How Estonia became the #1 Digital Nation

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Estonia is a small nation with a reputation as  global leader in e-government. Citizens of Estonia enjoy a streamlined experience across their digital interactions with the state. The “e-Estonia” narrative has driven Europe’s most efficient and effective digital public service, putting it in the driving seat of the European Commission’s digital single market, sustaining Estonia’s tech start-ups at home, and their growth aspirations abroad.

“Even though there are only a little over a million of us, thanks to Estonia’s capabilities, we can make ten million payments, perform ten million requests and sign ten million contracts in just ten minutes. Even ten times larger states cannot beat us.”

Kirsty Kaljulaid, President of Estonia

Cyber Defence centre of excellence

In 2007 Estonia suffered a nationwide cyberattack. Government websites and digital services were defaced or unavailable. Following the attack, there were worries that sensitive citizen data may have been compromised. By this point Estonia’s public services were already in an evolved state of “digitalisation” to meet the cost and efficiency imperatives of the small nation. Services such as tax and voting were already online.  Unlike its peers disconnected paper public services, Estonia needed security solutions to assure continuity and integrity of citizen data.

In the aftermath of the attack  the NATO Cooperative Cyber Defence Centre of Excellence was established in Tallinn. In 2008 Estonian government took steps to secure and guarantee authenticity of transactions in some Government databases, building on indigenous cryptography work. This was the genesis of the scheme which uses “linked timestamping” to audit changes in several Estonian Government databases today and assure that they have not been tampered with. These technologies were commercialised by Guardtime AS and others, and though its linked timestamping scheme is best described as a Distributed Ledger Technology, Guardtime jumped on the Blockchain bandwagon in 2017 with a marketing makeover renaming its Keyless Signature Infrastructure KSI Blockchain..

Small Streamlined State

Much has been written by Digital Transformation commentators about the reasons for e-Estonia’s success, but the following systems played a fundamental role:

  1. A uniform digital identity system implemented across public services, banking, and some private service providers (the state eID system is based on a “standard” PKI, with 2 factor authentications based on identity smartcards and mobile devices)

  2. A cross-government data interchange system (the X-road system lets government agencies look up information in other government databases)

  3. Availability to citizens of systems to monitor how and when their personal information is being used by government officials (mostly implemented by Guardtime’s DLT audit)

These foundations are mortared together with strong technical leadership, political commitment to remove legal and regulatory impediments to the deployment of technology solutions, and a populace with a higher than average degree of trust in digital government solutions. The result is a small streamlined state - so far no large developed economy has shown the leadership and commitment to transform their legacy systems with this level of integration.


Baltic Blockchain

Estonia and neighbouring countries have an active blockchain and cryptocurrency community. In 2017 there were 2 major conferences which attracted speakers from Silicon Valley and rivalled London-based events in size. The active tech start-up scene in Estonia has given rise to a significant share of Europe’s more established blockchain start-ups, notably Funderbeam (financial services), Healthureum (Healthcare), and a healthy pool of smaller bootstrapping and seed funded companies already with customers such as WePower (Energy).

Estonia has a record of technology entrepreneurialism which belies its size. It enjoys a healthy angel and institutional investment environment for technology ideas. That the 2011 sale of Skype to Microsoft created many Tallinn-based developer $Millionaires undoubtedly helped.

E-resident entrepeneurs

In 2014 Estonia’s digital identity scheme was extended through the E-Residency programme to foreigners.  This “government start-up” scheme seems to have created an elite group of Global Estonians including well-known operators in Silicon Valley’s Venture Capital scene, further increasing access to capital. It also provided an easy infrastructure for location independent businesses to establish head office operations, tax, employment and business banking within the EU. At the time of writing E-residents were responsible for the creation of 5,000 businesses (mostly technology industry) based in Estonia. At the end of 2017 this has generated €15Million in net income according to independent auditors.

Building on the e-Estonia narrative, the Estonian government is reinventing its mission:

“Estonia is now a blockchain nation. Our digital society is underpinned by blockchain technology and our secure digital identities provide a significant advantage to blockchain companies that need to verify online identities”

Former President Toomas Hendrik Ilves 

What does this mean in practical terms? Firstly, blockchain companies (both physically based in Estonia, and registered in Estonia by E-residents) are using the E-residency identity verification process to satisfy KYC checks as they raise funding through ICOs. In late 2017 Estonian Government issued proposals for the establishment of an E-residency cryptocurrency, under the working title of “EstCoin” with goals of enabling a fluid marketplace and incentivising growth in the E-Residency community.

This blog is extracted from our Scottish Government research which is now available, sign up to receive it via email.