If you are looking to harness the distributed ledger technology (DLT), as a payment professional, it is now, more than ever, necessary to ensure that both you and your partner have the access to the right systems and controls to mitigate risks and meet compliance requirements of financial crimes. But the question of how to efficiently do so arises. In this scenario, what can help you is “know your transaction” in blockchain or “KYT”. 

Knowing your transaction in blockchain can be simply defined as a process, which allows financial institutions to closely monitor and analyse financial transactions for identifying suspicious activities like money laundering or fraud. Its needs have increased with the increasing adoption of digital payments raising the demand for better transaction monitoring. For payment teams KYT allows examination of transaction details helping in the identification of potential crimes. Although implementation of KYT can be costly, the cost of failing to catch illicit activities could be higher, both in financial penalties and reputational damage. So let's delve deeper to understand how “know your transaction” in blockchain can help payment teams. 

What is Know Your Transaction (KYT) in Blockchain? 

Know your transaction, is a program that is associated with monitoring online transaction data to identify and prevent financial crimes like money laundering and terrorist financing. It is an essential part of the larger "know your customer" (KYC) program, which emphasises identity verification and due diligence at the start and throughout the client life cycle. KYT is essential to blockchain because it helps financial institutions and payment teams adhere to anti-money laundering laws while safeguarding their clients and brand from financial crime. Without KYT, payment teams would be vulnerable to risks of unknowingly facilitating illegal activity, which could lead to legal penalties, financial losses and reputation damage. Besides, KYT in blockchain promotes transparency and accountability in financial systems, which is necessary for maintaining the integrity and stability of global economies, while allowing monitoring of transactions and helping in identifying suspicious activities.

How Does KYT Work? 

Here’s how KYT typically works for financial institutions and payment teams: 

1. Data Collection: The first step of KYT includes collecting data about each transaction, for example the amount, where it is coming from and where it is going. 

2. Risk Assessment: After data collection, KYT includes looking at the transaction to identify if anything seems unusual, such as an unexpected large amount or a transfer to a high-risk country. In simple terms, KYT checks the gathered data from transactions and gives a risk score. Typically, this score is determined by details such as the type of transaction, the parties involved, and the location of the transaction. Eventually, it aids in identifying possible dangers or problems early on, such fraud or unlawful activities. 

3. Continuous Monitoring: Following transaction flagging, the KYT system keeps an eye on the transactions in real-time, searching for trends that could indicate that something unlawful is taking place. 

4. Alert & Action: The payment team is required to disclose any transactions deemed suspicious to the police after the KYT determines that something is amiss and prompts them to look into the matter further. 

Importance of KYT in Blockchain 

KYT helps businesses in detecting and preventing financial crimes, while enabling them to maintain regulatory compliance and reduce risks. It allows proactive identification of potential instances of money laundering, terrorist financing and other criminal activities. With robust implementation of KYT in blockchain, businesses can comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, safeguarding themselves against fines and legal repercussions. TransFi’s solutions, customised for Web3 businesses, offer advanced data analysis and risk assessment, which can empower businesses to screen wallets in real-time, stay ahead of criminal activities and enhance the accuracy and efficiency of KYT processes overall.

How KYT Enhances Blockchain Payment Security

The contribution of KYT in enhancing payment security in blockchain can be understood through its following impacts on blockchain: 

1. Real-Time Monitoring : KYT systems continuously monitor blockchain transactions, allowing for the detection of irregularities immediately. This proactive surveillance identifies suspicious patterns, such as high-frequency transactions or large transfers to newly acquired addresses. With real-time analysis of transactions, organizations can detect potential threats that might otherwise go undetected. Besides, by preventing fraud or money laundering with quick intervention, it reduces potential losses significantly. In consequence, real-time monitoring of KYT strengthens the overall security of blockchain payment systems.

2. Risk Assessment : KYT tools thoroughly evaluate the danger of wallet addresses by looking at past transactions and behavior. It assesses counterparties' reputation and aids businesses in making well-informed choices regarding doing business at particular addresses. KYT takes into account variables like past transaction history, affiliation with businesses on a blacklist, and risk considerations related to geography. Identifying high-risk wallets reduces the risk of fraud by assisting company owners in taking preventative measures or rejecting transactions completely. Therefore, it can be claimed that a strong framework for risk assessment improves security and confidence in the payment ecosystem.

3. Fraud Detection & Alerts : KYT systems promptly detect possibly fraudulent transactions by utilizing advanced algorithms. The technology can identify irregularities that can point to criminal conduct by contrasting recent transactions with historical scam trends. This enables real-time notifications to users and compliance staff, enabling prompt risk mitigation measures. This proactive strategy not only identifies suspicious activity but also takes action before it causes serious harm. This helps in maintaining the integrity of blockchain and assets are protected with effective fraud detection.

4. Regulatory Compliance Assistance : KYT solutions make sure that companies follow important rules like AML and KYC. KYT assists enterprises in maintaining transparency by offering comprehensive information on transaction histories and wallet risk levels. This decreases the danger of fines and penalties from government organizations, which can negatively affect enterprises. Furthermore, KYT enhances the connections between financial institutions and industry partners by providing a robust compliance framework.

