Although most economic activity involving Bitcoin and other cryptocurrencies is legal, bad actors use Bitcoin for illicit purposes. In most jurisdictions around the world, any business who transacts in cryptocurrency on behalf of customers is required to comply with anti-money laundering and counter financing of terrorism regulations (AML/CFT). This means cryptocurrency businesses are under regulatory obligation to have a compliance program to detect and prevent illicit activity.
Given the large transaction volumes of many cryptocurrency businesses, it's hard to detect all high risk activity without many false positives. Too many false positives create unnecessary work for compliance teams and can cause bad user experiences if the compliance team questions or suspends a user based on a false positive.
Chainalysis KYT (Know Your Transaction) recently launched Alerts in beta to detect as much high risk cryptocurrency activity as possible with fewer false positives. Today, we're excited to announce that Alerts is out of beta and available to all Chainalysis customers.
Interested in learning more about KYT Alerts? Get in touch with our team
Don't miss important high risk activity
With Chainalysis KYT Alerts, compliance teams are able to comprehensively detect high risk activity because Chainalysis has the largest dataset on illicit cryptocurrency addresses. Chainalysis will only label a cryptocurrency address with a real world entity name if we're 100% sure the address is controlled by the named entity. This limits false positives because you can be certain an address is controlled by the entity named in Chainalysis KYT.
For more information on the wide range of high risk activities that Chainalysis identifies, check out our recent webinar on cryptocurrency typologies. The webinar covers many high risk typologies, including: darknet markets, terrorist financing, sanctioned cryptocurrency addresses, stolen funds, scams, ransomware, gambling services, mixers/tumblers, cryptocurrency ATMs, high risk exchanges, and fundraising for illicit or violent activity. Chainalysis continuously collects data on these activities in real time, and KYT generates Alerts for all of these typologies.
Blockchains are constantly changing as more transactions are added to the ledger. This activity can significantly change the risk of a given transaction. For example, if a user of an exchange withdraws some Bitcoin to a previously unused Bitcoin address, it is difficult to assess the risk of the Bitcoin address immediately because it is brand new at the time of the withdrawal. But a few weeks later, the address may spend the funds from the exchange withdrawal. Chainalysis may then identify that this address belongs to a darknet market, for example.
Chainalysis is constantly monitoring the blockchain and sends Alerts through KYT whenever any high risk activity is detected. This ensures compliance teams won't miss anything, even if the high risk activity is detected after the time of the transaction.
Fewer false positives
Most comprehensive understanding of services
In order to prevent false positives, it's important to identify both high risk and low risk entities on the blockchain. Here's a simple example to illustrate why: suppose a customer of your exchange withdraws bitcoin to address A. Address A then sends those funds directly to a sanctioned address. While it might seem like your customer is very high risk, it's possible that address A is a deposit address at another exchange, and that exchange happened to use the funds from the deposit to address A to fund the withdrawal of another customer. In this case, your customer was simply withdrawing funds to another exchange. The other exchange is responsible for the exposure to the sanctioned addresses – not you.
Tuning and customization
Chainalysis has a transaction monitoring tuning team that can help adjust Alert rules to meet your compliance policies. The transaction monitoring tuning team can help you examine different scenarios based on your historic data in order to choose the thresholds that make sense for your business.
Chainalysis KYT uses machine learning to intelligently prioritize your Alerts based on your past compliance decisions. Your compliance team can review Alerts sorted by those most likely to be of concern, based on the actions your team took on previous Alerts that were similar. This feature is currently in beta - you can sign up here for early access.
If you're already using Chainalysis KYT and would like help getting started with Alerts, contact your customer support manager. And if detecting and preventing criminal use of Bitcoin and other cryptocurrency sounds interesting, we're hiring.