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A Framework to Build User Profile on Cryptocurrency Data for Detection of

Money Laundering Activities

Conference Paper · December 2019

DOI: 10.1109/ICIT48102.2019.00081

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 2019 International Conference on Information Technology (ICIT)
A Framework to Build User Profile on
Cryptocurrency Data for Detection of Money
Laundering Activities
Sidharth Samanta Bhabendu Kumar Mohanta
Dept. of CSA Dept. of CSE
Utkal University IIIT Bhubaneswar
Odisha,India 751004 Odisha,India 751003
samantasidharth@gmail.com C116004@iiit-bh.ac.in
Abstract—Ever since Bitcoin got its popularity, cryptocurren-
cies becomes the first choice of investors, tech enthusiasts, and
criminals. Nowadays it became a prominent tool for money laun-
dering, hawala and criminal payment system. Money laundering
is the process of converting illegal black money to legal white
money. This can be done by various ways like transferring money
from one account to another via multiple intermediate accounts.
Detecting this complex activity is very difficult and challenging,
because of the high volume of transactions and bitcoins data
structure. There are many methods proposed in different papers
to detect money laundering in the conventional banking system.
In this study, we proposed a framework to convert the bitcoin’s
transnational data into a similar data frame of bank’s user
database, which is used by some existing state of the art intelligent
systems to detect the abnormal cluster of transactions and user
behavior.
Index Terms—Money Laundering, Intelligent System, Bitcoin,
Intelligent User Profiling, Recommendation Engine.
I. I NTRODUCTION
The term money laundering is used to describe the process
of converting dirty money to clean money [1]. Here the dirty
money is the money that obtained illegally. For example, the
money comes from criminal activity such as extortion, kidnap-
ping, bribe, contract killing, drugs selling, human trafficking,
and tax evasion [2]. A person or an organization cannot deposit
the money directly to the bank because it can detect the
abnormal behavior of transaction and the user cannot disclose
the source of the money. This money is often referred to as
black money and has a huge negative effect on the economy.
So, there are very strict anti-money laundering laws in major
developing and developed countries.
To utilize the dirty money, the person or organization needs
covert it to clean money or white money. There are numerous
ways to cheat the financial system of the government to
launder the dirty money. People with a lot of dirty money
typically hire experts to launder it. The money undergoes
multiple cycles of keenly planned transactions to transform
it into pure clean money [3].
Cleaning a large amount of money by using money laun-
dering process is a complicated process. Here you must trust
978-1-7281-6052-8/19/$31.00 ©2019 IEEE
DOI 10.1109/ICIT48102.2019.00081
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Siba Prasad Pati Debasish Jena
Dept. of CSA Dept. of CSE
Utkal University IIIT Bhubaneswar
Odisha,India 751004 Odisha,India 751003
sibaprasadpati1994@gmail.com debasish@iiit-bh.ac.in
all the intermediators to transfer the money in offshore banks
or Swiss banking system [4], where a person’s privacy is the
top priority. Switzerland has an institution of banking secrecy
since 1934. This made the Swiss banks the major hub for
individuals looking to store dirty money or to evade taxes.
Money laundering is not as simple as it seems. There
are three major steps involved in money laundering such as
Placement, Layering, and Integration figure. 1. The first step
is placement, which refers to the actual deposit of dirty money
in the mainstream banking system by opening bank accounts
in the name of anonymous individuals or fake organizations.
In the next step, Layering refers to divide the dirty money
into smaller fragments by creating multiple layers of complex
financial transactions. This step provides an audit trail and
anonymity. This is done by transferring the money to off-
shore bank accounts on behalf of shell companies, purchasing
pseudo high valued things like paintings, diamonds, lending
loan at low or no interest rates and exchanging with foreign
currency. In the Integration phase, all the dirty money gone
through multiple cycles of layering returns to the banking
system as clean money.
II. E XISTING M ETHODS TO D ETECT M ONEY
L AUNDERING
This section consists of a brief description of some related
studies on existing methods and techniques to detect money
laundering and anomalies in user behavior.
In this [3] study authors proposed a TFA (Transition Flow
Analysis) system to detect the Money Laundering in banks and
financial sectors. In this system, graph structure is derived from
money transactions. The abnormalities in the graph produced
by large deposits indicate review for money laundering. The
authors in the paper [4], proposed a framework which uses
case reduction method for the minimization of the dataset.
Then transaction pairs are generated based on common at-
tributes and behavior. The transaction pair goes through a
clustering algorithm to evaluate the probability of money
laundering.
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 Fig. 2. Bitcoin Blocks (Source: blockgeeks)
Fig. 1. Money Laundering Process

