Is This Tiny European Nation a Preview of Our Tech Future?
On a Spring afternoon, I’m gazing out the window of an office building on the outskirts of Estonia’s capital, Tallinn, watching people stroll below, when a cream-colored plastic container mounted on black wheels rounds the corner and begins maneuvering its way among the pedestrians. The device looks like a kid’s toy. But in reality it’s a high-tech delivery robot called Starship and potentially the next mega-profitable invention to spring from this snowy, miniature country on the northern edge of Europe—one of the more unexpected launching pads on the planet. “If you look at sci-fi movies set 20 years from now, you don’t see people carrying their groceries. Robots just arrive at their homes,” says Ahti Heinla, cofounder and CEO of Starship Technologies. Reality, he says, has caught up to sci-fi. “About two years ago we realized it was possible to create this part of the future right now.”
For a snapshot of how we might all be living tomorrow, there are few better places to visit than this picturesque city of 400,000, whose winding medieval alleyways offer an elegant contrast to its digital present. Creating the future now, as Heinla puts it, is Estonia’s driving project, and increasingly it is its core business too.
Most Americans or even Europeans would be unable to find this pinprick on a map, squeezed between its small Baltic Sea neighbor Latvia and mammoth Russia. Its population, just 1.3 million, is about the same as Dallas or the Bronx borough of New York City. But its modest size and remoteness belies its clout. It is here that a group of friends, including Heinla, invented the hugely popular Internet calling platform Skype.
Given Estonia’s history, the invention of Skype in this country was ironic. While Americans were buying their first cell phones, about a quarter-century ago, Estonians were shut off from the world as an outpost of the Soviet Union. You could easily wait 10 years to be assigned a landline phone. By the time the Soviet Union imploded in 1991, the country was in a time warp. “We did not have anything,” says Gen. Riho Terras, the commander of Estonia’s armed forces, who had been a student activist at the time. The country had to reboot from zero. Terras says each citizen was given the equivalent of 10 euros, or $10.60. “That was it,” he says, laughing. “We started from 10 euros each.”
One generation on, Estonia is a time warp of another kind: a fast-forward example of extreme digital living. For the rest of us, Estonia offers a glimpse into what happens when a country abandons old analog systems and opts to run completely online instead. That notion is not fanciful. In various forms, governments across the world, including those in Singapore, Japan, and India, are trying to determine how dramatically they can transform themselves into digital entities in order to cut budgets and streamline services (and for some, keep closer tabs on citizens). Estonia claims its online systems add 2% a year to its GDP.
The moment I land in Tallinn, my phone pings with the city’s free Wi-Fi network, which rolled out more than 15 years ago. But the extreme-digital life of regular Estonians is far less visible. At birth, every person is assigned a unique string of 11 digits, a digital identifier that from then on is key to operating almost every aspect of that person’s life—the 21st-century version of a Social Security number. The all-digital habits begin young: Estonian children learn computer programming at school, many beginning in kindergarten.
In 2000, Estonia became the first country in the world to declare Internet access a basic human right—much like food and shelter. That same year it passed a law giving digital signatures equal weight to handwritten ones. That single move created an entire paperless system. Since no one was required to sign with a pen, there was no need for paper documents to pay taxes, open a bank account, obtain a mortgage, pick up a prescription, or perform most of life’s other tasks, other than marrying and divorcing. “I established my company in about 20 minutes, without going anywhere,” says Kaidi Ruusalepp, 41, CEO of Funderbeam, an investment trading platform for early-stage, non-IPO startups, which she founded in 2013. “We never visited the tax board, the Social Security agency, anything,” she says. “Everything is online.”
So, too, are Estonians’ taxes. Almost all Estonians file taxes online—within minutes. Since public registries are all linked in one system, Estonians can log in to prefilled tax declarations showing their income, property, number of children, and so on. They make necessary tweaks and hit the send button. (Outside the U.S., this type of approach is increasingly common.) Last year then–Prime Minister Taavi Rõivas earned loud cheers on The Daily Show when he described to host Trevor Noah how he had filed his taxes on his iPad during a few idle minutes in the Luxembourg Airport.
