Crypto moves fast. And with speed comes risk. Crypto wallets hold billions in value and process countless transactions every day.
But they’re not immune to risk. Hacks and key loss often grab headlines, but an equally great - and less visible -threat lies in illicit funds moving silently through wallets. Chainalysis reports $33 billion in crypto has been laundered by cybercriminals since 2017. A figure that highlights both the scale of the problem and the pressing need for stronger safeguards.
Regulators require wallet providers, exchanges, and institutions to address the financial crime risks tied to wallet activity, with Anti-Money Laundering (AML) and Know Your Transaction (KYT) controls. AML covers the laws, rules and policies designed to stop illicit finance, while KYT provides the tools to monitor activity and detect suspicious transactions. Combined, they provide the foundation of a stronger, safer digital asset risk management strategy.
Understanding AML and KYT in crypto
Because crypto has historically allowed transactions to be relatively easily anonymised, regulators have moved quickly to impose strict Anti-Money Laundering (AML) requirements on exchanges and service providers.
AML frameworks outline how businesses should flag suspicious activity, investigate risks, and report findings to regulators. These principles have long been in place for traditional finance, and since 1989 the Financial Action Task Force (FATF) has set global requirements. In 2019, FATF extended its standards to crypto with the “Travel Rule,” requiring providers to share sender and receiver details for qualifying transactions.
But crypto isn’t banking. Transactions settle instantly, span multiple blockchains, and can involve pseudonymous participants. AML on its own isn’t enough. KYT provides the missing piece.
KYT monitors activity in real time. Like Know Your Customer (KYC) at onboarding, KYT focuses on behaviour after funds start moving. Spikes in volume, transfers to sanctioned wallets, or use of mixers are all red flags that KYT systems are built to detect.
The need for this overlap is clear. Cases like the Bitzlato exchange, sanctioned in 2023 for facilitating money laundering, show what happens when compliance is neglected. Together, AML and KYT make the difference between wallets that are simply “secure” and wallets that are also trusted, compliant, and resilient.
The role of KYT in wallet protection
The sheer scale of crypto transactions has made manual oversight unworkable. By 2024, illicit cryptocurrency transactions accounted for approximately USD 45 billion in total volume, according to TRM Labs, a figure that continues to draw the attention of regulators worldwide. To keep pace, KYT has emerged as an essential tool for identifying suspicious behaviour at scale.
At its core, KYT provides real-time transaction monitoring. Every transfer is analysed for patterns: rapid-fire trades across multiple wallets, links to mixers or privacy tools, or sudden spikes in asset movement. These signals don’t prove wrongdoing on their own, but they highlight areas that warrant further investigation, allowing compliance teams to intervene before issues escalate.
This matters because without KYT, wallet protection is blind. A wallet could be technically secure yet still be exploited to launder funds or process ransomware payments. For wallet providers and exchanges, KYT is a way of protecting both customers and their own reputation from being tied to criminal activity.
How AML complements KYT for wallet security
AML frameworks provide the regulatory guardrails within which KYT operates. KYT delivers granular insights into transaction behaviour, but AML defines how those insights are applied. Together, they form a complementary approach.
- Address screening: AML requires businesses to block or flag interactions with sanctioned or blacklisted wallets. In 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash, after evidence showed it had laundered over $7 billion in crypto. Without AML processes in place, providers risked unknowingly facilitating these flows.
- Verification of funds: AML obligations require businesses to establish the provenance of assets by conducting source-of-funds and source-of-wealth checks. For wallet providers, this means assets cannot be accepted without appropriate due diligence, including screening against sanctions lists, tracing transaction flows across multiple hops, and identifying exposure to high-risk services such as mixers or tumblers.
- Policy customisation: AML is not one-size-fits-all. A global exchange might need stricter controls than a small wallet provider. AML frameworks allow controls to be scaled and tailored, making them workable in practice.
By combining AML’s broad oversight with KYT’s real-time monitoring, wallet protection becomes both proactive and enforceable. Every movement of funds can be scrutinised, flagged, and acted upon, strengthening resilience against illicit activity.
Benefits of integrating AML and KYT for wallet protection
Integrating Anti-Money Laundering (AML) frameworks with Know Your Transaction (KYT) monitoring transforms wallet protection from a purely technical function into a complete compliance and security system. The benefits are wide-reaching:
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Enhanced security
AML and KYT work together to build a multi-layered security framework for wallets. AML defines the baseline rules: which transactions must be reviewed, which addresses are considered high-risk, and what escalation paths exist when suspicious behaviour is identified. These rules establish consistency and ensure compliance with regulatory standards.
