Blockchain Technology: An Analysis of Potential Applications and Uses

This paper will focus on explaining what blockchain technology is, the fundamentals of how it works, and applications of it. By utilizing sophisticated cryptography, a distributed network, a specified order of events the technology is able to create a ledger that cannot be altered due to its existence on many computers that able to detect if the data has been changed or tampered with. To help illustrate the uses of blockchain technology the technical explanation is complemented with real and hypothetical ways that the technology it being used. The use of blockchain technology originated with financial application and has expanded to many industries as new and creative ideas come to fruition

Anomaly Detection In Blockchain

Anomaly detection has been a well-studied area for a long time. Its applications in the financial sector have aided in identifying suspicious activities of hackers. However, with the advancements in the financial domain such as blockchain and artificial intelligence, it is more challenging to deceive financial systems. Despite these technological advancements many fraudulent cases have still emerged. Many artificial intelligence techniques have been proposed to deal with the anomaly detection problem; some results appear to be considerably assuring, but there is no explicit superior solution. This thesis leaps to bridge the gap between artificial intelligence and blockchain by pursuing various anomaly detection techniques on transactional network data of a public financial blockchain named 'Bitcoin'. This thesis also presents an overview of the blockchain technology and its application in the financial sector in light of anomaly detection. Furthermore, it extracts the transactional data of bitcoin blockchain and analyses for malicious transactions using unsupervised machine learning techniques. A range of algorithms such as isolation forest, histogram based outlier detection (HBOS), cluster based local outlier factor (CBLOF), principal component analysis (PCA), K-means, deep autoencoder networks and ensemble method are evaluated and compared

Crypto-assets : Regulating the "dark side" of financial blockchain

The use of financial blockchain and decentralised ledgers system has many benefits. These include immutability, efficiency and security. Digital financial information can be securely stored on a network of computational devices, with changes to those records being reflected simultaneously across that network, but there is also a dark side. Public blockchains, although visible, are typically anonymous and this presents its own challenges. The source and destination of digital asset transfer can be misleading and masked, sometimes resulting in money laundering. Tax can be evaded and the proceeds of trade transactions difficult to audit. There are other concerns that need to be addressed as the increasing scale and sophistication of blockchain transactions grows. The digital wallet trail becomes more opaque with size. These dark traits will need to be properly regulated if the technology is to be used for societal good

Using Blockchain Technology to Facilitate Anti-Money Laundering Efforts

Money laundering can be defined as any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources (Money Laundering, 2016). It is difficult to determine the magnitude of money laundering because these illicit financial flows remain hidden (Schott, 2006). A report issued by the United Nations Office on Drugs and Crime (UNODC) quoted that the total of all criminal proceeds amounted to $2.1 trillion in 2009. The study also shows that “Less than 1 percent of global illicit financial flows are currently seized and frozen” (Pietschmann & Walker, 2012). This is concerning because money laundering not only enables the operation of criminal organizations such as drug and human traffickers but can also significantly distort the economies in which they enter. The Financial Action Task Force (FATF) is an inter-governmental policy-making body that has helped to promote anti-money laundering efforts since its formation in 1989. It has issued 40 recommendations to fight money laundering and nine special recommendations to combat terrorist financing which have been adopted by 32 countries (About - Financial Action Task Force, 2016). Unfortunately, implementing these strategies has proved to be difficult for both developed and lesser developed countries. According to a study conducted by PricewaterhouseCoopers in 2016, “over the last few years, in the U.S. alone, nearly a dozen global financial institutions have been assessed fines in the hundreds of millions to billions of dollars for money laundering and/or sanctions violations (PricewaterhouseCoopers, 2016). It stands to say that if financial institutions are having difficulties implementing frameworks to prevent and detect money laundering, then our enforcement agencies are unable to adequately address the issue as well. A new hurdle that enforcement agencies have had to face is the emergence of Bitcoin, as well as other cryptocurrencies, that can be described as “a digital currency and online payment system in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank” (Swan, 2015). Being an often unrecognized currency, many banks and financial institutions have not had to worry about modifying their compliance programs. The biggest benefit of cryptocurrencies to money launderers is its decentralized nature. There is no governing authority, as members of the network handle issuances and payments. Once a disruptive technology, Bitcoin is beginning to lose momentum for a number of reasons and some its strongest proponents are now referring to it as nothing more than an experiment. The purpose of this paper is not to examine Bitcoin, but rather its underlying technology that has been found to be the actual value: blockchain. After providing a brief overview of the technology and the hurdles that financial institutions face when implementing anti-money laundering compliance programs, the possible ways in which blockchain can help alleviate these difficulties will be examined

