Blockchain ‘Know your Transaction: In this comprehensive guide, learn how to combat financial crime using blockchain transaction monitoring from Markus Kempner, BVNK’s HeaBVNK’ snti-Financial Crime Architecture and Intelligence.
Suppose you’re an industry expert interested in using DLT. In that case, you and your business associates must ensure that you’re adequately prepared to deal with any threats and adhere to regulations around financial crime.
Digital asset payment rails are as vulnerable to abuse as other payment rails. Chainalysis reports that in 2022, anonymous addresses transferred almost $23.8 billion worth of Bitcoin, with little less than half of that amount reaching centralized, mainstream exchanges even if evidence from Chainalysis shows that illegal behavior accounts for less than 1% of all on-chain transactions.
Another area that could benefit from distributed ledger technology is the fight against money laundering. Because blockchain ledgers are public, they provide a novel and effective means of monitoring transactions, tracking money movements, and thwarting fraud.
What is ‘know your Transaction’ on the Blockchain?
Know Your Transaction (KYT) monitors online transaction data to detect and prevent money laundering and terrorist financing. The ‘know your customer’ (KYC) program involves KYT, identity verification, and due diligence at the start and throughout the client lifecycle.
KYT can also be used for fiat payments, but distributed ledger technology has popularised it. Blockchains are transparent, auditable, and permanent so that you can track funds from source to beneficiary and their full history.
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KYT on the Blockchain can also aid firms with KYC. From stolen and fraudulent identities to AI photos, video, and speech, identification concerns have persisted for decades. Customer verification is important but not enough to prevent financial crimes. The financial sector has had to adjust rules and emphasize transaction history and behavior. Blockchain can provide great insights and opportunities compared to traditional payment rails.
What are Blockchain Analytics?
Financial services providers, regulators, and FIUs employ blockchain analytics solutions. These solutions automatically identify dangers and exposure. They also let you monitor transactions and find addresses associated with high-risk exchanges, gambling, sanctions, and dark web markets in forward and backward transactions.
Here’s an Here’se of how it works:
- OFAC includes a digital currency address in its list of SDNs.
- Your blockchain analytics tool-using firm is the transaction counterparty for this address.
- You get an alert quickly and can act. You will be notified if you transfer or receive funds to or from that address or connected addresses.
Request your provider’sprovider’son monitoring strategy. Most providers employ blockchain analytics, but some offer protection. In addition to client identification and due diligence, BVNK uses blockchain analytics tools to monitor real-time transactions. We add another layer of security by employing machine learning-supported analytics to reveal the ‘unknown.’’ DLT enhances pattern identification, network analytics, and outlier detection. It lets us reference global transactions and proprietary data, allowing us to actively detect odd conduct rather than just looking for high-risk and fraudulent individuals or financial crime tendencies.
This approach also allows us to reassess other traditional anti-money laundering approaches, such as blanket transaction limits, which may cause friction for genuine payers in favor of better, more focused action. Targeted action could include examining public transaction history to find networks that ‘layer’ transactions and block addresses used to transport financial crime proceeds.
Can you know the payer’s Idpayer’swith Crypto Payments?
Since crypto wallet addresses do not require real-world identities, blockchains make it difficult to determine if a coin belongs to a person. However, most crypto payments are made from custodial wallets on centralized exchanges, which demand consumers to provide their complete name, government-issued ID, and current address during signup.
Depending on your risk appetite, you can collaborate with your payments partner to highlight payments from other wallet types where a user may not have gone through onboarding. Countries are implementing new consumer identification laws for enterprises handling crypto assets, following the Financial Action Task Force (FATF) guidelines. Blockchain ‘Know your Transaction: The “Crypto Travel Rule” requires”crypto asset service providers and intermediaries to reveal payer and beneficiary information in specified situations (depending on transaction size).
Several companies are producing reusable and portable ‘passes’ to allow Bitcoin holders to authenticate their identity once and connect it to all their blockchain transactions. “The financial sector has had to adjust controls and focus more on transaction history and behavior. Blockchain can provide great insights.”
Can you”Verify the Source of Funds with Crypto Payments?
Although it is difficult to identify the owner of a coin, blockchain technology can provide detailed information about its provenance. Each transaction has a visible, permanent, and auditable identification assigned at the start. Using continuous transaction monitoring and KYT methods, you may be sure if the Bitcoin you got is linked to illegal behavior.
Can you Force Closed-loop Payments with Crypto?
Blockchain ‘Know your Transaction: Ensuring that customer payouts go back to the depositor and that all incoming and outbound payments come from the same registered client is what closed-loop payments are all about. The Blockchain rarely allows automatic ‘closed loop’ paymloop’ Most participants use centralized exchange-exchange-held’ wallets’ to make ‘blockchain payments.
Customers depositing money from their preferred exchange wallet receive payment from the exchange. The customer will require a different address because the exchange issued a beneficiary address. The money may not be sent to the source but to the same person.
There are some circumstances where you can force closed-loop payments on the Blockchain:
- Account-based blockchains like Ethereum accept self-custody wallet payments. You can transfer payments back to the same address on these blockchains, like email. However, some payment teams may not accept self-custody wallet payments due to the lack of consumer verification.
- If big payments justify a manual process, ask the payer for a screenshot so you can manually compare the transaction hash from wallet to wallet.
Reframing AML for Blockchain
Long-standing regulations have helped curb criminal activities and reduce money laundering risk on blockchains. Since 2014, the Financial Action Task Force (FATF) has published cryptocurrency anti-money laundering (AML) guidance, which several regulatory authorities have enshrined into law.
As authorities build standards, payments and compliance teams and their providers are rethinking AML and CFT, using Blockchain to fight financial crimes. Blockchain ‘Know your Transaction: If you use the correct payment partners, technology, and AML processes, DLT payments can be safer or safer than traditional payments despite high-profile bad actors.
Also Read: Btcnewz.co.uk