KYT applies those rules directly to blockchain activity. Transactions are monitored in real time and assessed against a wide range of risk factors: exposure to sanctioned wallets, interaction with dark web marketplaces, abnormal transfer volumes, or the use of obfuscation tools like mixers and tumblers. Advanced KYT systems combine heuristics with blockchain analytics to trace fund flows across multiple hops, blockchains, and token types, making it possible to identify layering and integration attempts that would otherwise go undetected.
This is particularly important in crypto because settlement is near-instant and irreversible. Once funds leave a wallet, recovery options are limited. By integrating KYT into wallet protection, providers gain continuous visibility into transaction behaviour and can act immediately.
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Regulatory alignment
Global regulators are moving fast. In Europe, MiCA sets clear expectations for the regulation of specified activities involving crypto assets that are not already covered by EU law. Crypto-asset service providers must safeguard customer assets (Article 67) and demonstrate operational resilience (Article 62). That includes strong transaction monitoring and integrated AML/KYT processes.
Globally, the FATF Travel Rule adds another layer, requiring crypto businesses to collect and share sender and receiver details for transfers above certain thresholds. The aim is to bring the same level of transparency to crypto that already exists in banking, directly linking AML frameworks with KYT in practice. In the US, regulators are moving in the same direction. The U.S. Treasury and FinCEN have proposed stricter reporting for self-hosted wallets and expanded Suspicious Activity Report (SAR) obligations, pushing providers to prove they can trace funds and block illicit flows.
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Trust and credibility
Trust in crypto is still fragile. A string of high-profile incidents, from exchange collapses to wallet breaches and billions in illicit flows, has kept both retail investors and institutions wary. In crypto, where transactions can’t be reversed, credibility comes only from safeguards you can prove, not promises you make.
AML and KYT integration is central to this. Providers that can show they actively monitor transactions, trace the flow of funds across blockchains, and block connections to sanctioned or high-risk addresses demonstrate a higher standard of care. These capabilities prove that wallet security extends beyond private key management into the realm of responsible financial stewardship.
For institutions, this level of assurance is critical. Traditional finance is governed by strict compliance frameworks, and banks or asset managers entering crypto expect the same. A wallet provider that cannot demonstrate AML alignment or transaction monitoring at scale may struggle to pass due diligence reviews, limiting its ability to win partnerships or expand into new markets.
Retail users also pay attention. CoinCover’s Trust Factor Report revealed that 82% of investors want stronger protection against risk in crypto. For individuals who have seen stories of funds locked, stolen, or misused, reassurance comes from knowing their provider has the tools to stop suspicious flows before they become problems.
Ultimately, trust is the differentiator. In a crowded market, the providers that can evidence strong AML and KYT practices will stand out as credible, responsible, and safe.
The future of AML and KYT in crypto
The intersection between AML, KYT and wallet protection is deepening.
- Regulators are raising the bar. MiCA (EU), DORA (EU), FATF guidelines (global), and evolving US standards are setting stricter requirements for crypto providers. Compliance will only get more demanding.
- Technology is advancing. KYT solutions now integrate machine learning models capable of clustering wallet addresses, tracing multi-hop transactions, and recognising typologies such as layering, smurfing, and cross-chain obfuscation. These advances make it possible to flag suspicious activity earlier and significantly reduce the false positives that have long burdened compliance teams.
- Institutional adoption is setting new expectations. Banks, asset managers, and payment providers entering the crypto market demand wallet protection frameworks that mirror traditional finance controls: segregation of duties, audit trails, sanctions screening, and real-time monitoring. Due diligence reviews increasingly require proof of embedded AML/KYT controls alongside custody arrangements. Without this integration, providers face barriers to partnerships, licensing, and institutional capital inflows.
The narrative is shifting. Wallet protection used to mean anti-fraud safeguards. Today, it means building the infrastructure for a compliant and trustworthy digital asset economy, with AML and KYT at the core of that transformation.
How CoinCover supports AML and KYT integration
At CoinCover, we view compliance and security as two sides of the same coin. Our platform supports businesses by combining wallet protection with transaction oversight.
With CoinCover Protect, companies can safeguard wallets against theft and fraud. With CoinCover Recover, they can restore access if keys are lost or compromised. Together, these solutions help firms integrate AML and KYT requirements directly into their security systems.
Discover how CoinCover can help integrate AML and KYT processes for enhanced wallet protection. Contact us today.
