Separation of regulatory power considering users: Collaborative regulation with user data sovereignty compliance in anonymous privacy-preserving traceable blockchain

Abstract

Existing regulatory frameworks for decentralized anonymous payments help combat illicit activities such as money laundering and terrorism financing. However, With the development of the European Union's General Data Protection Regulation (GDPR) and data sovereignty, Existing frameworks struggle to balance privacy with regulatory compliance, often compromising user autonomy and data sovereignty. To address this, we propose the Linkable Distributed Regulatory Tag (LDRT) scheme, which enables traceability without altering transaction structure by leveraging Paillier homomorphic encryption and secret sharing. Building upon this, we introduce Decentralized Anonymous Payment with Data Sovereignty(DAPDS), the first regulatory framework for decentralized anonymous payments that complies with data sovereignty. DAPDS supports both UTXO and account-based models and employs a distributed regulator group with incentives to prevent dishonest behavior. We define and analyze the security properties of both LDRT and DAPDS, proving anonymity, linkability, traceability, collusion resistance, data sovereignty, distributed regulation, and fairness of incentive mechanism. Our work provides a valuable reference for future regulatory framework paradigms for anonymous privacy-preserving traceable blockchain. Experimental results show that DAPDS only incurs an additional 34ms of time cost over ETH in transacation phase and an average of only 2.66s per tracing request in tracing phase.