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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
Don't Mind Me
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  • 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 04 '22 at 07:34
  • @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. – Don't Mind Me Aug 04 '22 at 08:07
  • 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 06 '22 at 06:12

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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.

RedGrittyBrick
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  • 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. https://www.blockchain.com/btc/tx/6faef7b9cd63eaaa217006f6f52c2a42c898842987167bdd36331eac3413423b – Don't Mind Me Aug 04 '22 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. – RedGrittyBrick Aug 04 '22 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. – Don't Mind Me Aug 05 '22 at 08:11