Will Baltic states Embrace Crypto Startups and Blockchain Companies?

It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.
- Charles Darwin

When somebody talks about the tech startup industry, the majority of people mentally imagine worldwide famous tech hubs, such as San Francisco and the Bay area - Silicon Valley, New York, London, Amsterdam, Singapore, Berlin, and other megacities in most developed countries.

And this is not surprising - the startup industry critically relies on access to venture capital, collaboration with other market participants and legislation regarding emerging technologies, such as blockchain, AI, AR/VR, and others.

If you establish your startup in right place, you would get all necessary pieces to build a successful company - venture capital firms and angel investors that can write huge checks, best accelerators will help to sharp your product, regulatory “sandboxes” as well as tens of thousands of smart people, cool events, and possibilities to collaboration.

Twenty years ago during the dotcom bubble and rising of the Internet, it looked like real innovations and high-tech businesses can develop in a quite limited number of places. Now it is evident, that such a view is blinkered: situation significantly changed.

There are a lot of brand new places to create something cool. Making a decision regarding jurisdiction of your own company, it is important to keep in mind necessary success factors for any global startup:

1. Direct access to at least one huge market
2. As low operating expenses as it is possible to have more time to test your idea using VC funding
3. Legislation, that can supports your business and not ban you from using emerging tech, that can disrupt the market
4. Mature startup ecosystem - events, meetups, conferences, accelerators, and VCs

It looks like that in 2020 you can get all of this and even more without a presence in world-famous startups capitals.

How did the former Soviet republics become innovation hubs?

Approximately thirty years ago Baltic states - Latvia, Lithuania, and Estonia were poor ex-Soviet republics. But, after they gained independence they got a fresh start - according to the USSR dissolution agreement, Russian Federation inherit all ex-USSR external debts, so all ex-Soviet republics start their bookkeeping from the blank page.

Besides this, they got an infrastructure, human capital, and neighborhood with the European Union, which was forming at that moment. During the last 30 years, they hugely moved forward - became the EU members, adopt Euro, e-government, modern legislation, focused on fostering innovative entrepreneurship and created a stable political and banking system.

It is important to note, that in the postindustrial economy you don’t need large territory or abundance of natural resources such as oil and gas anymore to be successful.

The good examples to support this statement are small, but very high-developed countries such as Luxembourg, Liechtenstein, Singapore, Sweden, Denmark, and many others. All you need in the new “game” is to attract financial capital, smart people and build innovations.

All of this is going in accordance with the citation of Charles Darwin - if rules change, change your game strategy. These countries changed, and what they got?

I am convinced that the best answer to this question is the practical experience, which is much more relevant than ratings of any kind. So, I invited several successful blockchain companies from Baltic states to share their opinion and experience regarding the business landscape they are operating on. So, let’s going on to some insider stuff.

Let's start with Latvian startup Mission Tech. They provided a comprehensive comment regarding the conditions for innovation entrepreneurship.

At the end of 2017, Latvia finally adopted Startup Law (special legislation for tech companies) with startup visas for non-EU founders. Just in 4 weeks non-EU founders could get a residency permit (startup visa), establish a new company & open bank account. It’s the fastest solution in the whole EU. According to Eurostat data, only one in three managers in the EU is female. However, in Latvia, this figure is in the majority, with 53% of leading positions going to women.

It is important to note that Latvia takes 3rd place in the OECD ranking for the attractiveness of the tax system and has the lowest requirements for founders in terms of finances. Since the start of the business, you need to pay a minimum salary of only 460 euros.

For example in Finland, this amount is approximately 2500 euros half of which goes to taxes. Moreover, Riga is one of the cheapest European capital. For example in Riga, you can live for 1000 euros for 30 days, while in London it is only 10. For venture capital funds, a startup set up in Latvia is an absolute advantage, because the cost of living in London, Paris, and Berlin is 82, 75 and 50% higher than in Riga.

Latvia has the lowest EU rates on capital gains, and dividends received from other countries are taxed in Latvia at a 0% rate. Also, Latvian startups can receive tax benefits in the amount of 200,000 euros, if only 30,000 euros are raised from accelerators or venture funds.

Unlike Estonia, you don’t need a special license for any related crypto activity. It’s 100% legal to operate crypto exchange without any special requirements (except let know local tax authorities). 

If you are thinking, where to move to the EU to start a crypto company, we definitely recommend Latvia. We’ve participated in the process of more than 40 companies relocating to Latvia, and we know stuff we talking about.

The other, more restrained opinion regarding doing business in Latvia was provided by trading platform Hodlhold, which is one of the most known blockchain companies from Baltic states.

