Understanding KYT On The Blockchain: What Payment Teams Need To Know

Distributed ledger technology gives payments and compliance teams powerful new tools in the fight against financial crime.

Doing business on the blockchain requires clear vision and understanding and, in the digital era, payment professionals have new tools at their disposal, which make compliance and risk mitigation more straightforward. The transparency offered by blockchain is a game-changer in the fight against financial crime.

Illicit Transactions And New Opportunities

The bad news? 2022 saw nearly $23.8 billion in cryptocurrency sent to illicit addresses, with almost half going to mainstream centralised exchanges. The good news? Chainalysis data indicates that these transactions represent less than 1% of total on-chain activity, suggesting that overall risks are low. In fact, the transparent nature of blockchain ledgers offers us a powerful tool: "Know Your Transaction" (KYT). This method allows us to continuously monitor transactions, track the flow of funds, and detect and prevent illicit activity.

Know Your Transaction (KYT)

"Know Your Transaction" (KYT) is emerging as a crucial component of the broader KYC program, monitoring online transaction data to detect financial crimes. With the rise of blockchain, KYT has come to prominence, allowing the flow of funds to be traced from originator to beneficiary. It goes beyond simply asking “who are you?” and also asks “what are you doing?”.

As blockchain transactions become more prevalent, KYT is emerging as a vital tool in the fight against financial crimes. It complements the broader KYC program by focusing on monitoring online transaction data to detect suspicious activities. With blockchain's transparency, KYT traces the flow of funds from originator to beneficiary. It shifts the emphasis from just identity to provide a more nuanced understanding of transactional behaviour. While KYC remains essential, the rise of KYT showcases the evolving nature of anti-money laundering practices in the blockchain era.

Blockchain-Powered Analytics For Enhanced Payment Control

Blockchain analytics tools have revolutionised risk assessment. They monitor transactions and detect various high-risk categories. At BVNK, we take a multi-layered approach, including customer identification and due diligence, and deploying blockchain analytics tools to carry out real-time transaction monitoring. Plus we offer an additional layer of protection by using analytics supported by machine learning to unveil the ‘unknown’.

The inherent transparency of blockchains offers unparalleled opportunities for pattern recognition, network analytics, and outlier detection, enabling us to use both global transaction information and proprietary data. With Distributed Ledger Technology (DLT), we can proactively pinpoint unusual behaviour instead of merely focusing on known high-risk individuals or prevalent financial crime patterns. This extensive visibility, further enhanced by the capabilities of AI and advanced data models, empowers payment teams and their providers to undertake more informed, targeted monitoring of transactions. Rather than solely depending on traditional measures like blanket transaction limits that can inadvertently impede legitimate transactions, teams can delve into the vastness of public transaction histories; this allows them to unearth networks of users that layer transactions and pinpoint addresses tied to illicit financial activities. While customised rules, such as specifying permitted and banned addresses based on a business's risk profile, remain invaluable, the ultimate advantage stems from capitalising on blockchain's transparency coupled with cutting-edge data analytics.

Crypto Payments: Identity And Verification

Cryptocurrency’s inherent nature makes identity and source verification complex. However, most crypto payments are made from custodial wallets, and new rules and industry solutions are being introduced to ensure more transparency and verification. Regulators around the world are introducing the so-called 'Crypto Travel Rule', based on Financial Action Task Force (FATF) guidance. In certain cases, this rule mandates crypto asset service providers and intermediaries to share payer and beneficiary information in a crypto asset transaction. The industry is also pioneering reusable and portable ‘passes’ for identity proof, allowing a more transparent verification process.

Reframing AML For The Blockchain

The blockchain era introduces powerful tools for Anti-Money Laundering (AML), particularly through enhanced KYT practices. These tools not only mitigate risks but also provide a more comprehensive view of transactional behaviours. As regulations adapt to these technological advancements, the financial world is redefining its approach to AML and the fight against the financing of terrorism.

Despite high-profile bad actors in the space, DLT payments can be as safe and often more safe than traditional payments if you work with the right payment partners and combine it with the right technology and AML practices. This rethinking of traditional practices aligns with the broader trend of leveraging new tools in the fight against financial crime, paving the way for a more transparent and secure digital age.