Cryptocurrencies and other forms of digital assets are rapidly changing the financial landscape around the world, and the Central and Eastern European (CEE) region is no exception. The use of cryptoassets is growing among both individual users and businesses. However, along with the opportunities that this type of investment offers, there are also significant risks. Among the most serious are the risks of money laundering and terrorist financing. Today, we will explore in detail the measures to combat money laundering and terrorist financing in the area of crypto-assets across the CEE region. Additionally, I will share practical tips on how to work with this type of assets.

Regulatory and Legal Environment of the CEE Region and Crypto

Countries in the CEE region have been working to integrate cryptocurrencies into their legal frameworks for several years. Several nations have passed important laws and regulations aimed at creating legal oversight of the crypto industry, laying the foundation for the regulation of crypto-assets.

For example, laws adopted across different CEE countries establish the legal status of virtual assets (VAs) and provide a legal basis for their use. The main provisions of such laws typically include:

• Regulation of cryptocurrency platforms and exchanges: Operators of virtual asset markets (cryptocurrency exchanges and wallets) are required to register with authorities and comply with AML/CFT requirements.
• Transparency of cryptocurrency transactions: Companies operating in the cryptoasset space must ensure proper customer identification (KYC) and maintain records of transaction information.
• AML/CFT reporting: Transactions exceeding a certain financial threshold must be subject to mandatory reporting, and suspicious transactions must be reported to the local Financial Intelligence Unit (FIU).

Legislative Harmonization with European Standards

During the integration process with the European Union, many CEE countries are aligning their AML/CFT laws with European standards. This includes adapting legislation to international norms in the fight against money laundering and terrorist financing. As part of this process, regulators across the CEE region require operators in the cryptocurrency industry to comply with international AML/CFT standards, such as ensuring customer identification, monitoring transactions, and reporting suspicious activities to the local FIU.

Role of Local FIUs in the CEE Region

Who monitors compliance with AML/CFT regulations in the crypto space? Local Financial Intelligence Units (FIUs) across the CEE region are responsible for overseeing compliance with AML/CFT regulations. These agencies supervise entities subject to virtual asset regulations and provide guidance to ensure transparency in cryptocurrency operations.

Main Trends in AML/CFT Regulation of Cryptocurrencies in the CEE Region

The use of cryptocurrency is increasingly popular across the CEE region, prompting several key trends in the regulation of cryptoassets.

1. Increased Requirements for Customer Identification (KYC)

As the crypto industry grows, there is a heightened need to strengthen customer identification measures. Virtual asset service providers (VASPs) in the CEE region are required to conduct KYC procedures for all customers involved in significant transactions. This includes:

• Collecting and verifying the client’s personal data during registration.
• Continuously monitoring customer transactions for suspicious activity.

Many crypto exchanges and wallets now offer advanced verification services, such as biometrics and integration with national databases, to confirm users’ personal data.

2. Implementation of Transaction Monitoring on the Blockchain

The implementation of transaction monitoring tools on the blockchain is becoming a standard practice. Companies monitor the movement of cryptocurrencies between wallets, identify risky transactions, and detect links to illicit assets. For example, blockchain analysis tools enable companies to:

• Identify suspicious transactions that follow patterns commonly associated with money laundering or terrorist financing.
• Analyze large or frequent transactions to detect potential red flags.

Leading financial institutions across the CEE region are already employing such transaction monitoring tools.

3. Adopting a Risk-Based Approach

Similar to other regions, the CEE countries are increasingly using a risk-based approach in AML/CFT processes. Companies are expected to assess the risks associated with cryptocurrency operations and implement appropriate mitigation measures. Key stages of this approach include:

• Establishing a customer’s risk profile based on factors such as transaction volume, the client’s country of residence, and the type of virtual assets involved.
• Implementing enhanced due diligence for high-risk transactions, such as stricter customer identification and increased transaction monitoring.

4. Preparation for the Implementation of MiCA

Although some CEE countries are not EU members, they are preparing to adopt European norms, such as the forthcoming MiCA regulation (Markets in Crypto-Assets). MiCA will provide uniform rules for the crypto-asset market in Europe and establish requirements for transparency and investor protection. Companies in the CEE region working with cryptoassets are already preparing to comply with these international standards.

5. Cooperation with International Organizations

Countries in the CEE region actively cooperate with international organizations, such as the Financial Action Task Force (FATF), to implement best practices in AML/CFT. Many nations are in the process of harmonizing their legal frameworks with FATF standards, though full implementation is still ongoing.

Practical Recommendations for Crypto Companies in the CEE Region

Given the increased regulatory pressure in the CEE region, crypto companies should focus on ensuring compliance with AML/CFT legislation. Here are key recommendations for companies working with cryptocurrencies:

1. Implement Advanced Technologies for Customer Identification

To comply with AML/CFT requirements, companies must use modern technologies to identify customers, such as:

• Remote customer identification using biometric recognition technologies and integration with national databases to verify client identities efficiently.
• Real-time monitoring of customer transactions to detect suspicious or anomalous activities.

2. Invest in Blockchain Analytics

Crypto companies should invest in blockchain-based analytics tools to monitor transactions, detect suspicious patterns, and mitigate risks associated with illegal activities. These tools can:

• Detect transactions involving addresses linked to criminal activity, hacker attacks, or terrorist financing.
• Perform deep analysis to identify unusual patterns, such as large sums being split into smaller transactions or sudden significant transfers.

3. Apply a Risk-Based Approach

Companies should integrate a risk-based approach into their AML/CFT processes, segmenting customers into risk categories based on factors like transaction volume, asset type, and geographic location.

4. Prepare for International Norms Implementation

Crypto companies in the CEE region must prepare for the adoption of European regulations, such as MiCA, and ensure compliance with evolving international standards. This involves:

• Monitoring regulatory developments and adjusting business processes to meet new requirements.
• Adapting business models as necessary, particularly regarding token issuance or cryptocurrency exchanges.

5. Train Employees and Foster a Culture of Compliance

Employee awareness is critical for effective AML/CFT compliance. Companies should invest in regular staff training on AML/CFT regulations and crypto-related risks. Building a culture of compliance encourages employees to actively participate in identifying suspicious activities and adhering to internal compliance rules.

Conclusions

Cryptocurrencies and other virtual assets have significant potential for the development of financial technologies in the CEE region. However, to mitigate money laundering and terrorist financing risks, companies working with cryptocurrencies must comply with strict AML/CFT regulations. As the regulatory environment in the CEE region evolves toward European standards, it is essential for companies to ensure compliance through innovative technologies, a risk-based approach, and a strong culture of compliance.