Suspicious Transactions in Smart Spaces

IoT systems have enabled ubiquitous communication in physical spaces, making them smart Nowadays, there is an emerging concern about evaluating suspicious transactions in smart spaces. Suspicious transactions might have a logical structure, but they are not correct under the present contextual information of smart spaces. This research reviews suspicious transactions in smart spaces and evaluates the characteristics of blockchain technology to manage them. Additionally, this research presents a blockchain-based system model with the novel idea of iContracts (interactive contracts) to enable contextual evaluation through proof-of-provenance to detect suspicious transactions in smart spaces

Anti-Money Laundering Alert Optimization Using Machine Learning with Graphs

Money laundering is a global problem that concerns legitimizing proceeds from serious felonies (1.7-4 trillion euros annually) such as drug dealing, human trafficking, or corruption. The anti-money laundering systems deployed by financial institutions typically comprise rules aligned with regulatory frameworks. Human investigators review the alerts and report suspicious cases. Such systems suffer from high false-positive rates, undermining their effectiveness and resulting in high operational costs. We propose a machine learning triage model, which complements the rule-based system and learns to predict the risk of an alert accurately. Our model uses both entity-centric engineered features and attributes characterizing inter-entity relations in the form of graph-based features. We leverage time windows to construct the dynamic graph, optimizing for time and space efficiency. We validate our model on a real-world banking dataset and show how the triage model can reduce the number of false positives by 80% while detecting over 90% of true positives. In this way, our model can significantly improve anti-money laundering operations.Comment: 8 pages, 5 figure

Reconciliation of anti-money laundering instruments and European data protection requirements in permissionless blockchain spaces

