KYC vs KYT: A comprehensive guide for digital asset businesses

Compliance plays a critical role in building trust, reducing risks, and enabling growth for digital asset businesses. Two essential elements of any compliance strategy are Know Your Customer (KYC) and Know Your Transaction (KYT). While they are closely related, each serves a distinct purpose. This guide explores the differences between KYC and KYT, their roles in compliance, and why they are both vital.

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What is KYC?

KYC refers to the process of verifying the identity of customers before they interact with your platform. It ensures that users are who they claim to be, helping to prevent fraudulent and illicit activity.

Key elements of KYC:

• Identity verification: Collecting government-issued IDs, proof of address, and other personal details.
• Risk profiling: Assessing customers based on factors like geographic location and financial activity.
• Ongoing monitoring: Regularly reviewing profiles to maintain compliance as circumstances change.

Why KYC is important:

KYC helps businesses detect and prevent financial crimes like identity theft, fraud, and money laundering. By verifying the identity of users during onboarding and routinely during the business relationship, businesses can reduce risk and align with regulatory standards.

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What is KYT?

KYT focuses on monitoring and analyzing transactions to identify suspicious or unusual activity. Unlike KYC, which looks at customer identities, KYT examines customer behaviors and the flow of funds.

Key elements of KYT:

• Transaction analysis: Detecting anomalies such as structuring or unusual patterns.
• On-chain and off-chain tracking: Providing a comprehensive view of transaction activity.
• Real-time alerts: Flagging high-risk transactions for immediate review.

Why KYT is important:

KYT adds an extra layer of protection by continuously monitoring transactions. It helps detect illicit activities that may not surface during onboarding, such as money laundering or fraud attempts.

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Differences between KYC and KYT

• Focus: KYC identifies who the customer is, while KYT examines what the customer is doing.
• Purpose: KYC reduces risks during onboarding by verifying user identity, while KYT ensures ongoing oversight by monitoring transactions.
• Data types: KYC relies on personal details like IDs and proof of address, while KYT focuses on transaction patterns and activities.
• Use case: KYC is crucial during the onboarding process, whereas KYT is essential for ongoing compliance efforts.
• Regulatory alignment: KYC supports AML compliance and customer due diligence, while KYT aligns with global standards like the FATF’s Travel Rule.

Why digital asset businesses need both

Digital asset businesses face unique challenges in a high-risk, regulated environment. Combining KYC and KYT creates a comprehensive compliance strategy that safeguards both businesses and their customers.

1. KYC ensures trust at the start: By verifying users during onboarding, businesses reduce the risk of bad actors entering their platform.
2. KYT provides ongoing protection: Transaction monitoring helps identify and address suspicious activities in real time.
3. Together, they close compliance gaps: Businesses gain a full picture of user behavior, enabling smarter and faster decisions.

Real-world example

Consider a user who passes the KYC process during onboarding. Months later, their transaction activity begins showing signs of structuring (breaking a large transaction into smaller ones to avoid detection), which is a common tactic for money laundering. Without KYT, this behavior might go unnoticed. Integrating KYC and KYT allows businesses to detect such anomalies and respond immediately.

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How ComPilot simplifies KYC and KYT

ComPilot brings KYC and KYT together into a unified, AI-powered compliance platform designed for digital asset businesses. Here’s how we make compliance smarter and simpler:

• Unified data views: Customer profiles and transaction data are available in one intuitive dashboard, streamlining decision-making.
• Instant alerts: Automated notifications for suspicious activity ensure quick action.
• Blockchain-agnostic capabilities: Monitor both on-chain and off-chain transactions effortlessly.
• Scalable compliance tools: Adapt easily to evolving regulations and the growth of your business.

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Conclusion

KYC and KYT are essential components of a strong compliance program. They complement each other by addressing different aspects of risk: customer identity and transaction behavior. Together, they enable digital asset businesses to operate securely, build trust, and grow confidently in an evolving regulatory landscape.

Explore how ComPilot can integrate KYC and KYT seamlessly into your compliance strategy by reaching out for a free demo and elevating your compliance processes.

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