Brief history of Estonian technological development

Estonia is known as an innovative country and a digital leader, as well as an excellent location or source for doing business. The country with about 1.3 million people, shows size is irrelevant when it comes to the jump on technological innovation.

We have a very active start-up sector that make use of blockchain technology in various ways. From credit services to big data, and crypto services to digital identity management, most innovative IT-based start-ups have utilised digital assets and some sort of blockchain technology in their business. I am pleased to say that quite a few of  technology-enabled innovative companies have either hailed from Estonia or chosen Estonia as their home country. Around 215 fintech companies have been established in Estonia or they have some kind of connection with Estonia. That is an impressive number by itself, and more so when taking into account our smallish area and population – showing that Estonia is seen as fertile ground where innovative ideas can grow and prosper.

Why have we succeeded? Sure, there are multiple decisions and reasons behind it. When we started to develop our digital society we were lucky to have very digital-minded and determined leadership. We introduced our secure e-identy, national digital identity system. We took the decision that all public services government offers in analogue world, that is on paper, must be available also digitally.

Our e-identity system enables remote identity verification and signing documents digitally, which greatly reduces the administrative burden, time and effort. Most notable examples are e-tax filing, e-voting, e-shcools and accessing most medical service infrastructure via our respective e-portal. When designing digital services our main goal was to create citizen/customer-focused solutions. Take tax declaration. You must have your ID card, a computer or mobile with internet connection, and it takes you 3 minutes to do the declaration. Or digital prescription. Super easy to use. You only need to take your ID card to any pharmacy in the country. Because of this accessibility and user-friendliness, after a year introducing the solution 99% of all the prescriptions in Estonia were digital. Same goes with tax declarations – as it was designed keeping the end-user in mind, not the government officials in mind, it is so convenient that rarely anyone does it on paper.

Our approach can be characterized as pragmatic, resilient and entrepreneurial - and that has provided us opportunities to be an almost paperless society already for decades. For example, in banking and payment services sector – we have entirely skipped the phase of using cheques as a means of payment.   

There are many other reasons that have helped us on our way, but for you I want to bring out three.

First – building and maintaining the trust. Government sector and private sector need each other to build a successful digital society. That will only work if there is mutual trust. Transparency is a must.

Second - regulators must be willing and ready to understand novel business models and legal requirements need to be understandable and graspable to the general population.  And simple for government authorities and private sector companies to enact and follow.

Again – our experience is that it will only work if there is a smooth cooperation. For developing our first FinTech Strategy we are now working together with different stakeholders from the public and private sector, leveraging our strong IT-sector and friendly business environment to overcome possible obstacles that prevent Estonian businesses to be scalable and successful here and abroad.

Third lesson from our experiences I wanted to bring out today – never settle with what you have. Digital society will never be ready. New risks will emerge daily. Developments are super quick in the tech world. Fintech sector is moving rapidly. If a government wants to keep the pace one needs to dedicate to it every single year. There will always be plenty of room for improvements.

Estonia is by no means immune to threats and major security risks. As much as the task of the Government is to encourage innovation, we must also limit the downside risk. Serious cyberattacks mainly starting 15 years ago made us push digital initiatives and cyber security further and harder.

We have learned that what doesn’t kill you makes you stronger.

But let me be more specific with cyber security and fintech.

Estonia has utilised decentralised, distributed systems since 2001 and blockchain since 2008.

And as mentioned earlier blockchain technology are used by several fintech’s in Estonia.  One of the best examples is called KSI (Keyless Signature Infrastructure) blockchain - provided by company named Guardtime. KSI is designed to protect networks, servers, and databases in Estonia from attacks, detect any deliberate or unintentional data changes and ensure data integrity at rest. If you are interested in that, I recommend you to dig more deeply into the solutions Guardtime offers.

Crypto-assets, AML and AI

Fintech companies are often associated with crypto-assets in various forms, and indeed many governments around the world are now focusing on this area. This is also the case in Estonia and the European Union as a whole.

Because alongside the optimism and success, there are real and legitimate concerns: anonymous cryptocurrency payments feeding into an explosion of ransomware and risk for potential money laundering.

Some decentralized finance (DeFI) applications may look like Ponzi schemes and are aggressively offered to retail investors.

Therefore, if we want to continue enjoying the charms of the digital society the response to managing the risks is equally essential. Not at the level of the individual countries only but in entire Europe and even globally.

In this regard we held an international AML conference in middle of April in here in Tallinn. In my opening speech I told to the public that we have been looking at various new ideas of the so called reg-tech industry.

The solutions that might have been intended to reduce the time and costs of compliance, might also have positive impact to the speed of decision-making within the companies themselves. The flexibility and ability to change and adapt has never been as crucial as it is today. And might never been so important also for the financial sector, as it is today.

Or let’s take another example.

There have been several discussions at the global level how to imply the travel rule to crypto-assets transactions. Basically, in the traditional financial sector the travel rule requires financial institutions to share information about their customers and the associated transactions with each other. By doing so, they can monitor the transactions and report suspicious activities that may involve money laundering or terrorism financing.  When the SWIFT system is in place for traditional payment service providers, then crypto-assets service providers lack an industry-wide messaging standard. It is said that the pseudonymous nature of cryptocurrencies and new business models like DeFi-s make it complicated to apply a globally agreed crypto travel rule in practice.

