International Association
for Cryptologic Research

Payment channels are one of the most prominent off-chain scaling solutions for blockchain systems. However, regulatory institutions have difficulty embracing them, as the channels lack insights needed for Anti-Money Laundering (AML) auditing purposes. Our work tackles the problem of a formal reliable and controllable inspection of off-ledger payment channels, by offering a novel approach for maintaining and reliably auditing statistics of payment channels. We extend a typical trustless Layer 2 protocol and provide a lightweight and scalable protocol such that: - every state channel is provably auditable w.r.t. a configurable set of policy queries, such that a regulator can retrieve reliable insights about the channel; - no information beyond the answers to auditing queries is leaked; - the cryptographic operations are inexpensive, the setup is simple, and storage complexity is independent of the transaction graph's size. We present a concrete protocol, based on Hydra Isomorphic State Channels (FC'21), and tie the creation of a state channel to real-world identifiers, both in a plain and privacy-preserving manner. For this, we employ verifiable credentials for decentralized identifiers, specifically verifiable Legal Entity Identifiers (vLEI) that increasingly gain traction for financial service providers and regulated institutions.