This method [5] was proposed by Lin-Tao, Jiu-Long Zhang

and Na Ji. In this paper, a Radial Basis Function neural
network based on APC-III is proposed to detect money
laundering. The proposed model shows promising results in
enhancement of the detection rate as well as reduction of false
positive rate remarkably.
In this paper [6], the authors proposed a reporting system
based on the statistical method named Suspicious Activity
Reporting using Dynamic Bayesian Networks (SARDBN).
The method is a hybridization of dynamic Bayesian network
and distance-based clustering.
In the paper [7], the authors proposed a model based on
statistical learning theory of Support Vector Machine for the
detection of unusual behavior of the customer. The authors
concluded the proposed algorithm can get high accuracy and
high speed by using the RBF kernel. As it is unsupervised, so
Fig. 3. Bitcoin Transaction (Source: Wikipedia)
it does not depend upon labeled training data .
The authors in [8], investigated some unsupervised machine
learning algorithms such as k-means clustering, Mahala No- maintained in all the nodes, so it is nearly impossible to make
bis Distance based method and unsupervised Support Vector any modification. Before committing any transaction, each
Machine on bitcoin transnational data set . node evaluates all transaction history to validate the amount
to transfer.
III. C RYPTOCURRENCY
The Blockchain details are explained in [11] by the authors.
Cryptocurrency is the most secure medium for digital money After validation Each transaction in a block also perform
exchange based on decentralized network over the internet to multiple hashing operation with sender’s public key and hash
conduct financial transaction by using cryptography functions. value of previous transaction. In figure.3 shows the process of
Although the principle behind this technology proposed in transaction in bitcoin and the figure.4 represents a contextual
1991 [9] but introduced to the world as bitcoin [10] in the diagram of a single block in bitcoin.
year 2009. Unlike conventional centrally monitored money From December 2017, when bitcoin cryptocurrency is at its
exchange system, bitcoin used a distributed network of nodes historical peak till date, the field experienced an outstanding
called miner, who keeps track of transactions. Each mining hype and engagement from researchers, businesses, startups
node keep the list of transactions in blocks which hold the and individuals. Till 19 August 2019 we have around 1600
SHA 256 cryptographic hash of previous block as in figure. 2. cryptocurrencies over the internet and having a collective
As this process is irreversible and the blocks of transactions are market capital of 100 billion USD, which is larger than 127