When I visit Rõivas, 37, in his office in the Estonian Parliament, it’s weirdly devoid of paper. He says during nearly three years as Prime Minister the only time he signed his name in ink was in ceremonial guest books. Theoretically, he says, the government could issue an online order to send troops into battle. “I never signed any law physically,” he says. “Never.”
Estonians were also first to be able to vote online in elections, back in 2005. When I ask Estonian President Kersti Kaljulaid where she voted in last November’s elections, which brought her to power, she responds as if my question is dumb: “From my computer at home.” Kaljulaid was speaking to me while we were on a boat to Tallinn from Helsinki, in neighboring Finland, where she had just signed a deal allowing the countries to recognize each other’s digital ID cards. Now, for example, Finns and Estonians can visit doctors in the other country and automatically call up their medical records—all stored online. “We have been using digital identifiers for 17 years,” she says. “People have learned to trust the system.”
Estonians might take all this tech wizardry for granted now, but the country was on its knees economically after the Soviet collapse. It had one huge advantage: It was starting from scratch. “People were paid in cash,” says Martin Ruubel, 41, president of Guardtime, a 10-year-old software security company that developed the country’s blockchain system (more on that in a moment), sitting in his Tallinn office on the grounds of a converted former military barrack. Since no Estonian had ever had a checkbook, once the Soviets were gone the country simply skipped past pen and paper and issued bank cards. It was a money saver, but had another benefit: It pushed Estonians to get online fast.
Scrambling to piece together a country, the new leaders, young and inexperienced, also rapidly privatized the telecom industry. “It was highly successful,” says Mart Laar, 57, who became the first post-Soviet Prime Minister, at age 32, and is now chairman of the board of supervisors for the Bank of Estonia. Since so few people had even landline phones, many simply bought mobile handsets instead. Laar, a historian, says he knew nothing about computers but believed they needed to start with the latest technology. When Finland offered to donate its analog telephone exchange to its poorer neighbor for free, Estonia turned it down.
The government recruited Ruusalepp, now Funderbeam’s CEO, as the new country’s first IT lawyer when she was just 20 and still a student. “I had no law degree and no understanding of technology,” she says. Her first task was to create a law for digital signatures, years ahead of many countries. “We wanted to change the country. We had brains, and we just had to shoot,” she says.
Those early decisions set the stage for today’s thriving tech scene in Estonia. Skype, founded in Tallinn in 2003, spawned a generation of techies and would-be entrepreneurs. “People thought, If Estonian guys could do something like Skype, I can do it also,” says Andrus Oks of Terra Venture Partners, an investment fund in Tallinn. And when Microsoft bought Skype in 2011 for $8.5 billion, ex-Skypers plowed money into new startups in Tallinn, further attracting U.S. investments. Skype’s founding developers, including Starship’s Heinla, also launched a venture capital fund, called Ambient Sound. “The Skype effect has been enormous,” says Heinla, who started Starship with Skype cofounder Janus Friis; major investors include Daimler A.G., as well as Silicon Valley firms Shasta Ventures and Matrix Partners.
Now, if you order Chinese takeout through platforms DoorDash or Postmates in Redwood City, Calif., or Washington, D.C., your food might arrive as a Starship test run, with a ping on your mobile phone letting you know your delivery robot is at the door. Starship is also doing test deliveries in Bern, Switzerland, and London, and Domino’s Pizza plans to test some deliveries by Starship soon in Hamburg.
The Skype effect does not end there. In 2011, Skype’s first employee, Taavet Hinrikus, cofounded TransferWise, an online money-transfer company, which now occupies four floors of a Tallinn building and handles about $1 billion a month in exchanges around the world. Investors include Andreessen Horowitz and Peter Thiel’s Valar Ventures.