Artykuł ten zmierza do pogodzenia wymagań unijnego rozporządzenia o ochronie danych osobowych (RODO) i instrumentów przeciwdziałania praniu brudnych pieniędzy i finansowania terroryzmu (AML/CFT) wykorzystywanych w dostępnych publicznie ekosystemach permissionless bazujących na technologi rozproszonych rejestrów (DLT). Dotychczasowe analizy skupiają się zazwyczaj jedynie na jednej z tych regulacji. Natomiast poddanie analizie ich wzajemnych oddziaływań ujawnia brak ich koherencji w sieciach permissionless DLT. RODO zmusza członków społeczności blockchain do wykorzystywania technologii anonimizujących dane albo przynajmniej zapewniających silną pseudonimizację, aby zapewnić zgodność przetwarzania danych z wymogami RODO. Jednocześnie instrumenty globalnej polityki AML/CFT, które są obecnie implementowane w wielu państwach stosowanie do wymogów ustanawianych przez Financial Action Task Force (FATF), przeciwdziałają wykorzystywaniu technologii anonimizacyjnych wbudowanych w protokoły sieci blockchain. Rozwiązania proponowane w tym artykule mają na celu spowodowanie kształtowania sieci blockchain w taki sposób, aby jednocześnie zabezpieczały one dane osobowe użytkowników zgodnie z wysokimi wymogami RODO, jednocześnie adresując ryzyka AML/CFT kreowane przez transakcje w takiej anonimowej lub silnie pseudonimowej przestrzeni. Poszukiwanie nowych instrumentów polityki państw jest konieczne aby zapewnić że państwa nie będą zwalczać rozwoju wszystkich anonimowych sieci blockchian, gdyż jest to konieczne do zapewnienia ich zdolność do realizacji wysokich wymogów RODO w zakresie ochrony danych przetwarzanych na blockchain. Ten artykuł wskazuje narzędzia AML/CFT, które mogą być pomocne do tworzenia blockchainów wspierających prywatność przy jednoczesnym zapewnieniu wykonalności tych narzędzi AML/CFT. Pierwszym z tych narzędzi jest wyjątkowy dostęp państwa do danych transakcyjnych zapisanych na zasadniczo nie-trantsparentnym rejestrze, chronionych technologiami anonimizacyjnymi. Takie narzędzie powinno być jedynie opcjonalne dla danej sieci (finansowej platformy), jak długo inne narzędzia AML/CFT są wykonalne i są zapewniane przez sieć. Jeżeli żadne takie narzędzie nie jest dostępne, a dana sieć nie zapewni wyjątkowego dostępu państwu (państwom), wówczas regulacje powinny pozwalać danemu państwu na zwalczanie danej sieci (platformy finansowej) jako całości. Efektywne narzędzia w tym zakresie powinny obejmować uderzenie przez państwo (państwa) w wartość natywnej kryptowaluty, a nie ściganie indywidualnych jej użytkowników. Takie narzędzia mogą obejmować atak (cyberatak) państwa lub państw który podważy zaufanie użytkowników do danej sieci.This article is an attempt to reconcile the requirements of the EU General Data Protection Regulation (GDPR) and anti-money laundering and combat terrorist financing (AML/CFT) instruments used in permissionless ecosystems based on distributed ledger technology (DLT). Usually, analysis is focused only on one of these regulations. Covering by this research the interplay between both regulations reveals their incoherencies in relation to permissionless DLT. The GDPR requirements force permissionless blockchain communities to use anonymization or, at the very least, strong pseudonymization technologies to ensure compliance of data processing with the GDPR. At the same time, instruments of global AML/CFT policy that are presently being implemented in many countries following the recommendations of the Financial Action Task Force, counteract the anonymity-enhanced technologies built into blockchain protocols. Solutions suggested in this article aim to induce the shaping of permissionless DLT-based networks in ways that at the same time would secure the protection of personal data according to the GDPR rules, while also addressing the money laundering and terrorist financing risks created by transactions in anonymous blockchain spaces or those with strong pseudonyms. Searching for new policy instruments is necessary to ensure that governments do not combat the development of all privacy-blockchains so as to enable a high level of privacy protection and GDPR-compliant data processing. This article indicates two AML/CFT tools which may be helpful for shaping privacy-blockchains that can enable the feasibility of such tools. The first tool is exceptional government access to transactional data written on non-transparent ledgers, obfuscated by advanced anonymization cryptography. The tool should be optional for networks as long as another effective AML/CFT measures are accessible for the intermediaries or for the government in relation to a given network. If these other measures are not available and the network does not grant exceptional access, the regulations should allow governments to combat the development of those networks. Effective tools in that scope should target the value of privacy-cryptocurrency, not its users. Such tools could include, as a tool of last resort, state attacks which would undermine the trust of the community in a specific network

When Intrusion Detection Meets Blockchain Technology: A Review

With the purpose of identifying cyber threats and possible incidents, intrusion detection systems (IDSs) are widely deployed in various computer networks. In order to enhance the detection capability of a single IDS, collaborative intrusion detection networks (or collaborative IDSs) have been developed, which allow IDS nodes to exchange data with each other. However, data and trust management still remain two challenges for current detection architectures, which may degrade the effectiveness of such detection systems. In recent years, blockchain technology has shown its adaptability in many fields, such as supply chain management, international payment, interbanking, and so on. As blockchain can protect the integrity of data storage and ensure process transparency, it has a potential to be applied to intrusion detection domain. Motivated by this, this paper provides a review regarding the intersection of IDSs and blockchains. In particular, we introduce the background of intrusion detection and blockchain, discuss the applicability of blockchain to intrusion detection, and identify open challenges in this direction

