Cryptocurrencies offer exciting opportunities, but also introduce new compliance challenges. This article explores KYT (Know Your Transaction), a crucial tool for ensuring crypto compliance and mitigating risks.

Why Crypto Compliance Matters

In the very dynamic world of cryptocurrency, establishing compliant operations is essential for long-term success. Robust compliance fosters trust with regulators, customers, and financial institutions. It reduces legal risks, fosters innovation within a clear framework, and maintains market access.

Today, compliance is no longer an option but a necessity. It is essential not only for the survival and growth of businesses but also for the health and future of the industry. By establishing a robust compliance system, crypto businesses can reap numerous benefits:

- Building Trust: By adhering to regulatory standards and legal requirements, crypto businesses can demonstrate their compliance and credibility to regulators, customers, and other financial institutions, which is vital for establishing strong partnerships and attracting new clients.

- Reducing Risks: Non-compliant behaviors can lead to severe legal consequences, including fines, litigation, or even criminal charges. Establishing compliant processes helps businesses identify and mitigate these risks, protecting their interests.

- Fostering Innovation: Compliance provides a clear framework for innovation, enabling businesses to confidently develop new products and services while adhering to applicable laws and regulations.

- Maintaining Market Access: Many jurisdictions require crypto businesses to obtain licenses or registrations to operate. Complying with these requirements is crucial for maintaining market access.

KYT: A Key Pillar of Crypto Compliance 

KYT, which stands for Know Your Transaction, is a process used by financial institutions to monitor and track financial transactions for potential fraud or suspicious activities. KYT crypto aims to help institutions identify the source and destination of each transaction, assess transaction risks, take appropriate actions, and report suspicious transactions to regulatory bodies.

Know Your Transaction KYT differs from the traditional financial sector’s KYC (Know Your Customer), which focuses on verifying identities, by concentrating on transaction behavior analysis.

Previously, KPMG suggested in the "Future of Banking Outlook" that the focus of anti-money laundering efforts should shift from compliance with KYC regulations to proactive control of risks associated with potential suspicious transactions, with KYT being key to managing transaction risks.

In the traditional financial sector, KYT is currently a value-added option, but in the realm of virtual asset transactions, KYT is becoming a necessity for managing risks and ensuring compliance. KYT plays an indispensable role in achieving compliance goals within the crypto compliance framework by requiring businesses to scrutinize transactions to identify and prevent transactions related to money laundering, terrorist financing, and other illegal activities.

Core Elements of KYT 

KYT operates through a systematic process involving the monitoring and analysis of financial transactions to detect and prevent potential fraud or criminal activities, especially those related to money laundering or terrorist financing. The core elements of KYT include:

- Data Collection: Financial institutions collect transaction data, customer information, and other relevant data from various sources.

- Investigation: When a transaction raises suspicions, an investigation delves into its details to uncover any associations with criminal activities or financial crimes.

- Risk Scoring: Collected data is analyzed, and transactions are scored based on factors like the nature of the transaction, participants, transaction patterns, and geographical locations.

- Real-time Monitoring: Algorithms and rule-based systems continuously monitor transaction data in real-time. This monitoring aims to identify any anomalies or suspicious activities that deviate from established norms or predefined standards.

- Reporting: According to anti-money laundering and counter-terrorist financing regulations, financial institutions must report suspicious transactions to assist law enforcement agencies in further investigation and action.

KYT and Regulation 

Currently, there are no specific global regulations for KYT itself. However, KYT-related practices are usually incorporated into broader anti-money laundering (AML) and counter-terrorist financing (CTF) regulatory frameworks. Although specific provisions for AML/CTF vary by country and region, financial institutions must comply with the guidelines set by the regulatory bodies in their respective countries or regions.

Here are some examples of regulatory frameworks that include KYT principles and their interpretations:

1. Financial Crimes Enforcement Network (FinCEN) - USA

• Regulatory Body: Subsidiary of the U.S. Department of Treasury, FinCEN

• Regulation: Bank Secrecy Act (BSA)

• KYT Requirements:

• • Implement effective transaction monitoring systems to identify and report suspicious activities.

