Sanctions and wallet screening (KYT)

When a deposit arrives or a customer requests a withdrawal, exchanges and other providers run the counterparty address through blockchain analytics tools. These assign a risk score based on direct and indirect exposure to sanctioned addresses, darknet markets, ransomware, scams, mixers and hacked funds. High-risk transfers can be held for review, rejected, frozen or reported to authorities. The same tools monitor customers' activity over time, which is why the practice is called know your transaction, as a complement to KYC.

Screening is how firms meet sanctions obligations, such as those enforced by the US Treasury's OFAC or EU sanctions regulations, which forbid dealing with listed persons and, in OFAC's case, specific crypto addresses. When OFAC sanctioned the Tornado Cash mixer's contracts in 2022, screening tools began flagging any funds that had passed through it; the designation was lifted in 2025 after a court ruling.

Screening also catches innocent users. Dust sent from a flagged address or coins with a distant tainted history can freeze an account, and users often must document the source of funds to have it released.