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Digital residency pays off big for Estonia

Benjamin Bathke
December 29, 2017

Estonia is expected to get a 100-to-one-euro return on investment for its e-Residency program, which lets anybody start a business from afar. It is even planning to launch ‘estcoins,’ its own cryptocurrency.

Estland elektronische Aufenthaltskarte
Image: e-Residency Team

When Michael M. Richardson walked into a Tallinn police station in December of 2014, he felt somewhat apprehensive. Only knowing Estonia from old movies, the 58-year-old American entrepreneur had a few stereotypes about the former Soviet republic. Richardson took the long trip to Estonia because he was itching to become a ‘digital resident’ to help him get the company off the ground he had been contemplating for years in Europe.

In the end, Richardson’s concerns were unfounded. Applying for Estonia's e-Residency program, he says, was “as easy as getting a fishing license in Minnesota” — upload a passport photo online, pay 100 euros at a registration office and wait approximately two weeks for the completion of a background check.

In January of 2015, immediately after he picked up his e-Residency card, Richardson launched E-Drive Retro, a startup that turns oldtimers into electric vehicles. It now has offices in Tallinn, Helsinki and Miami.

"I was able to begin operations seamlessly, despite the fact that I was living on Wall Street at the time and only spending a few days per month in Tallinn," Richardson, who currently resides in Helsinki, told DW.

Norwegen Michael M. Richardson, E-Drive Retro
Michael M. Richardson is the founder of E-Drive Retro, posing here next to an EV classic carImage: DW/B. Bathke

The Republic of Estonia is the first country in the world to offer government-issued digital residency to non-resident citizens. Since its inception three years ago, almost 30,000 virtual residents from 143 countries have created close to 3,000 companies and paid 2.8 million euros in labor taxes. And according to a cost-benefit analysis published by Deloitte this month, they have so far brought 14.4 million euros ($17 million) back to Estonia in net financial proceeds and indirect socio-economic net benefits, a number the consulting and financial services firm predicts will rise to 1.84 billion euros ($2.17 billion) by 2025. This represents a return of 100 euros for every one euro invested in the program.

Kaspar Korjus, e-Residency's managing director, called the program "one of the most important governmental experiments of the 21st century."

"These very positive results validate our initial vision, which we hope is now shared by more people,” Korjus told DW in an email. "It is totally unique that one nation decides to open its borders digitally to anybody in the world.”

Estland App Turnit
Jiffi, a smartwatch app, is a tech transport app by Estonian startup Turnit. It's one of many examples of innovations produced by Estonia's ambitious digital economyImage: Turnit

Who are Estonia's e-residents?

As the e-Residency statistics website shows, so far almost 20 percent of applicants are from neighboring countries Finland and Russia, followed closely by Ukraine and the US (each around 6 percent). UK applications, now at over 1,500 (5.47 percent), spiked during Brexit. Germany, Italy, India, and France make up around four to five percent each. 95 percent of applications have been accepted thus far.

To US entrepreneur Richardson, one of the main benefits of the e-Residency program is the "secure, painless and widely accepted credentialing for everything business-related in Estonia,” such as filing taxes and business reports online as well as establishing and transacting business with Estonian suppliers.

Setting-up a "home-away-from-home," as he puts it, which included renting an apartment as well as registering cars as a non-EU citizen, was "incredibly fast and easy." Especially all the "automated paperwork” around cars helped him focus on his startup instead of wasting time with trivial bureaucratic procedures.

"That was an unexpected benefit and far easier than similar efforts in places like France or the UK in comparison,” the former technology strategist told DW.

Estonia's Skeleton Technologies makes ultracapacitors
Software isn't the only product category developed by Estonian startups. Here, Estonian startup Skeleton Technologies shows off its ultracapacitorsImage: Skeleton Technologies

An e-resident can start a company via the internet, manage it remotely, and operate it regardless of location. E-Residency does not, however, grant citizenship, residency for tax purposes, a residence permit, nor a permit to enter Estonia or the European Union. E-residents must renew their license for 100 euros every three years.