With hindsight, it seems inevitable that Russia would sooner or later collide with its pint-size former territory, which, aside from becoming a major tech hub, had rushed to join both NATO and the EU after the Soviet collapse.
Russia’s payback finally came in 2007—and it would markedly change Estonia. It happened when Estonia’s government decided to move a World War II memorial statue of a Soviet soldier from central Tallinn to a nearby war cemetery. Pro-Russian demonstrators burned barricades and looted stores in days of rioting. Then Estonia’s banks, its Parliament, and several public services suddenly went off-line, in one of the biggest-ever distributed denial-of-service attacks to hit a country. The 2007 cyberattack still haunts Estonia. “We were already really, really dependent on online. We had no paper originals for a lot of things,” says Guardtime’s Ruubel. Estonia believes Russia was behind the attack.
Shortly after, the only NATO-accredited cyberdefense center opened in Tallinn. And this year Estonia will open the world’s first “data embassy” in Luxembourg—a storage building to house an entire backup of Estonia’s data that will enjoy the same sovereign rights as a regular embassy but be able to reboot the country remotely, in case of another attack. “It was quite clear after 2007 that we knew how to fight against external attacks,” Ruubel says. “The worry was, What if there was an attack from inside the system, with someone tampering with the data?”
The answer to that concern came in the form of the technology that now underpins crucial parts of Estonia’s system, as well as some of its most successful startups, and that, in the years ahead, could help power the country’s future growth: the blockchain.
Essentially a distributed database, a blockchain—the system that also underpins the cryptocurrency Bitcoin—serves as a public ledger that can never be erased or rewritten. The technology allows Estonia’s engineers to strengthen its encrypted data and lets Estonians verify at any time that their information has not been tampered with. Estonians are also required to use two-step verification for many online tasks. These and other security measures, say Estonians, make their system as close to unbreakable as possible. (The U.S. State Department said last year that cybercrime “does not represent a major threat” in Estonia.) They contrast it, for example, to Edward Snowden’s hacking into the NSA, which he continued over 18 months. “No Snowden can crack this system,” boasts President Kaljulaid.
Outside the country, however, there are some doubts as to whether the Estonians’ technology is as secure as they claim. In 2014—seven years after the suspected Russian hack—engineers at the University of Michigan studied Estonia’s online-voting system and concluded that determined hackers—such as Russian operatives—could feasibly penetrate it, creating fake votes or altering the totals in order to rig elections “quite possibly without a trace,” they wrote in their report. “Estonia’s system places extreme trust in election servers and voters’ computers—all easy targets for a foreign power,” they said. Estonia disputed the claims, saying that it had worked flawlessly in six elections and that it had “a level of security greater than was possible with paper ballots.”
To Estonians, the potential of extreme-digital systems for both governments and businesses is dizzying—and with the blockchain, it has only just begun. Guardtime, which has 150 employees and estimates about $23 million in revenues in 2015, is now among the world’s biggest blockchain companies, with clients around the world, including Lockheed Martin and the U.S. Department of Defense. Funderbeam uses so-called colored coin technology, based on the public Bitcoin blockchain, to keep track of transactions and investments. That eliminates the need for brokers and clearing agents.
Ruusalepp, whose early backers at Funderbeam included the Silicon Valley venture capital investor Tim Draper, says she regularly hears Americans argue that paper records are more secure. Estonians, by contrast, would be aghast to have their medical records in paper folders in doctors’ offices, she says. “You can never see who has looked at your data,” she says. “Blockchain solves the issue of trust.”
Those who created Estonia’s system say they believe the arguments raging in the U.S. over data privacy are largely misplaced. The focus should instead be to give people control over who accesses their data, by using blockchain technology. “The real issue is data integrity,” says Toomas Hendrik Ilves, an Estonian-American from Leonia, N.J., who served as Estonia’s President from 2006 until last November, and is now a senior fellow at Stanford University’s Center for International Security and Cooperation and sits on the World Economic Council’s Future of Blockchain group. He says it could take many years for the U.S.’s sprawling agencies to create an Estonian-type blockchain architecture. “I’m smack in the middle of Silicon Valley, at Stanford, and the amount of creativity is amazing,” Ilves says. “But the public sector is lagging way, way, way behind.”