Still, I think we have a chance in here to work together and come up with a common standard in this respect.

About Regulation

The financial sector is certainly one of the most regulated business sectors. The essential purpose of financial services regulation is to ensure financial stability and customer protection. But it also has an additional dimension in the European Union – the ambition to create a single European market, which will benefit both from the development of companies and the expansion of customer choice.

Often, fintech companies offer their services to traditional financial companies to help them solve the challenges posed by regulation. A good example is “know your customer” requirement, which is an important element in the provision of all financial services. Based on the technological innovation, for example the Estonian company Veriff solves the question of how to identify new customers digitally, being convinced of their identity.

The creation of a single market requires uniform regulation and supervision in all Member States. Thus, regulation is certainly one of the biggest challenges in the development of the fintech sector – how  much room does regulation in the financial sector leave for innovation, experimentation and thus inevitably also for failures?

In fact, the issue is often even more complicated – the activities of a fintech company may be one that, at least at first glance, does not fit into the current framework at all.

As already slightly touched before, a new type of financial and investment services like crowdfunding and crypto-assets have created challenges for regulators.

In both areas, regulation is catching up, but I am sure that new ideas will not stop to spring.

Financial supervisors also need to keep pace with technological developments and possibly even rethink their roles.

While the most exciting developments will come from the private sector, governments will play a crucial role in updating regulations and making tokenized claims and assets usable in the legacy world.

A start-up company in the financial sector may not be within the perimeter of a financial service provider and financial supervison at all, as in the case of RegTech companies.

Moreover, this may not be easy for the service provider or supervisor to understand the relevance at first glance. In any case, it requires dialogue and cooperation. If real customers come to the game with their real money and data, the scale and interest are quite different.

Technical innovation such as Artificial Intelligence is also a new opportunity and provides solutions in applying regulations, especially in the fight against money laundering and terrorism financing.

In general, we must ensure that our business environment is transparent and works for everyone by establishing technology-neutral regulations that equally benefit the entrepreneurs, customers and the sector as a whole.

War in Ukraine

Endnotes

To sum up, let me once more point out three main areas.

• First, one of the most critical bases that a country can provide to both the technology and financial sectors is trust, and it is based on both regulation and close cooperation.

Maintaining this trust requires constant devotion, research, and development, as well as asking and answering serious questions.

We made several strategic choices at the state level already in the 1990s, on which much of today's success and the general mentality of Estonian society is based.

More important than the technical achievements, however, has been the great mutual trust between the state and individuals, which has made possible to implement many innovative solutions in the field of e-government and cyber security, but also created the basis for the explosive growth of the Estonian start-up sector.

Thus, our country's strategic focus has been on the technology sector and the development of the start-up ecosystem more broadly. And the fintech sector has benefited greatly from it.

• Secondly, public-private partnerships presuppose a mutual and sincere interest in the challenges facing both sides.

What are the big problems that governments want to solve with the help of technology?

What are the barriers that prevent the technology sector, including fintech companies, initiate and implement innovative ideas?

The keys in here could be an effective sandbox or innovation hub, specialized incubator and also cooperation with education and research institutes. Sandbox or hub could be a tool for risk-free development and testing of new services (and would allow the regulator to understand the solutions better.

For instance as we have an open data directive in EU, state is interested in creating new real-time service of “know your customer” which means that we can turn a new page in the fight against money laundering.  Most likely Estonia will be the first country to make machine-readable data in national registers and databases available for the KYC procedure and will also provide them with a time stamp that provides the highest confirmation of the origin and compliance of the data.

• Finally, we are living in extraordinary but also in complicated times, and it is not excluded that even more difficult ones lie ahead.

War that Russia started in Ukraine has leaded the entire financial sector into a new reality, which follows the post-pandemic inflation. Financial institutions, including fintech companies, are reacting in real time to impose sanctions and boycotts on Russia and its citizens. How can fintech help even more? IWould it be possible to make financial services kind of bullet-proof taking into account the basis of conventional and hybrid war?

Among other things, we should use it to learn and develop even better and to contribute to the protection of our values and the planet through the fintech sector.

There are several allegations about cryptocurrency mining and energy waste. European Parliament is thinking of banning even bitcoin mining and similar proof of work type of mining of different cryptocurrencies.

Would banning a technology be a right decision? Instead can we turn this type of new gold to green?

Maybe fintech start-up’s can become a leaders in the transition to sustainable energy sources.

In this sense Estonian deep tech startup Single.Earth is disrupting climate action by investing in the forests the world has left, not making up for the ones that have already been destroyed. In simple terms Single.Earth offers landowners a new business model: to earn money from living trees. Using satellite imagery and data, Single.Earth looks at nature in real time and sees how much of any area of the world absorbs CO2 and retains biodiversity, which is then tokenised for ecological value.

I believe in innovation. So I believe with new and responsible kind of technology we can make a world cleaner and better place!

These are big words but let them add momentum to today's debate this morning!