Blockchain and Fraud Detection

Details

• Authors: Terence Schwab
• Title: Blockchain and Fraud Detection
• Supervisior: Prof. Dr. Jörg Osterrieder
• Degree: Bachelor of Science
• University: University of Applied Sciences Bern, BSc Business Information Systems
• Year: 2023
• Status: Working Paper

Summary

This study examines the impact of blockchain technology on fraud detection in the Bitcoin network. She gives insight into the use of Bitcoin for criminal activities, such as the closure of the anonymous transaction platform Silk Road. Considering that there have been many studies on the detection of anomalies and frauds using statistical and data-mining techniques, there is still a need for investigations that concentrate on dealing with these networks. The work focuses on the difficulties that the characteristics of blockchain technology, such as anonymity and global reach, present for legislation and regulation. The strategy for answering the research question includes thorough literature research as well as the creation of a fraud detection method to identify potential fraudulent transactions in Bitcoin network data sets. To formulate a conclusion, the findings of the literature review and the developed methodology are compared.

Abstract

This thesis intends to examine the influence of blockchain technology aspects on fraud detection in the Bitcoin network in the era of digital cryptocurrencies, driven by Bitcoin and its underlying blockchain technology. The rapid development of blockchain technology and the difficulties it pre-sents in terms of security and integrity are what motivated this investigation.

Despite the ever-growing importance of blockchain technology and cryptocurrencies, fraud and illegal activities are a persistent problem in this area. Cryptocurrencies in particular are tempting for criminal activities due to their anonymity and pseudonymity. Therefore, the question of how much blockchain technology's characteristics affect fraud detection in the Bitcoin network arises.

The aim of this work was to deepen the understanding of the role of blockchain technology in this context through both a detailed literature review and the development and application of a fraud detection method.

The methodology used included a literature review and a practical application in which the outlier detection method was applied using IQR to identify potential fraud in Bitcoin transaction records. The research found that the traceability and public nature of blockchain technology have a positive impact on fraud detection. They enable transparency of all transactions and public availability of wallet data, which contributes to the detection of potentially fraudulent activities. The study demonstrates that anonymity and pseudonymity make it more challenging to punish offenders once fraud has been discovered. This underlines the need for clear legal regulations and guidelines for action.

The study has shown that even simple statistical techniques for fraud detection can be effective in smaller data sets. For more extensive analyses, it is recommended to develop methods that com-bine statistical techniques, data mining and machine learning.

In terms of the future, this thesis asks whether the specifics of blockchain technology or a lack of government policies and laws are responsible for the use of cryptocurrencies for criminal activity. A detailed study is proposed that goes beyond blockchain technology, for example, to explore a concept of international policies and laws. The study underlines that blockchain technology and its handling in society are relevant research topics that need to be further investigated

Important links

https://drive.google.com/drive/folders/1rKcfM84FymMbqqS_YzNfZVJRFtwL9pW3

Contact

• Prof. Dr. Jörg Osterrieder
• Terence Schwab