KYC & KYT: Key Mechanisms to Detect, Uncover, and Mitigate Fraud on Blockchains 🔍

KYC & KYT

KYC and KYT are pivotal in the cryptocurrency industry for ensuring transparency, regulatory adherence, and transactional security. 

Understanding KYC & KYT: 

KYC, or "Know Your Customer", signifies the process through which a company verifies its customers' identities, entailing the collection of personal information such as identification and proof of address to ascertain that customers are not engaged in illegal or fraudulent activities. Centralized entities, like exchange platforms, employ KYC procedures during investor registration.  

On the other hand, KYT, or "Know Your Transaction", scrutinizes customer transactions to detect and deter suspicious or illicit activities by tracing funds on the blockchain, aiding in the identification of potential fraudulent schemes through crypto-asset movement analysis.  

While KYC engages in off-chain verification of investors, KYT emphasizes on-chain activity monitoring. 

Regulatory Implications: 

Companies operating in the crypto-currency sector have a crucial interest in implementing robust KYC and KYT procedures. In many juridictions, this is a requirement to obtain the necessary license such PSAN in France and Crypto Asset Service Provider (CASP) in Europe. Firstly, this enhances their credibility in the eyes of investors, regulators and the general public, which can facilitate their access to traditional financial markets. 

What's more, KYC and KYT are essential for preventing criminal activity, helping to protect the integrity of the crypto-currency market. By avoiding suspicious transactions, companies can help maintain user confidence. 

Lawmakers around the world are taking an increasing interest in crypto-currency-related activities. Regulations have tightened to combat tax fraud, money laundering and terrorist financing. Against this backdrop, KYC and KYT are becoming essential tools for ensuring regulatory compliance. 

KYC involves several steps, including collecting official identification documents, verifying customer identity, monitoring activities and transactions, and setting spending thresholds for users. Companies must also regularly update customer information and report suspicious transactions to the relevant authorities.  

KYT, or "Know Your Transaction", relies on sophisticated monitoring tools that analyze transactions on the blockchain to detect suspicious patterns. 

Blockchain & Transparency: 

Blockchain technology provides total transparency on all exchanges between across different wallets. The principle of KYT is to analyze incoming and outgoing flows for a given wallet. From these flows, we are able to identify the interactions made with other wallets. In this way, it is possible to trace the path of crypto-currencies that have been stolen or used for illicit purposes. The tools available on the market enable very detailed analysis of the source of funds and an intuitive visualization of these information through an interface. 

Case Studies: 

Several firms, like Elliptic and Chainalysis, specialize in KYT services, employing advanced algorithms to trace fund provenance, monitor suspicious addresses, and assist businesses in regulatory compliance. The latter announced in a report that over $3.8M in funds were stolen by hackers in 2022. It is also a privileged partner of the US government in the fight against money laundering and the analysis of suspicious wallets. These companies use their own advanced algorithms to track the provenance of funds, monitor suspicious addresses and help businesses remain compliant with regulations. 

One of the biggest hacks in cryptocurrency history was the hack of the Mt. Gox exchange in 2014, which was robbed of 850,000 BTC. Chainalysis tools were used to track down 2 Russian hackers who are suspected by the US Department of Justice of having stolen 647,000 BTC.  

Recently, Elliptic was singled out for having attributed 4 recent hacks worth a total of $240 million - Atomic Wallet ($104M), CoinsPaid ($37.3M), Alphapo ($60M) and Stake.com ($41M) - to the North Korean Lazarus Group. 

EU Regulatory Evolution: 

The recent introduction of the DAC-8 directive by the European Union illustrates this trend. It aims to amplify oversight of crypto-asset players in Europe, aligning definitions and obligations with those of the MiCA (Market in Crypto Assets) regulations. This directive imposes reporting requirements on all digital asset service providers (DASPs), enhancing transaction transparency involving crypto-assets. 

Conclusion: 

Currently, while KYC is a regulatory mandate for most investment platforms, KYT, though not obligatory, has proven to be a powerful tool in tracing fraudulent funds and suspicious wallets. The broader adoption of KYT in the industry could significantly augment transparency in fund circulation and bolster trust in crypto-assets. 

Contact Us: 

Interested in implementing a robust KYC/KYT framework? Reach out to us. Our adeptness in this domain enables us to offer valuable guidance and support.