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Article

Application of Benford’s Law on Cryptocurrencies

by 1,2,*,† and 1,3,†
1
Faculty of Mathematics Natural Sciences and Information Technologies, University of Primorska, 6000 Koper, Slovenia
2
Research Centre of the Slovenian Academy of Sciences and Arts, The Fran Ramovš Institute, 1000 Ljubljana, Slovenia
3
InnoRenew CoE, 6310 Izola, Slovenia
*
Author to whom correspondence should be addressed.
These authors contributed equally to this work.
Academic Editor: Jani Merikivi
J. Theor. Appl. Electron. Commer. Res. 2022, 17(1), 313-326; https://doi.org/10.3390/jtaer17010016
Received: 7 November 2021 / Revised: 7 February 2022 / Accepted: 8 February 2022 / Published: 25 February 2022
(This article belongs to the Special Issue Blockchain Commerce Ecosystem)
The manuscript presents a study of the possibility of use of Benford’s law conformity test, a well proven tool in the accounting fraud discovery, on a new domain: the discovery of anomalies (possibly fraudulent behaviour) in the the cryptocurrency transactions. Blockchain-based currencies or cryptocurrencies have become a global phenomenon known to most people as a disruptive technology, and a new investment vehicle. However, due to their decentralized nature, regulating these markets has presented regulators with difficulties in finding a balance between nurturing innovation, and protecting consumers. The growing concerns about illicit activity have forced regulators to seek new ways of detecting, analyzing, and ultimately policing public blockchain transactions. Extensive research on machine learning, and transaction graph analysis algorithms has been done to track suspicious behaviour. However, having a macro view of a public ledger is equally important before pursuing a more fine-grained analysis. Benford’s law, the law of first digit, has been extensively used as a tool to discover accountant frauds (many other use cases exist). The basic motivation that drove our research presented in this paper was to test the applicability of the well established method to a new domain, in this case the identification of anomalous behavior using Benford’s law conformity test to the cryptocurrency domain. The research focused on transaction values in all major cryptocurrencies. A suitable time-period was identified that was long enough to present sufficiently large number of observations for Benford’s law conformity tests and was also situated long enough in the past so that the anomalies were identified and well documented. The results show that most of the cryptocurrencies that did not conform to Benford’s law had well documented anomalous incidents, the first digits of aggregated transaction values of all well known cryptocurrency projects were conforming to Benford’s law. Thus the proposed method is applicable to the new domain. View Full-Text
Keywords: cryptocurrency; Benford’s law; anomaly detection; method application cryptocurrency; Benford’s law; anomaly detection; method application
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MDPI and ACS Style

Vičič, J.; Tošić, A. Application of Benford’s Law on Cryptocurrencies. J. Theor. Appl. Electron. Commer. Res. 2022, 17, 313-326. https://doi.org/10.3390/jtaer17010016

AMA Style

Vičič J, Tošić A. Application of Benford’s Law on Cryptocurrencies. Journal of Theoretical and Applied Electronic Commerce Research. 2022; 17(1):313-326. https://doi.org/10.3390/jtaer17010016

Chicago/Turabian Style

Vičič, Jernej, and Aleksandar Tošić. 2022. "Application of Benford’s Law on Cryptocurrencies" Journal of Theoretical and Applied Electronic Commerce Research 17, no. 1: 313-326. https://doi.org/10.3390/jtaer17010016

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