Fraud Detection Framework for Blockchain Finance: Tackling Arbitrage, Liquidity Exploits, and Money Laundering

Blockchain technology has revolutionized numerous industries by providing decentralized, transparent, and immutable ledgers. However, its adoption is hindered by persistent security challenges, including arbitrage attacks, liquidity exploits, and noncompliance with antimoney laundering (AML) regulations. This paper proposes an enhanced framework to address these issues, combining dynamic pricing mechanisms, AI-based anomaly detection, and regulatory compliance checks within a multilayered architecture. The framework is composed of five interconnected layers: the input layer for data collection and validation, the data warehouse layer for structured data classification, the processing layer for anomaly detection and pricing adjustments, and the decision layer for transaction validation, execution, and reporting. The integration of these layers ensures robust security and compliance mechanisms, reducing system vulnerabilities while optimizing efficiency. To validate the proposed framework, we conducted simulations using real-world blockchain scenarios, including decentralized finance (DeFi) platforms and cryptocurrency exchanges. Results demonstrate significant reductions in arbitrage opportunities and liquidity risks, with improved accuracy in anomaly detection and compliance adherence. For instance, the dynamic pricing mechanism mitigated 87% of arbitrage attack attempts, while the AI-based anomaly detection achieved an 89% accuracy rate in identifying high-risk transactions. This study provides actionable insights and a scalable solution for enhancing blockchain security and trust. Future work will focus on integrating cross-chain interoperability, real-time threat intelligence, and privacy-preserving techniques to further expand the framework’s applicability. By addressing critical vulnerabilities, this research contributes to the development of secure, transparent, and compliant blockchain ecosystems, paving the way for wider adoption across industries. Unlike previous blockchain security models, our framework introduces a real-time, AI-enhanced risk assessment mechanism that dynamically updates transaction risk scores, mitigating financial threats in decentralized environments. This holistic approach provides a scalable, explainable, and adaptive security system that not only protects decentralized financial infrastructures but also aligns with emerging regulatory requirements, ensuring long-term applicability.