  • Conduct ongoing due diligence on customer transactions.

  • Comply with Section 352 of the Patriot Act, establishing risk-based procedures for ongoing customer due diligence to detect and report any suspicious transactions and regularly maintain and update customer information.

Interpretation: FinCEN plays a central role in U.S. AML/CTF regulation, focusing on continuous monitoring and customer due diligence to identify and report suspicious transactions.

2. Anti-Money Laundering Directive (AMLD) - European Union

• Regulatory Body: European Union

• Directive: AMLD

• KYT Requirements:

• • Customer due diligence

  • Risk assessment

  • Transaction monitoring

  • Identification and verification of customer identities

  • Monitoring ongoing transactions

  • Reporting suspicious transactions

Interpretation: AMLD is the core of the EU’s AML/CTF regulatory framework, covering key KYT elements like customer identity verification, transaction monitoring, and reporting of suspicious transactions. These provisions are regularly updated to address and minimize risks related to money laundering and terrorist financing.

3. Financial Action Task Force (FATF) Recommendations

• Regulatory Body: Global anti-money laundering and counter-terrorist financing organization, FATF

• Recommendations: Global standards and recommendations for AML/CTF

• KYT Requirements:

• • Emphasize the need for continuous monitoring and understanding of customer transactions as part of an effective AML/CFT program.

  • Customer due diligence should be assessed based on four risk factors: product, service, and transaction risks; customer-related risks; risks associated with specific countries and geographical areas; and risks related to distribution channels.

  • Immediately report any suspicious transactions upon discovery.

Interpretation: FATF recommendations provide benchmarks for global AML/CTF regulation, with suggestions for continuous monitoring and risk assessment crucial for effective implementation of KYT.

Other Country Examples of KYT Regulation

- Canada: The Financial Transactions and Reports Analysis Centre (FINTRAC) requires financial institutions to report suspicious transactions and conduct due diligence on customers.

- United Kingdom: The Financial Conduct Authority (FCA) requires financial institutions to conduct risk assessments and implement customer due diligence and transaction monitoring measures that match the risk assessment.

- Australia: The Australian Transaction Reports and Analysis Centre (AUSTRAC) requires financial institutions to implement an anti-money laundering/counter-terrorist financing plan, including customer due diligence, transaction monitoring, and reporting of suspicious transactions.

- Singapore: The Monetary Authority of Singapore (MAS) requires financial institutions to implement effective AML/CFT compliance programs, including customer due diligence, risk assessment, and transaction monitoring.

- Hong Kong: The Hong Kong Monetary Authority (HKMA) requires financial institutions to conduct risk assessments and implement customer due diligence and transaction monitoring measures that match the risk assessment.

- Japan: The Financial Services Agency (FSA) of Japan requires financial institutions to implement effective AML/CFT compliance programs, including customer due diligence, risk assessment, and transaction monitoring.

Application of KYT in Crypto Compliance 

Compliance and Risk Control in Crypto Gambling 

The rise of cryptocurrencies has brought new opportunities to the gambling industry but also introduces some new risks and challenges. To ensure the compliance and security of crypto gambling, gambling businesses need to take effective risk control measures.

Firstly, comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. Gambling businesses should undertake customer identity verification and continuous customer monitoring procedures. These procedures help ensure that only legitimate customers can conduct crypto transactions and prevent illegal activities.

Secondly, controlling risks in crypto transactions is key to ensuring transaction security. Gambling businesses should implement multi-layer security measures, including data encryption, SSL certificate verification, and multi-signature procedures, to ensure that users' crypto assets are fully protected. Additionally, establishing a comprehensive internal audit system and regularly reviewing transaction records help detect anomalies promptly.

Furthermore, compliance and risk control in crypto operations are equally important. Gambling businesses should strictly adhere to regulatory policies, ensuring that business operations comply with legal requirements. When conducting crypto gambling operations, ensure that the game content is legal and meets ethical standards, avoiding the dissemination of harmful messages.

