Kaspar Korjus, an Estonian tech entrepreneur turned top government official, agrees that his plan to make a government-backed crypto-coin is justly characterised as “a solution waiting for a problem”. He doesn’t, however, view this as a bad thing. If Venezuela doesn’t get there first, the tiny post-Soviet nation looks set to become the first country to issue a state-backed cryptocurrency.
Initially, the currency will be restricted to e-residents through a lock-up phase, but the aim is for them to reach both crypto and traditional exchanges
The topic first emerged in August 2017, when Korjus floated the possibility of Estonia becoming the first country to issue an initial coin offering (ICO) in a blog post. The aim would be to raise funds for Estonia’s e-residency project, a much-talked-about scheme that invites foreign entrepreneurs to become virtual residents of Estonia. The idea was to raise cash for the project while simultaneously creating incentives for investors and interested parties to support the growth of the e-residency community. It also hoped to put Estonia on the map as a haven for blockchain technology.
But the idea quickly ran into a stumbling block in the shape of Mario Draghi, President of the European Central Bank (ECB), who shot the idea down in September during a press conference. He stated: “No member state can introduce its own currency; the currency of the eurozone is the euro.”
The new digital nation
However, Draghi’s criticism has not stopped planning from going ahead, and has been largely dismissed by the assertion that an ‘Estcoin’ would definitely not be a currency. “Much of the criticism of Estcoin was based on the fact that Estonia simply can’t start its own cryptocurrency even if it wanted to… That’s why we have always referred to Estcoin as a proposed ‘crypto-token’,” said Korjus in a more recent statement. It is currently unclear what form the crypto-token will take. So far, Korjus has presented three proposals, all of which he insists can be introduced “without alarming [the ECB]”.
One thing all three proposals have in common is that they focus on providing some sort of crypto-enhancement for the country’s digital residency project. Under the project, anyone in the world (who isn’t a criminal) can become an e-resident and obtain an official Estonian digital ID for €100 ($123). The digital ID enables e-residents to identify themselves and sign documents online, making it possible to run a business through Estonia’s infrastructure or open a bank account from afar. They also provide a useful infrastructure for cryptocurrency projects. “Verified online identities give us a very good advantage for trading cryptocurrencies and it helps blockchain entrepreneurs with KYC [know your customer] requirements,” said Arnaud Castaignet, Head of Public Relations for the e-residency scheme.
Existing e-residents include Angela Merkel and Shinzo Abe, but the scheme has also provided a useful platform for entrepreneurs based everywhere from Bangalore to Turkey. In return for access to its hi-tech government infrastructure and ID cards, Estonia has been able to play host to, and receive corporation tax from, a growing number of flourishing small businesses. Korjus calls it the ‘new digital nation’.
The ambitious project is described as a way to break down barriers for entrepreneurs in less developed countries, while creating an online community of location-independent entrepreneurs. The official aim is to gain 10 million e-residents, a number that far outstrips Estonia’s actual population. This may seem ambitious, but the country’s e-resident population has soared to nearly 30,000 in just four years.
The goal of enhancing e-residency provides a common thread for the three Estcoin proposals that are currently on the table, but each one is wildly different in substance. The first proposal, which was laid out in a blog post at the end of last year, is to create a crypto-token that would act as a kind of loyalty token for the e-residency project. The concept – dubbed ‘community Estcoin’ – would provide a framework to reward actions that benefit the project, such as recommending a friend to become an e-resident, driving traffic to the website or providing advice to other e-residents. The coins would hold value within the e-resident community platform and could also be used to buy goods and services from other Estonian companies. Initially, the currency will be restricted to e-residents through a lock-up phase, but the aim is for it to eventually reach both crypto and traditional exchanges.
The kind of community effect that the proposal is targeting is popular among cryptocurrency heavyweights. Vitalik Buterin, the founder of Etherium, commented: “An ICO within the e-residency ecosystem would create a strong incentive alignment between e-residents and this fund and, beyond the economic aspect, [would make] the e-residents feel like more of a community since there are more things they can do together.”
