As the financial world increasingly intersects with decentralized technologies, blockchain is emerging not just as a tool for innovation, but as a powerful force for modernizing compliance. In particular, it offers a new lens for combating financial crimes such as money laundering, enabling both traditional financial institutions and virtual asset service providers (VASPs) to evolve beyond the limitations of legacy compliance systems.

Beyond Identity: A Shift from KYC to Transactional Insight

Under the Bank Secrecy Act (BSA), U.S. financial institutions are mandated to implement anti-money laundering (AML) programs, which include customer due diligence, transaction monitoring, suspicious activity reporting, and staff training. The first step in this process, known as Know Your Customer (KYC), involves collecting personal data and assessing initial risk at the onboarding stage.

However, conventional compliance tools have their shortcomings—chief among them is the reliance on siloed, private databases. These systems are inherently blind to activity occurring outside their own walls. For example, when a customer deposits funds into a traditional bank, the institution often depends solely on the customer’s statements to assess the origin of those funds.

Enter Blockchain: Visibility Beyond Borders

Blockchain technology disrupts this model by offering a transparent, immutable ledger that captures the full trail of digital asset movement. With the right tools, VASPs and financial institutions can gain real-time insights into transactions, far beyond their own platforms. This leap in visibility lays the foundation for what is now referred to as Know Your Transaction (KYT).

KYT doesn’t just improve upon KYC—it transforms compliance itself. By leveraging blockchain data, institutions can trace the journey of funds across the entire network, enabling them to:

Instantly assess risk at the transaction level

Independently verify data without relying on customer disclosures

Continuously update insights as new information becomes available

These features make KYT an adaptive layer of intelligence in a field where threats and red flags evolve rapidly.

KYT in Action: Proactive Risk Management

Modern compliance platforms now integrate KYT capabilities directly into their monitoring tools. This allows them to flag suspicious activity in real time, whether it involves transfers to high-risk jurisdictions, links to darknet markets, or interactions with flagged wallets.

But KYT goes further than triggering alerts. It can dynamically adjust a customer’s risk rating based on ongoing activity. While KYC-based ratings are static snapshots from account opening, KYT enables institutions to monitor behavioral trends. If the risk threshold crosses a predefined level, the institution can escalate due diligence, restrict account access, or file a Suspicious Activity Report (SAR) with regulators.

Elevating Sanctions Screening in a Digital World

KYT also reinvents sanctions compliance. With the U.S. Treasury’s Office of Foreign Assets Control (OFAC) now publishing sanctioned crypto wallet addresses, blockchain-based monitoring allows firms to track and map entire networks of associated addresses using heuristics and forensic analysis. This goes far beyond matching names and street addresses, KYT turns transactional patterns into actionable intelligence.

As a result, VASPs can proactively identify indirect exposure to sanctioned entities and apply countermeasures before a transaction is ever completed.

A New Era of Compliance Intelligence

Blockchain’s transparency is redefining the boundaries of financial compliance. KYT offers not just a regulatory advantage, but a strategic one, giving institutions a deeper, more comprehensive view of risk across time, platforms, and counterparties. In doing so, it aligns digital asset innovation with responsible finance and positions the industry for a future where security, integrity, and inclusion go hand in hand.