5. Trust Building : KYT systems build trust among users and stakeholders by increasing transparency in blockchain transactions. It offers clear access to all parties, along with verifiable transaction histories through comprehensive monitoring and reporting. This transparency demystifies blockchain technology for those who are not familiar with it, making it easier to use and comprehend. Users are increasingly inclined to embrace blockchain payment systems as their trust in security measures grows. All things considered, greater openness enhances blockchain technology' standing in the larger financial community.

KYT vs KYC in Payments

Both KYC (Know Your Customer) and KYT (Know Your Transaction) are crucial in identifying potential risks, but their focus differs in aspects of financial security. So, let's find out the difference between KYT and KYC in payments: 

• KYC (Know Your Customer): The most common times when businesses refer to KYC includes when opening a bank account, insurance policy, making investments or a pension scheme. It is an essential step which helps in thoroughly understanding clients, verifying their identities and accessing the risks that are likely involved in establishing a business relationship. KYC is crucial for preventing illegal activities like money laundering and fraud, which also safeguards financial institutions and payment team’s from potential threats. 

• KYT (Know Your Transaction): On the other hand, KYT focuses on obtaining detailed and data-centric information about customer transactions. It includes closely analysing major economic activities in a customers account, like that of domestic cash transactions, international card transactions, remittances (both inward and outward),  along with cross-border transactions and trade finance transactions. 

Why Payment Teams Need KYT in Blockchain? 

There are various reasons why payment teams and financial institutions need KYT in blockchain, the most important ones of which include: 

1. Regulatory Compliance: It is necessary for financial institutions  as per law to comply with AML ( anti-money laundering) and CTF (counter-terrorism financing) regulations. In this context KYT serves as an essential tool for payment teams and financial institutions to meet these obligations and avoid penalties associated with non-compliance. 

2. Detection and Prevention of Financial Crime: With continuous monitoring KYT  enables financial institutions not only detect but prevent fraudulent or criminal activities like that of money laundering and terrorist financing. This eventually helps institutions and its customers stay protected against financial losses and reputational  damage.  

3. Risk Management: KYT serves as an important risk management tool, which allows payment teams in identifying and mitigating risks associated with specific transactions, customers or counterparties. 

4. Improved Customer Due Diligence: With the help of KYT financial institutions can conduct better customer due diligence by offering more detailed information about transaction history of the customer and potential risks that can arise from the activities. 

5. Enhanced Operational Efficiency: Financial institutions can enjoy overall improvement in their operational efficiency with the help of KYT in blockchain, as it automates the monitoring and tracking of transactions, eventually reducing the need for manual processes, and increasing accuracy. 

Conclusión 

KYT has evolved as an indispensable component in the blockchain ecosystem, playing one of the most important roles in maintaining financial integrity and regulatory compliance. With the continuous growth of blockchain technology and disruption of traditional financial systems, the need for sophisticated transaction monitoring intensifies. KYT for payment teams address the unique challenges imposed by blockchain’s decentralization technology. KYT is effective in enhancing the transparency and security of blockchain transactions,  ensuring that suspicious activities are identified and mitigated in the earliest stages. With detailed insights into transaction behaviours, KYT supports regulatory compliance with anti-money laundering and counter-terrorism financing standards, which is necessary for legitimacy and stability in the blockchain industry. TransFi offers beginner friendly and comprehensive KYT features to be implemented in blockchain and help businesses grow across borders. It also enables businesses to buy or sell 50 + assets across the world using digital payment gateway “Ramp”, while offering its “Collections” feature, an affordable payment collection solution. You can also take help from TransFi to pay your employees,  vendors or freelancers with its global payment solution known as “Payouts”. 

PREGUNTAS FRECUENTES

1. What is the fullform of KYT?

KYT is the acronym for Know Your Transactions. It is a process that is generally used by financial institutions for monitoring and tracking financial transactions for detecting and preventing fraudulent or criminal activity, such as money laundering or terrorist financing. 

2. What is KYT in blockchain? 

KYT in blockchain relates to the process of verifying the reliability of a wallet by screening its activity such as origin and destination of the transactions. 

3. What is AML and why is complying with it important? 

AML stands for anti-money laundering, which is a set of compliance requirements that helps financial institutions and businesses monitor transactions for detecting criminal economic activity. It is necessary for financial institutions to comply with this regulation to continue functioning in the international market. 

4. What is KYC vs KYT? 

KYC (Know Your Customer) is primarily associated with verifying The Identity and background of customers, whereas KYT (Know Your Transaction) is about gathering insights into transactions taking place in a financial institution for identifying suspicious or potentially illegal activities. 

5. What is KYT regulation? 

KYT systems equip institutions with necessary tools to stay compliant. It offers robust systems to financial institutions that help in combating money laundering and terrorist financing. Thus, enabling payment teams to stay compliant.