E-Residency: potential for boosting e-commerce

By the year 2030, the United Nations hopes to realise their 17 Sustainable Development Goals (SDGs). These are concrete objectives that are simple to understand albeit challenging to achieve. The eighth SDG is about promoting “Decent Work and Economic Growth”. According to the Financial Times, digital information more than doubled between 2013 and 2015, globally. In an increasingly digital world, e-commerce (or digital trade) emerges as a more efficient way to connect producers and consumers. A seller in China is only a screen away from a buyer in Europe. Direct access to the online global market enables small and medium enterprises (SMEs) to grow, increase prosperity and advance the eighth SDG. E-commerce lowers marginal costs of production (it is equally cheap to digitally distribute 15 books as it is to distribute 1500 books). Using digital finance as one example, a McKinsey study shows that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6 percent by 2025. This could create up to 95 million new jobs. As our world shifts from the physical to the digital, various opportunities to increase worldwide prosperity continue to arise.

One of these opportunities is the introduction of e-Residency initiatives. Estonia is a pioneer on this area and provides an interesting case study: the Estonia e-residency programme. Regardless of where you live, anyone with online access can apply to become an e-resident of Estonia. The application process is relatively simple and speedy. E-residency will come in the form of a smart-card with a microchip and no photo,which connects with USB card reader for two-step authentication. This membership provides such benefits as: a secure digital identity and access to the European Digital Single Market. Businesses can be operated online within the legal and widely trusted framework of the EU. E-residency gives some entrepreneurs the chance to mitigate domestic flaws in policy or infrastructure and assimilate themselves into the global online market. The online creations have been numerous, including the Serbian company Limo4, which used e-residency to accept payments from providers not previously available in Serbia.

SMEs are among the main beneficiaries of a system which says it will cut support service costs and red tape. Indeed, a reason that motivated the creation of the Estonian programme was the promise of growing the number of active companies operating out of the country, specifically SMEs. Though it should be mentioned that e-commerce was never the primary goal of the e-residency program, it does hold value in this regard as well, as Veikko Montonen (Second Secretary of the Permanent Mission of Estonia to Geneva) mentioned in an interview. Further, there still exists a large global digital divide between developing and developed nations. From the International Telecommunication Union’s 2015 report, ‘4 billion people from developing countries remain offline, representing 2/3 of the population residing in developing countries’. Not only must internet access and physical infrastructure be available to these countries, there must exist policies and political will in support of global digital trade. E-residency can help people to participate in e-commerce by enabling them to 1) run a business independently of location by establishing, registering, and administering an Estonian company online; 2) open a bank account in Estonia for business and gaining access to payment service provides; 3) digitally sign documents and contracts with e-signature accepted as qualified in EU. However, there also exist hurdles that could prevent entrepreneurs from developing countries from obtaining e-residency: 1) the potentially high cost of €100 and 2) you must physically go to an Estonian embassy or Estonia to pick up your card. Because of Estonia’s small size, there are not very many embassies across the world. For example, on the continent of Africa there is only one Estonian embassy in Cairo, Egypt. It is also important to keep in mind that companies run by e-residents who are not located in Estonia are likely considered tax residents by the country where they physically reside and attention needs to be paid to stay in compliance with all the laws and to avoid double taxation also in Estonia.

Estonian e-residency remains a valuable resource for many people to gain direct access to global digital trade. Nevertheless, it seems to be a tool most frequently used by developed nations. For example, the top 10 countries with the highest number of applicants wishing to be Estonian e-residents are various European states, India, Russia, and the USA. Daniel Ha, CEO of a small company with headquarters in San Francisco, California says, ‘an e-residency allows smaller companies like ours to consider substantial work in areas that we otherwise couldn’t reach.’ Still, there are many developing nations among the list of 135 countries with citizens applying for e-residency. View statistics on the Estonian programme. As of October 2016, more than 1000 companies have been created through Estonian e-residency.

While e-residency is a new and exciting, it is not a catch all solution to developing an inclusive global market, nor was it ever intended to be. Though e-residents have the option to start businesses with their residency, an Estonian bank account is required to create a new company. Legislature was just recently enacted on November 1 that allow for residents and e-residents to open accounts without being physically present in the banks. The process can now take place through real time video, including an interview over video as well. Indeed, banks are currently working on incorporating this development into their systems and processes. Still, there seems to be some confusion over the benefits of e-residency. An Estonian e-resident in New York describes some technical difficulties he had and his curiosity about what to do with his newfound residency.

Closing the digital divide and engaging all countries in e-commerce seems to be the growing trend. Estonia’s e-residency programme is an example of an innovative way to create a more inclusive online space. The initiative is the first of its kind so it will presumably adapt to desires and needs as it continues to grow. Indeed, the very idea of the internet is to connect more people; its usefulness is enhanced the more users it has. The same can be said for e-residency. If Estonia’s digital pioneering inspires other nations to create their own versions of e-residency, its effectiveness will increase. There is great potential for the realisation of SDGs as various nations continue to join the global digital market.

Marissa Wilkinson is intern at DiploFoundation