It is not a secret that a lot of international companies transport workers and offices to Latvia. It is connected mainly with high-quality workers, relatively low salaries and other operational costs. The location is perfect and immigration authorities are very friendly to startups and entrepreneurs - it is easy to get startup visas and residency.

Unfortunately, the legislation for crypto is not finally developed now, and in fact, we have no clear rules, how to work with crypto here. The government support for fintech and crypto companies is also limited. In our opinion, Latvia, as well as Lithuania and Estonia have good chances to become ones of world crypto leaders.

But, to achieve this we need to complete the puzzle with crypto-friendly legislation - for example, Estonia made it several years ago and the results are amazing. I hope, it will be done soon.

The view on the Estonian business landscape was provided by Itez, a startup that made successful business on providing crypto-fiat exchange services for EU residents.

Due to the fact that we have a rather specific type of business, we have been precisely choosing the most suitable jurisdiction. As a result, we established our company in Estonia, as it suited us both in terms of costs and the convenience of legislation. In addition, it allows us to acquire the necessary licenses for our type of activity.

Regarding the rules of operation for crypto companies, it is not a secret that they are tightened across the EU and Estonia is not an exception. However, we stay compliant with all of them. The advantages of this jurisdiction outweigh this tendency, such as low costs and very efficient e-government - we can make almost all business-related operations online.

Talking regarding the advice for crypto companies which plan to establish a crypto business, Itez points out the following:

First of all, be honest with the law. Do not save on lawyers for the preparation and subsequent maintenance of a package of operational documents for the company. Do not forget that the attention of the regulator and lawmakers is especially riveted to cryptocurrencies, so you should not be cunning. It will be better for everyone.

For example, our activity requires licensing and we have two licenses - for the exchange of cryptocurrencies and for storage of cryptocurrencies of third parties. In order to fully comply with the law, we have implemented an adequate AML policy that is consistent with EU directives. In addition, we have a special AML officer who constantly monitors the work of our company.

And finally, here is rather interesting material, which allows to understand the intricacies of doing business in Latvia. This comment was provided by Startuplatvia.eu, a government-supported initiative aimed on support of the Latvian startup ecosystem.

First of all, Latvia is part of the EU, which in terms of regulations and investment opportunities is a good starting point. The business climate is rather good, especially for startups that deal with cryptocurrencies. In Latvia, crypto is being regulated by the tax office and not the Financial and Capital Market Commission (local financial regulatory authority).

You don’t have to acquire any additional licenses if you plan to open up a crypto exchange or any other crypto-related business in Latvia (opposite to Estonia, laws of which require to get a special license). Profits from crypto trading are considered to be capital gains in Latvia, which is taxed as 20% for physical persons and 0% for companies.

Right now Latvia is moving in the right direction, especially for foreigners that plan to start a new business in Latvia. One can apply for a startup visa which technically provides temporary residence permits for up to 5 founders. That is a huge opportunity for people who want to kickstart in the EU.

Taking about our advice to start your startup journey would be to study https://startuplatvia.eu/ to better understand whether this jurisdiction and benefits it provides suits your goals.

If you have your own funds and want to work from a country that has a friendly and well-developed legislation framework then Latvia is a good place to start. If you plan to do fundraising in Europe, the UK or Germany would probably fit your needs better.

Regarding the crypto business, there are a lot of opportunities. You can make a fully legal and operational crypto business in Latvia. Speaking about the future, my opinion is that Eastern Europe will develop faster in terms of blockchain and crypto adoption.

It is mostly connected with the fact that existing financial systems here receive less trust from people than in Western European counties like Sweden or the UK.

So, what is possible to conclude from provided comments?

In fact, Baltic states are at the initial stage of building their innovation hubs in comparison with such big players as Silicon Valley. But, despite the youngness and limited economic resources (note that the amount of capital in the economy of Baltic states is tiny being compared to the US or UK ones), they got a huge success.

This success is based on a simple principle of efficient usage of all the strong points that you have. These strong points are presented by, but not limited to low operational costs and cost of living, integration in the EU market, low taxation and flexible immigration laws. It is exciting when you can hire three developers instead of one in Silicon Valley or New York on the same budget to test your idea and ensure a longer runway for the company.

The achieved success of these three countries on an innovation market is nothing but the confirmation that the adaptiveness of the system to external conditions is often more important than other features. It looks like that this principle is working for both - for countries, that offer good conditions to modern entrepreneurs and for companies, that choose efficient jurisdiction to build business.

I do not have any vested interest in any of the mentioned companies. The views, descriptions and opinions expressed are those of the author and the companies, that provided comments. Do your own research.