0

Due to the recent change in regulatory bodies, crypto businesses are now being asked to prevent their customers from facilitating transactions used for money laundering and other illicit activities such a purchasing illegal goods or services. A preventative measure called Know Your Transaction (KYT) has become a necessity to combat this.

KYT services use on-chain analysis to determine if a sender's address is high or low risk.

However I have recently come across the issue that some bitcoin transactions appear to have multiple input addresses (example). I have read some posts here outlining that it is difficult to determine the true sender address from one of these transactions.

I would like to know if providing one of the sender addresses is good enough for the KYT service to determine if the transaction is high risk, or should I attempt to pass each of the sender addresses (for multi-sender transactions) as separate transactions. One drawback of the latter is that we pay per usage for each sender address, so it would result in higher fees.

I would like to point out that:

  1. I am using Coinbase Analytics
  2. I'm not sure if this is relevant but the transaction occurs on-chain and if it is flagged as high risk we would return the BTC to the customer
3
  • The intersection of regulating bodies and technical reality is where things stop really making sense. 'To' and 'from' labels exist at the human-interaction-layer, and the human-interaction-layer may actually map very poorly onto the bitcoin-movement-layer. In fact, the bitcoin-movement layer may not look anything like the human-interaction-layer at all! So whatever way you end up interpreting and implementing this regulatory policy, it'll probably not match reality perfectly well
    – chytrik
    Aug 4, 2022 at 7:34
  • @chytrik I would like to point out that we generate a wallet address for the customer to send us BTC, so I know the receiver address but not the sender address. Apologies if this is not what you meant. Aug 4, 2022 at 8:07
  • Yes, I did understand that. Your job here is just tough, as the regulators want their policy followed, even if it is nonsensical at a technical level. I'm sure there will be some method that is considered 'best practices' you will unfortunately have to follow, but as @redgrittybrick mentioned, thats a question best directed to your compliance team / lawyers / etc.
    – chytrik
    Aug 6, 2022 at 6:12

1 Answer 1

1

I would like to know if providing one of the sender addresses is good enough for the KYT service to determine if the transaction is high risk

I don't see how it could be good enough. If one of the other sender addresses is high risk, your service would give a false result. Wouldn't you knowingly have failed to adequately assess the risk and thereby aided in the processing of criminally obtained funds? At the least it seems negligent.

However I am not a KYT compliance officer, just some random person in the Internet. You should probably instead ask both your KYT service and a lawyer.

3
  • As you can see in the below transaction, there are 4 input addresses. So if the KYT service is intelligent enough, it would check all four input addresses. This is essentially my question. Apologies for not clarifying. blockchain.com/btc/tx/… Aug 4, 2022 at 10:01
  • To provide an accurate and complete assessment of a transaction, the KYT service must check every input to that transaction. If the KYT service does this for any referred transaction, you don't need to provide any addresses at all. I suggest you ask your KYT service about this. Aug 4, 2022 at 11:06
  • The thing is we pay for a third party fraud prevention service who have a direct connection with Coinbase Analytics, so I thought I had a better chance asking here, but I will send them my query now and see what they say. Aug 5, 2022 at 8:11

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.