; thus, both orally and in writing they proceeded to pose several questions to Mr de Voogd. As an example of that, FIU asked to be shown bank account numbers and owners where the money made from mediation of Bitcoins was being sent. As a reply, however, a notice came on April 21st 2014 of Mr de Voogd having sued the unit.

Namely, de Voogd was of the opinion that his activity remained outside Money Laundering (and Terrorist Financing) Prevention Act,  and FIU was not competent to exercise supervision over transactions with Bitcoins. Pretty soon, he halted his activities in Estonia and departed; the court saga continued, however, aimed at answering a matter of principle: is the moving of Bitcoins financial activity or not?

Now, yesterday and having passed all three instances of court, it was conclusively and officially determined that as Bitcoin comes with monetary value and thus allows discharging of obligations, trading therewith is economic activity. As also formerly underlined by European Court of Justice: the virtual currency Bitcoin has no other meaning than to be used as a means of payment.

Thus, pursuant to materials of the court case it made no difference whether Mr de Voogd saw his activity as a hobby or something else – this in no way excluded the suspicion by Financial Intelligence Unit that his activity may have met the criteria of a provider of alternative means of payment.  

«Buying and selling of Bitcoins as economic activity was pointed to by the expected continuance of the activity of the addressee of the prescript, the alleged existence of an office, payment options both by transfer and cash, as well as the sufficient likelihood of the activity targeted towards a profit,» reads the court judgment.

Supreme Court rejected the claim by de Voogd that his activity could in no way be linked with Estonia as the portal was not located in Estonian servers. «The activity of Mr de Voogd had a sufficient link with Estonia in order to have obligations and restrictions as prescribed by Estonian law extended to him. Irrespective of location of server, Estonia was among the places of activity of appellant and, among other things, the website had been created for Estonian clientele and the transactions could be paid for in cash at an office in Tallinn,» the court found.

Also irrelevant in the opinion of the court was the fact that Bitcoin was created much later than Estonian laws treating alternative means of payment. «The fact that the virtual currency Bitcoin was not yet created during the time the draft act was compiled and passed does not mean that the concept of alternative means of payment provider may not cover providers of virtual currency mediation,» the Supreme Court ruled.

However, the court noted that the legislator might specify the conditions set to provision of services of alternative means of payment, as while requiring that cyber money providers comply with money laundering prevention act new legal disputes may be triggered which could be avoided by specifying the requirements.

- Law must stay relevant

The same conclusion was arrived at by Estonian Cryptocurrency Association, thus far a silent party in the court saga at hand.

«We respect the court judgment and we particularly recognise the seriousness with which the subject was approached. Money laundering regulations are obviously necessary, while there is also the issue of volumes,» Estonian Cryptocurrency Association board member Asse Sauga told Postimees. Mr Sauga said the association finds with the court judgement in view that it makes no sense to put tech fans and banks into the same pot.

«Today, we are of the opinion that the general money laundering regulation in force in Estonia is clearly contrary to innovation and new technologies, and it must be reviewed and updated. We sincerely hope that this will be dealt with as priority,» said Mr Sauga to relate the stand of the association.

Representing Otto de Voogd at court, Law Office GLIMSTEDT partner Priit Lätt said it would be befitting to Estonia as an e-state to create an entrepreneurship environment where new business opportunities and bold ideas could be realised – for that, the legal system needs to move with the times.

He said the Supreme Court judgement should be followed by definite steps by the state to also ensure business opportunities for innovative solutions. «The current law is disproportionate and begs for flexibility – differing conditions and obligations ought to apply to providers of alternative means of payment and to financial institutions. Regarding development of new solutions, we are open to cooperation with state agencies,» said Mr Lätt who also sits as board member at Estonian Cryptocurrency Association.


What is Bitcoin?

Bitcoin is the first decentralised cryptocurrency moving directly from person to person without stopping at banks on its way. The Bitcoin network is upheld by its users themselves – instead of banks, they use a database which stores the ownership of the coins. The upkeep of the network is maintained by all computers included in Bitcoin network.

Over the years, the value of Bitcoins has greatly fluctuated. In 2010, a Bitcoin was worth $0.06. In its glory days in 2013 a Bitcoin stood at a whopping $979.45. At the moment, the cryptocurrency is down at $376.57.

Only a few people in the world know how the Bitcoin system actually works, who are the people developing it, and who take the decisions related to its development.

For consumers, Bitcoin is considered to have the advantage of no personal data asked with web payments, no bank account is needed and wallet is electronic only. There are numerous environments globally where people can obtain Bitcoins – like Kraken and Bitstamp.



Uku Tampere, Police and Border Guard Board press representative

Before 2008, we had several companies operating in Estonia providing alternative means of payment services and as such business was unregulated, an allowing sufficient anonymity, cyber criminals used it to launder criminally obtained money. However, Estonia escaped the (gradually building) reputation of criminal gains launderer as alternative means of payment provider was introduced in regulations, whereby providers of such service were obligated to identify their clients if their monthly turnover exceeded €1,000.  

For ordinary people buying or selling cryptocurrency in occasional transactions for own use, the Supreme Court judgement essentially alters nothing. However, when an individual begins to publicly offer cryptocurrency mediation service, he needs to apply for activity licence and meet the requirements prescribed by Money Laundering and Terrorist Financing Prevention Act.  

Even for Financial Intelligence Unit at central criminal police, the fresh Supreme Court judgement alters nothing. As applications for licences are filed to FIU, they are proceeded just as before the judgement. When a legal or physical person is discovered who publicly provides such services while having no licence, he will get the same kind of precept as was sent to the applicant in the court judgement above.