Building a global business

While US businessman Richardson used e-Residency to launch his startup, Indian entrepreneur Deepak Solanki used it to scale his. Established in 2012, Solanki's New Delhi-based company, Velmenni, is working on a high-speed, wireless data transmission technology called LiFi.

"In Estonia we got the first opportunity," Solanki said at the SME Assembly in Tallinn last month. "We were able to commercialize our first proof of concept, which came from an Estonian client."

When Solanki learned about the newly launched e-Residency program in late 2014, he joined immediately. Due to a lack of talented engineers in Estonia, however, he moved Velmenni back to India in April of 2015, six months after he had arrived. But since he had already established a client base and attracted interest from European investors, he opted against closing the Estonian entity.

Estimated benefits of Estonia's e-Residency program

"Clients and investors were more comfortable working with an Estonian, EU-based company rather than an Indian one," Solanki told DW. "Here, e-residency played an important role, because I'm able to run the whole business remotely from India.” Last year, Solanki raised an undisclosed sum from multiple UK investors, a feat he attributes to his e-Residency membership.

Estonia hopes for its digital citizenry to balloon to 150,000 people, and to establish 20,000 companies globally by 2021. And by 2025, according to the Deloitte analysis, the average operating company of an e-resident will benefit Estonia with approximately 70,000 euros in direct and indirect net proceeds.

The next step: government-issued 'crypto-tokens'?

In a blog post from early December, e-Residency's managing director Korjus announced that Estonia is to become the best option globally for "trusted ICOs” (Initial Coin Offerings), distributed and traded globally on the e-Residency platform. This would allow e-residents to raise virtual money for their companies from other e-Residency members.

ICOs would have to follow guidelines including a classification of crypto-tokens, compliance requirements, and best practices, such as enabling investors to monitor how the money raised is spent.

Of late, Estonia has become a hotbed for testing new technologies thanks to a number of new laws. The tiny Baltic state is, for example, the first European country to legalize autonomous driving on sidewalks, and to allow ride-hailing services like Uber to operate on the books. There's now a discussion underway on how to create a suitable legal framework for artificially intelligent autonomous machines, such as self-driving cars and other autonomous robots.

Startup Wall of Fame
Estonia's Startup Wall of Fame. The tiny North Baltic country decided to re-invent itself after it became independent of the Soviet Union in 1991 - and took to the digital economy like a fish to waterImage: DW/B. Bathke

Korjus' announcement comes on the heels of another, widely circulated blog post from August, where he first floated the idea of issuing "estcoins" that would allow people to invest in the country. In the post, the founder of the cryptocurrency Ethereum, Vitalik Buterin, argued that unlike existing international finance mechanisms, a state-issued cryptocurrency such as estcoin could encourage community-driven investments.

Two weeks later, however, European Central Bank president Mario Draghi rejected Korjus' idea, saying that "no member state can introduce its own currency" and that "the currency of the eurozone is the euro."

Acknowledging Draghi's criticism in his new post, Korjus responded by arguing that governments should consider the "disruptive impact" of these crypto tokens as they provide a "more efficient means for exchanging value globally.”

"The idea of disruption excites some people and terrifies others, but you can't fight against it," Korjus told DW via email.

ICOs on the rise

In his latest blog post, Korjus outlined three possible scenarios to issue estcoins: "Community estcoins" through a national ICO to encourage activities that support the e-Residency community on a platform currently under development; nonexchangeable "identity estcoins" - blockchain-based tokens used for activities such as digitally signing documents or enforcing smart contracts; and "euro estcoins," pegged to the Euro, which would "combine some of the decentralized advantages of crypto with the stability and trust of fiat currency."

A recent report by Tallinn-based funding and trading platform Funderbeam showed that money raised in ICOs this year increased to $2.8 billion (from $228 million in 2016), with the number of rounds quadrupling to nearly 150. In spite of its exponential growth, however, ICO funding still makes up only around five percent of startup funding globally. Currently, the top ten countries for ICOs are the US, followed by Switzerland, Singapore, Canada, China, Estonia, Russia, UK, Hong Kong and Finland.

Government sources told DW that Estonia will announce "several initiatives" in the context of ICO funding in January.