Cryptocurrencies are considered lawless means through which criminals are facilitated who disguise the original money source and perform malevolent activities. The reason is the anonymity due to which criminals find it an easy target to transfer money across the world. Digital identity in the cryptocurrency world stores information digitally that is collected from cryptocurrency transactions. This information is used to monitor the legitimacy of miners and customers.
Just the way banks perform due diligence operations by ensuring Know Your Customer regulations, in the cryptocurrency world, it corresponds to Know Your Transaction (KYT). The term KYT is coined as a result of cryptocurrency challenges that introduced anonymity and made backtracking difficult that ultimately gave opportunities to bad actors to conduct financial crimes. KYT helps conventional banks comply with the regulatory obligations along with the adoption of digital technology.
By identifying and verifying the transaction, virtual currency platforms will be able to maintain a clean customer base. Moreover, a rule-based approach helps spot suspicious activities of the customers in the financial system. At the core, financial transactions need clarity about the payment processes and third-parties involved in it. While making transactions among two companies, huge data is needed such as tax details, lading bills, documents, proof of residency and identity. In some cases, even, more granular details are needed such as the name of identity who reviewed the documents.
KYT solutions ensure trust between banks and their affiliates. Moreover, the KYT process provides enhanced security and reduces the cost of operations. To comply with regulatory authorities banks and financial institutions need to ensure transparency and security in the financial systems to avoid the entrance of bad actors who can disturb the legitimate financial flow.
Know Your Transaction – KYC of Blockchain
Blockchain, near regulatory authorities, is a complex concept that does not fully address the concerns of transparency and security. Looking at it with the perspective of banks and financial institutions, KYC is not enough for virtual currency service providers. The complex associations of digital identities and their data should be transparent enough to evaluate an identity against honest identity attributes. This helps ensure a clean customer base and reduce the incidences of financial crimes such as money laundering and terrorist financing.
KYT is effective in identifying the suspicious entities flowing in the financial system. The minors who mine coins in the blockchain are not fully aware of the persona and transactions associated with it. These hidden identities, as blockchain gives the concept of anonymity kills the objective of transparency. This is the reason that fraudulent entities become successful in performing sanctions across the world anywhere they want. This ultimately affects economic growth.
Local and global regulatory authorities are vigilant with respect to actions that virtual currency platforms and banks should consider regarding transaction verification of customers. Virtual currency services need to give a clear description of their working and operations to make it clear that no fraudulent entity is facilitated through their platform. KYT is the ultimate solution. KYT services are able to detect dishonest nodes that are making false transactions.
By employing technological advancements and innovative financial technologies, virtual currency providers can monitor suspicious entities. Using Artificial intelligence, machine learning, and other similar technologies, the behavior of individuals in the financial system can be detected and monitored. The transition that seems even close to suspicious is marked and discarded. In this way, the bad actors who misuse the anonymous feature of blockchain cannot proceed to a transaction if it does not contain any proof of transaction that it is an honest one.
Machine learning algorithms are trained with a huge amount of data set that are able to differentiate between honest and dishonest nodes. They filter out the bad actors from good ones and make them suspicious. This is done so if some entity tries to choose a transaction path that is unusual or make frequent transactions having a short amount or even try to make a one god transaction that crosses the minimum threshold. The attempt is considered violent.