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 Fig. 4. Block content of Bitcoin, data source blockexplorer
Fig. 5. Cryptocurrency user growth (source:bitcoin.com)
countries. There are about 3 million unique users of the
cryptocurrences and the number is increasing very fast figure.
5.
In the above statement the number of unique users are not
certain as the digital identity of a cryptocurrency user is just
a unique hash value. In recent years many cryptocurrencies
have introduced KYC, by which the service provider links the
identity of a user with the digital wallet to comply with the
policies of different nations.
IV. M ONEY L AUNDERING IN B ITCOIN
In this section, we will discuss on money laundering in
bitcoin, a pseudo-anonymous cryptocurrency [12] [10]. Nowa-
days Bitcoin is not just a trendy techie word or a hype. There
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Fig. 6. Bitcoin Mixing Process
are numerous benefits of bitcoin such as its anonymity is one
of them. A user have to keep both private key and public key.
The private key is used to access the wallet and authorize
fund transfer, where as the public key is used as a receiving
address. The receiver has to provide the public key to the
sender in order to receive bitcoin. In a bitcoin block only
the public keys are mentioned, so there is no way to find
out the private key due to the hash function. For which it is
possible for an individual or an organization to purchase goods
or services without revealing sensitive information to the seller
as well as others in the network.
Another benefit is that bitcoin provides payment system
having the users sending and receiving all across the globe
without the headache of currency exchange, which is very
useful for small or medium businesses for performing overseas
transactions. Bitcoins distributed peer to peer environment
[10] provides multiple benefits. The absence of a centralized
mechanism and use of cryptography hash function makes it
very safe and secure for transactions and reduces the risk
of manipulations and theft. As it is fully virtual and based
over internet, no government authority has any privilege to
moderate the transaction or track any user.
There are many methods used to launder money by using
bitcoin. One of them is bitcoin mixing, where tumblers or
bitcoin mixers allegedly clean dirty bitcoins by bouncing it
between various anonymous user addresses, before recombin-
ing the full amount through a single wallet figure. 6 [13]
[12]. There are two types of bitcoin mixing methods such as
Centralized tumbling services and peer-to-peer tumblers.
In centralized tumbling services the user sends his/her
bitcoins to a first-generation tumbler and must pay a small
percentage of the total sum as commission. Then you get the
full amount in your prescribed bitcoin wallet. How simple
it may feel, but there are many disadvantages and threats
 such as the risk of betrayal of the middle man etc. To
overcome this disadvantage peer-to-peer tumbler method is
used. Unlike centralized tumbling, here the users arrange to
mix by themselves. This process eliminates the risk of stealing,
as there is no middleman involved. When a group of peers
is formed completely, the bitcoin exchange process begins
among the participants. None of the peers in the mixing
network can know the connection between themselves as all
are anonymous to each other. This process continues multiple
times by using multiple numbers of users by sending randomly
guessed group members to complicate the transaction flow
analysis.
In the paper [12], the authors proposed Mixcoin protocol
for anonymous payments in cryptocurrencies like bitcoin. This
model also provides anonymity against passive attack. The
study also given a detailed review of the working principle of
the bitcoin mixing model. In another reference paper, [13] the
authors provided some ground reality report on Bitcoin money
laundering services. They have done extensive research on the
process by laundering actual bitcoins. Their study has provided Fig. 7. Process Flow Diagram
some facts and security concerns, that can only be obtained
by going through the process. They also raised some concerns
regarding security and privacy limitations, and reliability on the user list, then it will add as a new user profile, and the
commission charges. The smart contracts are also used for process will be the same for the receiver. Then the algorithm
different applications for applying the access control and to will associate the receiving transaction details to receiver’s and
develop business logic [14]. sender’s user profile labeled as ”in” and ”out” respectively.

V. P ROBLEM S TATEMENT ------------------------------------------

In bitcoin, there is no answerable authority, who manages BITCOIN PROFILING ALGORITHM
user database as well as validate the transactions. Instead it ------------------------------------------
uses a distributed environment for record keeping. Each and for each Block in Bitcoin:
every transnational data is openly available in every mining for each Transaction in Block:
node. So, by becoming a miner we can access the histor- if SId in not in UL
ical transnational data. But detection of money laundering then add SId to UL
transactions are very difficult, due to the ambiguity in the for each Receiver in Transaction:
human behaviour. Many researchers have succeeded to frame if RId is not in UL
the problem mathematically or statistically. Due to the result of then add RId in UL
money laundering on economy, there are many research going add [TNo, Time, 1, RA, SId] in UL[RId]
on this topic. But most of them are concentrated on the data add [TNo, Time, 0, RA, RId] in UL[SId]
conventional banking data, which is centralized and managed
by user profiling. SId :Sender Id (Hash)
But in case of bitcoin things are a little bit different. Unlike RId :Receiver Id (Hash)
conventional banking system where data stored by user’s UL :User List
perspective, in bitcoin the data stored in a transaction-only TNo :Transaction No (Hash)
format [6]. RA :Received Amount
1/0 :In/Out Transaction
VI. P ROPOSED M ETHOD
In this study, we propose a framework where the bitcoin The user profile is a summarized data of an individual, that
transnational data undergoes a specialized user profiling algo- holds his/her general habits and behavior. It comprehends the
rithm in order to form a bitcoin user profile database prior to most important and interesting facts about the person. This
being processed under any data mining or machine learning is used in the software development domain to provide per-
algorithm in figure.7. sonalized solutions. The user profile contents differ from each
We propose a Bitcoin Profiling Algorithm to convert the other according to the application domain [15]. Here in bitcoin,
bitcoin transnational data into user profiles. The algorithm will the user profile can be used for multiple purposes. Firstly,
read each transaction from all the blocks present in the bitcoin the raw profile data set can be used to provide input for the
network. If the sender’s hash address or it is not present in machine learning models to detect money laundering activities