The community Estcoin aims to be a useful tool for e-residents, but could also pave the way for the fulfillment of Korjus’ initial goal to make Estonia the first country to administer a national ICO. However, while Korjus’ vision of an Estonian ICO aims to “enable anyone to invest in a country for the first time”, many have described the idea as merely a variation of ordinary government bonds.
The second proposal can be described as an ‘identity Estcoin’, and it holds the ultimate goal of improving the efficiency of the Estonian Government’s infrastructure. Under the proposed plan, identity Estcoins would not raise any funds for Estonia and would not be tradable. Instead, they would leverage blockchain technology to improve the infrastructure behind digital identities. Estcoins would become part of the process of signing digital documents, filing taxes and so on, improving the e-residency experience.
Under this set-up, the Estcoins themselves would be digital tokens that are used when e-residents carry out activities like digitally signing documents and logging into e-services. Each e-resident would be assigned a certain amount to start them off and may have to buy more as time goes on. Any funds would be used to uphold the network, but ultimately the project could be cheaper for everyone due to economies of scale. According to Korjus, they would enable the system to work on any device and without ever requiring updates. Castaignet told Mrassociates that the identity Estcoin is the “really radical” proposal of the three and is thus likely to be a more long-term project than the others.
The second proposal may be radical, but the final proposal – the ‘euro-Estcoin’ – is the most controversial. It proposes a stable crypto-token that is pegged to the euro. Korjus explained in a blog post: “The way euro-Estcoins operate within the e-residency community would be similar to how other types of tokens operate within video games or simulated online worlds. E-residents could purchase euro-Estcoins within their new platform then trade them with other e-residents and cash out when required, while ensuring that all necessary banking and taxation rules are followed.” According to Korjus, the scheme would function through a government commitment to exchange any Estcoin back into a euro, and banks would be instructed to enable customers to switch between them freely. E-residents with euro-Estcoin balances would be able to make payments to one another without going through a bank. The idea is that transaction fees would be eliminated, creating a frictionless payments platform that could be used among members of the e-residency network.
Comparing the system to video game tokens makes it seem like a minor development, but a cryptocurrency that is protected from volatility while retaining the benefits of decentralisation has long been sought by crypto-enthusiasts. If widely adopted, however, it could run into unprecedented problems: one possibility is that people could skip the banking system altogether, holding most of their money in Estcoin wallets instead. This could strip banks of their deposits and provide a headache for the ECB.
The claim that the Estcoin has always been referred to as a token is not strictly true. In a previous blog post, Korjus speculated about a future in which Estcoins might be “accepted as payment for both public and private services and eventually function as a viable currency used globally”. He stated: “By using our APIs [application programming interfaces], companies and even other countries could accept these same tokens as payment.”
There are technical distinctions between a token and a currency; a token is a piece of an existing blockchain, whereas a currency is an entire blockchain system in itself
Yet, there are broader technical distinctions between a token and a currency. For instance, a token is a piece of an existing blockchain, whereas a currency is an entire blockchain system in itself. The problem is that the official terminology has become blurred over time, and both crypto-tokens and blockchain currencies are now frequently labelled cryptocurrencies. Another distinction, which was underscored by Castaignet, is that a currency must be a means of exchange. This means that, as long as Estcoin proposals are restricted to those within the e-residency community, the coins won’t fulfil the full definition of a currency.
“Even the proposal that is seen as being the most controversial, euro-Estcoin, we still don’t see it as a cryptocurrency. It might be a new way of expressing a currency, but it can’t be a new currency in itself, at least in our definition,” Castaignet said. Instead, he described it as a ‘utility settlement coin’.
And yet, many maintain that the distinction remains fuzzy. For instance, Preston Byrne, a blockchain technologist and structured finance solicitor, responded to the proposals by tweeting: “Estonia’s Estcoin is going to stretch EU regulators’ tolerance for ICO garbage to breaking point. ‘It’s not a currency, Mario [Draghi], it’s a token’ likely to go down as well as a lead balloon with the ECB.”
Castaignet told Mrassociates: “Of course there are some legal discussions, and we are not going to launch anything that is in contradiction with our international obligations.”