Estonia fame one of the most tech-savvy, start-up and crypto friendly environment is in the process of being tarnished as a result of the recent money-laundering scandal that has engulfed the country and its largest banks. How will it affect the startup and tech ecosystem?
The United States, Denmark, and Britain are taking a closer look at made payments from 2007 to 2017 of more than €200 billion. The money was allegedly part of the Russian money laundering scheme of the local branch of Danske Bank. As a result, Danske Bank, one of the largest banks and top lenders in the country has seen a 50% fall in share value.
However, Estonia accuses more than banks than the small branch of Danske bank. According to reports by Forbes, four other large international banks might have been involved: Citigroup, HSBC, Wells Fargo, and Barclays.
Estonia: A digital pioneer dethroned?
With Estonia having such a diverse and active tech and startup culture, there are fears that this scandal might have an impact on the local ecosystem. With 49 bankers currently arrested or under investigation, it is still unsure how this will impact the ease of receiving finance and loans in Estonia.
Much more crucial however is the effect on Estonia’s public image. Digital entrepreneurs from all over the world are seeking out Estonia for its excellent digital infrastructure. Opening a digital business in Estonia is deemed advanced but user-friendly, frictionless, and after all, extremely secure.
That the country who has been often warned about Moskow’s aggressive stance in international relations comes out as the country hosting a large chunk of illicit money flows from Russia now comes as an ironic twist to this image.
The Estonian government stands firm that they handled the situation correctly – but could have reacted faster. “It took longer than it should have taken us — both the Danish and the Estonian authorities — to end it”, admitted President Kersti Kaljulaid to the Estonian press.
“We have failed in PR but not in supervision”
Jurgen Ligi, former Estionian minister of finance
“We have failed in PR but not in supervision”, stated Jurgen Ligi, Estonia’s finance minister from 2009 until 2014. “Four years ago, nobody was taking money laundering as seriously as Estonia. In Europe, Estonia was the pioneer.”
Why crypto may be next
Paradoxically, not only the traditional banking sector around Danske bank but also the emerging crypto industry might receive a blow. Cryptocurrency is often associated with suspicions of facilitating money laundering. Trading in cryptocurrency allows for anonymity. Distributed ledger technology, like the public blockchain Ethereum, builds on the concept of the peer-to-peer economy – meaning that transactions do not need a third party.
In essence, blockchain-based cryptocurrency allows to validate or authenticate banking transaction without involving traditional central actors such as banks or regulators. On the flipside, this means that there are little oversight or transparency on who is trading and where the money flows originate.
In light of the current allegations, it is likely that regulators want to see stricter rules on disclosing transactions – and clients might be shying away from an industry easily perceived as somewhat murky.
While the fears persist, there are also people who think this scandal might have been a good thing for the local tech and startup ecosystem after all. As regulators put more focus on corruption and money laundering, businesses can be confident that their investments are clean. This way, investors and startups have a trusted path to receiving financing – even if the sources could be more limited for now.