Exploitation of cryptocurrencies as a tool for tax evasion: technological and regulatory issues

Tax evasion is a crime that harms the national economies, society and indirectly affects all the residents of each state. Now that after a long time of international efforts the traditional tax evasion tools have eventually been put under a reasonable control, a new technology has emerged able to facilitate efficient tax evasion. The main objectives of this research are to identify the regulatory challenges of the non-precedent technology, to analyse the applicability of the current EU legislation aimed at tax evasion prevention to the exploitation of cryptocurrencies, and to assess the recommendations of academics and international organizations for a possible future regulation. This research resulted establishing that tax evasion through cryptocurrencies is easy to perform at efficient level for the consumers while difficult to discover for the authorities. Due to the novel way of operation of the distributed ledger technology on which cryptocurrencies are based, cryptocurrencies cannot be placed under the existing regulation, instead an innovative approach is required. Each of the analysed proposition for the future regulation can only partly solve some of the challenges presented by the cryptocurrencies as a tool for tax evasion therefore a complex and globally consented approach needs to be developed

Towards practicalization of blockchain-based decentralized applications

Blockchain can be defined as an immutable ledger for recording transactions, maintained in a distributed network of mutually untrusting peers. Blockchain technology has been widely applied to various fields beyond its initial usage of cryptocurrency. However, blockchain itself is insufficient to meet all the desired security or efficiency requirements for diversified application scenarios. This dissertation focuses on two core functionalities that blockchain provides, i.e., robust storage and reliable computation. Three concrete application scenarios including Internet of Things (IoT), cybersecurity management (CSM), and peer-to-peer (P2P) content delivery network (CDN) are utilized to elaborate the general design principles for these two main functionalities. Among them, the IoT and CSM applications involve the design of blockchain-based robust storage and management while the P2P CDN requires reliable computation. Such general design principles derived from disparate application scenarios have the potential to realize practicalization of many other blockchain-enabled decentralized applications. In the IoT application, blockchain-based decentralized data management is capable of handling faulty nodes, as designed in the cybersecurity application. But an important issue lies in the interaction between external network and blockchain network, i.e., external clients must rely on a relay node to communicate with the full nodes in the blockchain. Compromization of such relay nodes may result in a security breach and even a blockage of IoT sensors from the network. Therefore, a censorship-resistant blockchain-based decentralized IoT management system is proposed. Experimental results from proof-of-concept implementation and deployment in a real distributed environment show the feasibility and effectiveness in achieving censorship resistance. The CSM application incorporates blockchain to provide robust storage of historical cybersecurity data so that with a certain level of cyber intelligence, a defender can determine if a network has been compromised and to what extent. The CSM functions can be categorized into three classes: Network-centric (N-CSM), Tools-centric (T-CSM) and Application-centric (A-CSM). The cyber intelligence identifies new attackers, victims, or defense capabilities. Moreover, a decentralized storage network (DSN) is integrated to reduce on-chain storage costs without undermining its robustness. Experiments with the prototype implementation and real-world cyber datasets show that the blockchain-based CSM solution is effective and efficient. The P2P CDN application explores and utilizes the functionality of reliable computation that blockchain empowers. Particularly, P2P CDN is promising to provide benefits including cost-saving and scalable peak-demand handling compared with centralized CDNs. However, reliable P2P delivery requires proper enforcement of delivery fairness. Unfortunately, most existing studies on delivery fairness are based on non-cooperative game-theoretic assumptions that are arguably unrealistic in the ad-hoc P2P setting. To address this issue, an expressive security requirement for desired fair P2P content delivery is defined and two efficient approaches based on blockchain for P2P downloading and P2P streaming are proposed. The proposed system guarantees the fairness for each party even when all others collude to arbitrarily misbehave and achieves asymptotically optimal on-chain costs and optimal delivery communication