Having built perhaps the world’s most seamless digital system, Estonia still faces a major limitation: its size. With just 1.3 million Estonians, it runs like a well-oiled machine. But engineers claim there is vast spare capacity. Built right, the system could work with huge numbers. (The U.S. could in theory reengineer its databases from scratch, say Estonian technologists, and serve 300 million Americans just as well.) To more fully leverage its technological advantage and boost economic growth, Estonia needs more market participants.
Since Estonia had little means for attracting masses of immigrants to its icy Northern European landscape, it came up with a quirky idea—another of its firsts in the world: offering people virtual residency. Taavi Kotka, 38, a software engineer and entrepreneur, dreamed up the concept after becoming the government’s chief information officer in 2013. Kotka wrote a policy paper arguing that the population needed to grow fast, and proposed a target of 10 million people by 2025. Since Estonian women were not about to have 10 babies each, the alternative was to figure out what kind of product the country could offer to the rest of the world. Somewhat like Delaware-based corporations in the U.S., e-residents of Estonia can now run their European operations remotely and do business in euros. “We want to be the office for micro and small companies, because that is basically what our country is,” say Kotka, who now works as a consultant to Estonian startups. “You cannot grow without customers.”
Estonia’s first e-residency cards rolled out in December 2014. The microchips inside them are identical to Estonians’ digital ID cards but come without citizens’ rights, like voting or public pensions, and there is no obligation to pay taxes in Estonia. This is no tax haven: Estonia requires that e-residents pay their taxes to whatever country they owe them. But for a fee of 145 euros (about $154) e-residents can register companies in Estonia, no matter where they live, gaining automatic access to the EU’s giant common market—about 440 million once Britain leaves the union. Of about 18,000 e-residents so far, about 1,400 have formed companies in Estonia. On average, each of those companies spends roughly 55 euros (about $58) a month on accounting and office administration in Estonia.
This year the government doubled its budget for the program and intends on doubling it again in 2018, saying it’s determined to ramp up e-residency numbers quickly. As numbers grow, so too will the business services Estonia offers. Officials have traveled to Tallinn from around the world to examine how to start their own e-residency programs. Kaspar Korjus, managing director of the e-residency program, says his office hosts about 500 delegations a year. “So far the only revenue model for countries is taxes,” he says. “But if we get 10 million e-residents paying $100 a month each, maybe we would not need taxes.”
The possibilities do not end there. With its government running on the blockchain, Estonia could in theory begin marketing other inventions as they unfold—creating huge new business. Rõivas, the former Prime Minister, says Estonia is working on developing “precision medicine” that would tap into the genome data of its 1.3 million citizens in order to better diagnose illnesses, treat people, and design personalized drugs. “We can use blockchain to make sure that the data exchanged is able to be traced,” he says.
It’s possible to imagine Estonia’s idea becoming a multibillion-dollar business in the years ahead—turning the whole view of government as a bureaucracy offering public services into an entity generating profits.
Perhaps only a place that started over from scratch in 1991 could reimagine the idea of a country. As I watch the Starship robots maneuver across the company’s office in Tallinn, CEO Heinla says he believes Estonians, after decades of living under Soviet rule, were uniquely suited to creating new ways of doing things, including how to run a government. “People grow up and see an establishment they cannot break into,” he says, so Estonians simply built something new, and more efficient. Older, more set in its ways—and more skeptical—the rest of the world has yet to catch up. Just don’t expect Estonia to wait for us.
A version of this article appears in the May 1, 2017 issue of Fortune with the headline “Welcome to Tomorrow Land.”