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Policy / Digital economy

How Estonia is expanding e-Residency while keeping control over identity

The Baltic state is digital in all things – except authenticating applicants to its pioneering e-Residency programme, which so far must be done in person, government CIO Siim Sikkut tells Tech Monitor.

One of Estonia’s many digital innovations is an e-Residency scheme that allows citizens from anywhere in the world to start a business within the EU’s jurisdiction. Launched in 2014, the programme has launched thousands of businesses but last year was exploited by criminals in one of Europe’s largest money laundering scams. Tech Monitor caught up with Siim Sikkut, CIO of the Estonian government, to hear how the country is expanding the scheme while keeping tight identity controls.

Estonia e-Residency
Since its launch in 2014, Estonia has approved more than 80,000 e-Residency applications. (Photo courtesy of the Republic of Estonia e-Residency.)

Since its launch, Estonia’s e-Residency programme has approved more than 80,000 applications and created over 16,000 enterprises, generating €54m in taxes and state fees. The three main profiles of e-resident applicants are white-collar entrepreneurs who can work remotely (or digital nomads), non-EU business owners looking to expand into Europe; and companies that operate with staff across borders and want to simplify their internal management.

But the scheme suffered a reputational blow last year after some e-residents exploited the programme to carry out cryptocurrency fraud in what has become one of Europe’s largest money-laundering scandals. A report by the Estonian police’s Financial Intelligence Unit said that both local firms and e-residents had been linked to organising “suspicious initial coin offerings and the misappropriation of large sums within them”.

Sikkut says Estonia encourages people to apply for the programme but that it treats any possible fraud very seriously. “E-Residency is a benefit, not a right,” he tells Tech Monitor. “If you’re legit and if you behave, awesome, we appreciate it so much, we enable you all that stuff. If we catch you doing something you shouldn’t, we stop it.”

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He argues that the risk of fraud stems from other service providers, such as financial institutions and consultancy companies, failing to carry out their due diligence, not the e-Residency programme itself. “If they [service providers] catch any e-resident, or have suspicions, they can immediately ask the government to pause your e-residency or stop it completely.”

Authenticating Estonia’s e-Residency applications

Nevertheless, the Estonian government goes to great lengths to certify the identity of e-Residency applicants. This has to be done in person: while his team is studying the possibility of combining biometrics with video conference, Sikkut has not yet seen a technology able to provide secure digital-only verification. Instead, applicants must provide fingerprints at their local Estonian embassy, and be seen in person by an official at least once.

These checks limit the scalability of the programme, however. Estonia has 40 embassies and 193 consulates abroad and e-Residency cards are available for collection at around 50 locations worldwide. To broaden its reach, the e-Residency programme has partnered with an external visa provider, BLS International, to process applications in addition to Estonia’s diplomatic missions abroad.

This week, the Estonian government announced the launch of four new international “pick-up points” in São Paulo, Bangkok, Singapore and Johannesburg – cities that Estonia has identified as remote working “hotspots” – to meet demand for applications. These pick-up points are operated by external providers who confirm applicants’ identities. “It doesn’t have to be our government rep, it can be somebody who works for us and does it to a careful degree and verify that you are you at the point of so-called inception or onboarding,” says Sikkut.

Siim Sikkut
Siim Sikkut, government CIO at the Ministry of Economic Affairs and Communications of Estonia. (Photo courtesy of the Republic of Estonia e-Residency.)

Despite last year’s fraud case, Sikkut claims there have been only a few attempts of using e-Residency fraudulently. “What we also made very public is that if we catch you, it has pretty tough consequences, not just in Estonia, but as a member of NATO and the European Union, you get banned from all over the place,” he says.

Growing demand for Estonia’s e-residency scheme

E-Residency applications spiked in 2017 and 2018 but, despite the boom of remote working during the pandemic, 2020 suffered a dip due to what Sikkut calls a “cocoon” effect: the uncertainty of pandemic made people hesitant to launch new businesses. But application numbers are picking up again, Sikkut says, and demand is expanding around the world.

Brexit has sparked two spikes in applications so far: one after the 2016 referendum and another when former PM Theresa May triggered article 50, officially initiating the UK’s departure. Another wave of British applicants is expected as the realities of doing business after Brexit become clear, Sikkut says. “We are not ashamed to say we are planning for this as well.”

Few countries have followed Estonia’s lead. Azerbaijan was the second to offer an electronic residency, and Lithuania launched a similar programme this year. But neither of these has the digital underpinnings of Estonia’s scheme, says Sikkut, and he has yet to see a comparable offer from another country or city.

“Our differentiation is that we don’t offer a tax haven or anything like that. We offer you an easy way of doing business. Our classic competition has been the Caribbean islands, Luxemburg… that’s a completely different value offer,” Sikkut concludes. “We offer concrete value to entrepreneurs from around the world and literally allowing them to do more business and have a livelihood for them and their families. The next step is to scale that.”

Cristina Lago

Associate editor

Cristina Lago is associate editor of Tech Monitor.