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 [8][3][9][10]. And secondly, it can be used to discover hidden
patterns in coin flow and user behavior to detect anomaly [11].
For now, we can take the method proposed in the reference
paper [4], where we must prepare a set of dense pairs of
senders and receivers by using the following merging pro-
cedure. The final set of the dense pair nodes has a high
probability of involvement in the money laundering process.
------------------------------------------
DENSE PAIRING ALGORITHM
------------------------------------------
for each pair p in D:
for each node i in p:
for each unprocessed pair pˆ in (D-p):
if i is in pˆ:
merger p and pˆ
remove pˆ from D
VII. A PPLICATION A REAS AND F UTURE S COPE
When we have a complete list of users and their respec-
tive transactions there are multiple ways we can utilize it
beyond detecting money laundering activity. Because money
laundering is not the only reason behind it’s attention from
government bodies. There are many illegal activities are going
on dark web.
The dark web is a different side of the internet, which is
not reachable for our conventional search engines or browser.
It can be only accessed by a secure browser named The Onion
Router (TOR) browser. TOR uses the onion routing protocol
to access the dark web, which is full of illegal marketplaces,
where they sells products drugs, guns, data and illegal videos,
and services like hawala, human trafficking, money laundering,
hiring hitman, hackers etc., which can only be purchased with
the exchange of bitcoin.From the dark web we can collect the
bitcoin address of the service provider and label their user
profile. After getting sufficient no of labelled user profile, we
can use a supervised machine learning algorithms to classify
and predict other service provider. In this way we can also
study about the users who deals with these kind of sellers or
service providers. By understanding the spending behaviour
we can further disclose new patterns.
VIII. C ONCLUSION
User profiling the bitcoin will help us save valuable time
and resources for creating a separate mechanism for detecting
money laundering. Instead we can deploy the existing AML
algorithms on the user profile. The profiling will also help
us to understand the magnitude of illegal activities happening
over a parallel dark economy.
Apart from the dark effect on the economy and banking
system, money laundering is responsible for the crime rate,
political instability, and terrorism. Hence, solving this problem
may directly reduce the crime rate and terrorist activities.
Detecting abnormal financial transactions to discover money
laundering activities is very complex and ambiguous. The pro-
posed framework aims to prepare the bitcoin transnational data
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publication stats
to be processed through any intelligent machine developed
for finding money laundering activity. In order to increase
the accuracy and efficiency, we can add more dependable
dimensions to the user profile. And to reduce the complexity
of the algorithm we can consider the transactions that are
performed in the concurrent time span.
There is one major problem in detection of money laun-
dering using bitcoin is Privacy, which is also considered as
its unique selling point. As bitcoin is a pseudo-anonymous
currency, we cannot identify the person or organization behind
a bitcoin user. So, there is a huge requirement of studies in
the field of identifying the actual user behind the hash value.
Many cryptocurrencies are adopting new AML methods like
KYC (Know Your Customer) to regulate the process.
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