Estonia’s efforts to create the world's first digital nation are putting the Baltic country of 1.3 million on the radar of entrepreneurs and investors worldwide. Launched at the end of 2014, the country’s e-residency programme enables anyone to access its digital environment through an Estonian ID card, and to set up an EU company with just a few hundred euros.

Thousands of individuals wishing to reduce their costs of doing business, gain a footprint in the EU or break through the infrastructure or political isolation of their home markets have signed up to the programme. This is strengthening Estonia’s reputation as a hub for innovation and unlocking an economic multiplier, adding impetus to the national economy.

Estonia is now building on the programme’s early success by combining it with the blockchain-driven revolution to launch a local cryptocurrency named 'estcoins'. This is designed to empower the digital nation, despite the doubts that the European Central Bank (ECB) has raised. 

A rising digital nation

Estonia’s e-residency programme makes it easy and affordable for anyone, anywhere in the world, to obtain an Estonian digital identity and access the country’s digital infrastructure. “We are exporting our business environment around the world,” says Adam Rang, the programme’s head of location-independent investment.

In its first two-and-a-half years, 35,453 individuals joined the programme, according to official figures. The geographic matrix of their origin speaks volumes about the reasons why they chose to join Estonia’s digital nation. People from countries at the edge of the EU such as Russia, Ukraine and Turkey have been particularly active in gaining a business footprint in the market. The UK’s Brexit vote has also prompted a spike in application by British nationals in the immediate aftermath of the referendum.

“For many people outside the EU, the programme means that they can have a EU company with access to many more financial services than in their home market,” says Mr Rang, highlighting the programme’s success in places such as Ukraine and Turkey, where crossborder transactions can be challenging. “On the other hand, the majority of e-residents are from across Europe. What they can get out of it is lower cost and lower capital of doing business,” he adds.

It takes €100 and a couple of months to get an e-resident digital identity card, and another €190 to set up a local company that can access all the services available on the local market, from accountancy to banking. Therefore, anyone, regardless of country of origin, can set up an EU-based company with €290, without even travelling to Estonia (the digi-ID card does not give right of entry to either Estonia or the EU, however).

At the same time, Mr Rang points out that Estonia’s competitive tax environment (which tops the Tax Foundation's global ranking for tax competitiveness) is not part of the equation. “Less than half of e-resident companies do pay taxes in Estonia, and they tend to be those digital nomads that keep moving from one country to another. For the majority of e-residents, if they clearly generate their value in a country other than Estonia, that is where they have to pay taxes.”

Economic multiplier

The e-residency programme is already paying off for Estonia. “For every euro invested, the programme has generated €100 for Estonia. That makes it the most profitable investment for the government, even more than education,” says Mr Rang.

The new 35,453 e-residents have set up 3444 new locally incorporated companies, and engaged with another existing 5229 business entities, according to official figures in March 2018. Most of the new businesses concentrate on business services and computer programming activities.  

So far, the whole project has generated a net income of €1.4m, plus €13m in net indirect socioeconomic benefits, according to an estimate by consultancy firm Deloitte, which is also the official adviser to the to e-residency team.

Assuming that Estonia manages to attract a total of 150,200 e-residents that set up 20,000 businesses by 2021, Deloitte estimates that the programme may bring an estimated €31m in net income for the country, and another €194m in net indirect socioeconomic benefits.

The crypto route

Estonia is going even further down the digital route on behalf of its community of e-residents with the introduction of 'estcoins', a crypto token to be used within the community.

The Baltic states have become a hotspot for initial coin offerings (ICOs). According to figures by start-up stock exchange Funderbeam, Estonia pulled off four ICOs in 2017, raising some $280m and making the European ICO top 10 ranking (led by Switzerland with 13 ICOs). The country also had the highest percentage of its overall start-up funding raised by ICOs, with 28%, highlighting the relevance that ICOs are gaining in a market such as Estonia, which has historically struggled to attract capital from abroad.

Estonian authorities are now working on launching a community platform where estcoins can be used for different purposes. For example, they could be used to reward people in return for doing things that contribute to the growth of the community. Another option under assessment is the so-called euro estcoins, the idea of engineering a crypto token pegged to the euro to facilitate crossborder trade.

Despite a guarantee that the token will be used exclusively within the e-residents community, the project has not gone unnoticed within the ECB. “No member state can introduce its own currency; the currency of the eurozone is the euro,” ECB president Mario Draghi said in September in answer to a question about the estcoin idea.

It remains to be seen whether Estonia eventually complies with the EU’s edict or goes its own way by issuing a state-backed cryptocurrency in the form of estcoins. Whatever happens, this digital nation is already on the move.