VeilAudit: Breaking the Deadlock Between Privacy and Accountability Across Blockchains

2025-10-14

AI Summary

Blockchain cross-chain interoperability faces a fundamental tension between privacy preservation and regulatory accountability: existing solutions are constrained to a binary choice—either full anonymity or full disclosure—rendering them unsuitable for regulated financial environments. This paper proposes the first cross-chain framework enabling privacy-preserving regulatory auditing. Our approach introduces three core innovations: (1) a verifiable anonymous transaction mechanism, where only auditors can link transactions via user-generated linkable audit tags and zero-knowledge proofs; (2) a threshold-triggered identity disclosure protocol, ensuring identities are revealed exclusively upon satisfaction of predefined regulatory thresholds; and (3) verifiable cross-chain behavioral history construction, enabling novel applications such as cross-chain credit scoring. Implemented as a prototype compatible with multiple EVM-based blockchains, our system demonstrates strong security guarantees, computational efficiency, and practical feasibility in real-world cross-chain settings.

Technology Category

• Machine Learning: Privacy
• Natural Language Processing: Machine Translation, Multilinguality, Cross-Lingual NLP
• Philosophy and Ethics of AI: Accountability, Interpretability & Explainability

Application Category

• Security and Privacy: Blockchains and distributed ledgers
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Responsible Web: Data and user privacy-enhancing technologies for the Web

Abstract

Cross chain interoperability in blockchain systems exposes a fundamental tension between user privacy and regulatory accountability. Existing solutions enforce an all or nothing choice between full anonymity and mandatory identity disclosure, which limits adoption in regulated financial settings. We present VeilAudit, a cross chain auditing framework that introduces Auditor Only Linkability, which allows auditors to link transaction behaviors that originate from the same anonymous entity without learning its identity. VeilAudit achieves this with a user generated Linkable Audit Tag that embeds a zero knowledge proof to attest to its validity without exposing the user master wallet address, and with a special ciphertext that only designated auditors can test for linkage. To balance privacy and compliance, VeilAudit also supports threshold gated identity revelation under due process. VeilAudit further provides a mechanism for building reputation in pseudonymous environments, which enables applications such as cross chain credit scoring based on verifiable behavioral history. We formalize the security guarantees and develop a prototype that spans multiple EVM chains. Our evaluation shows that the framework is practical for today multichain environments.

Problem

• Balancing privacy and regulatory accountability across blockchain systems
• Enabling auditor transaction linkage without revealing user identities
• Providing pseudonymous reputation mechanisms for cross-chain financial applications

Innovation

• Linking anonymous transactions via auditor-only tags
• Using zero-knowledge proofs for tag validation
• Enabling threshold identity revelation under due process