Recommendations for compliance and risk control in the gambling industry primarily include implementing anti-money laundering (AML), counter-terrorist financing (CTF), crypto transaction risk control, and crypto business compliance risk control. Only by following these regulations can the stable development of the gambling industry and the protection of users' rights be effectively ensured.

Pathway to Compliance for Blockchain Games 

As blockchain technology continues to evolve, GameFi (blockchain gaming) has emerged as a new field in the gaming industry. However, due to its decentralized nature, anonymity, and other characteristics, blockchain gaming faces many compliance challenges in both domestic and international operations. To ensure the compliant operation of blockchain games, game developers need to start from several aspects:

Firstly, comply with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. Perform KYC identity verification for all players, verify players' identity information, and establish player profiles. Monitor players' transaction behaviors, identify suspicious transactions, and take appropriate measures in a timely manner. Implement differentiated risk control measures based on players' risk levels.

Secondly, control risks in crypto transactions. For crypto transactions in blockchain games, a series of measures need to be taken to reduce risks. These measures include setting reasonable transaction limits to prevent large suspicious transactions, establishing robust market volatility management mechanisms to reduce market risks, and ensuring the security of players' wallets to prevent hacker attacks and asset theft.

Crypto business compliance risk control. Understand the crypto-related laws and regulations of different countries and regions, and ensure that game operations comply with local regulatory requirements. Develop detailed compliance policies and processes to clarify compliance responsibilities and obligations in game operations. Establish a robust internal control system to ensure the transparency and fairness of game operations.

Trustformer KYT: At the Forefront of Crypto Compliance 

Trustformer KYT is a KYT solution designed specifically for the crypto sector, aimed at effectively identifying and preventing money laundering, terrorist financing, and other financial crimes. With its real-time monitoring, risk alerts, risk tracing, intelligent analysis, and a global compliance think tank with extensive service coverage, Trustformer KYT has become a leader in the field of crypto compliance and is at the forefront of crypto compliance.

Advantages of Trustformer KYT:

- Real-time Risk Monitoring and Compliance Analysis: Trustformer KYT can monitor transactions and fund flows in real-time, combined with advanced intelligent analysis technologies. It performs risk scans on target addresses before transactions occur, identifying potential risks and issuing timely alerts to help users avoid transaction risks.

- Risk Tracing and Auditing: When users receive unidentified funds, Trustformer KYT can perform risk scans on the sources of the funds and store the tracing results as evidence. This helps users understand the legitimacy of the fund sources and take necessary actions in a timely manner.

- Risk Management and Analysis: Trustformer KYT provides various data statistical analysis models to understand users' risk control status and results from both macro and micro perspectives. Including sanction screening, illegal transaction identification, false crypto financial activity identification, hacker behavior, beneficiary identification, etc., it can flexibly handle various business scenarios' risk management and compliance needs.

- Global Compliance Think Tank: Trustformer KYT not only masters the latest compliance policies of various countries and regions but also provides a global compliance think tank, updating compliance information in real-time. This enables users to quickly develop compliance strategies that fit their business locations, ensuring compliance in different legal and regulatory environments.

- Extensive Service Coverage: Trustformer KYT's service targets include exchanges, wallet service providers, financial institutions, government agencies, OTC service providers, and individual investors involved in blockchain activities. It has covered 30+ countries and regions across North America, Europe, and Asia, providing risk control and compliance services to users worldwide.

- Global Data Monitoring: Trustformer KYT has analyzed 5 major public chains, including Bitcoin, Ethereum, TRON, BSC, and Polygon, covering over 2 billion addresses, 39 million contracts, and 39 billion transactions. It can also analyze smart contracts and active wallets, providing comprehensive risk monitoring and analysis.

Trustformer's services have covered 30 countries/regions including North America, Europe, and Asia.

Trustformer KYT has been adopted by many well-known enterprises and institutions, including:

• Cryptocurrency exchanges

• Wallet service providers

• Financial institutions

• Government agencies

• OTC service providers

• Individuals participating in blockchain activities

If you are looking for a reliable and efficient crypto compliance solution, Trustformer KYT is your best choice.