How Explainable AI Can Clarify Blockchain Transaction Auditing

Why Trust Techopedia Crypto
KEY TAKEAWAYS

Explainable AI |(XAI) is a form of artificial intelligence designed to develop models that explain the decisions they make. Among other uses, this can allow blockchain auditors to use AI to monitor and flag transactions, and understand why decisions have been made. However there are ethical considerations to explore in a decentralized world.

Blockchain technology can provide a range of industries with decentralized and immutable ledger systems, which enhance transparency, security, and efficiency. It can simplify supply chain management, track financial transactions efficiently, and transfer data securely across fragmented systems such as healthcare networks.

One of the key sectors where the technology has made significant inroads is in recording financial transactions. But with the increasing complexity of blockchain ecosystems and the need for regulatory compliance, auditing these transactions has become a challenge.

One potential solution is using explainable artificial intelligence (XAI), which can handle and analyze large volumes of data to help auditors and regulators gain insights into complex transaction histories and verify compliance. However, this raises ethical concerns, as blockchains are designed to protect users’ anonymity.

Can XAI be implemented in ethical ways? What would this mean for the industry?

What Is Explainable Artificial Intelligence (XAI)?

Explainable AI is a form of artificial intelligence (AI) and machine learning (ML) designed to develop models that explain the decisions they make. This allows users to understand how and why an algorithm makes decisions, which can help them to make better decisions and increase their confidence in the model. It can also help to identify mistakes and make improvements.

This is particularly important in industries such as healthcare and finance, where it is critical to ensure that decisions are not based on incorrect data or bias. Organizations need to provide transparent explanations of how decisions are made to demonstrate that they are committed to ethical and responsible data management.

Advertisements

When AI and ML are used in auditing procedures, audit evidence standards require auditors to provide appropriate and sufficient evidence to support their conclusions.

By integrating XAI into the auditing process, auditors and regulators can gain deeper insights into complex transaction histories and ensure they comply with regulatory requirements.

The Challenge of Auditing Blockchain Transactions

Blockchain’s distributed ledger approach facilitates secure transactions and data tracking. Transactions are processed across a decentralized peer-to-peer network of nodes, and the data is stored and shared cryptographically in a way that can ensure it is not manipulated or misused.

Traditional financial audits are relatively straightforward for auditors, as they can quickly gain access to centralized records and databases they need to analyze and verify transactions. However, as a blockchain is not controlled by a centralized entity, it can be difficult for auditors to access information. Additionally, transactions processed on a blockchain can be highly complex, involving multiple senders or recipients and the execution of smart contracts.

Blockchains provide transparency, as the details of each transaction are stored publicly and visible to any network users. This creates a challenge for auditors that need to verify transactions while protecting sensitive data.

A lack of standardization across the blockchain industry for reporting and documentation also presents a challenge. Each blockchain can have its own unique protocol and data structure, making it difficult for auditors to access and analyze transaction data consistently.

How Explainable AI Can Assist in Blockchain Auditing

The introduction of explainable AI to blockchain technology can change the automation of auditing and compliance.

Blockchain technology provides a secure means of tracking transactions and data in an immutable and tamper-proof system, while XAI can help to automate auditing with efficiency and transparency, bringing tools such as:

Processing Complex Patterns Within Transactions

ML algorithms can process large volumes of blockchain data in minutes. This is useful for complex transactions and records, where trust is crucial. It also reduces the time and effort required to conduct audits while increasing detection and enhancing accuracy.

Explaining Findings

XAI can provide auditors with detailed explanations so that they understand why a transaction was flagged as non-compliant or irregular. Auditors can validate the algorithm’s conclusions to ensure no important or relevant considerations were overlooked.

Detecting and Preventing Fraud

XAI algorithms can analyze blockchain transactions to identify suspicious activity, anomalies, and potential fraud and then explain how the model detected them. This provides a transparent and accountable approach to fraud detection, which can help organizations to avoid financial losses and improve their compliance systems.

Detecting Errors

XAI can identify potential system errors and alert users before any damage occurs. This can help to reduce the risk of malicious attacks.

Sharing audit trails

Auditors can use blockchain technology to store and share audit trail records in a secure environment, ensuring they remain accurate and any changes can be traced.

The intersection of XAI and blockchain has potential in several industries. It can be used in healthcare to help providers share patient data securely and understand medical decisions. It has applications in finance to help financial institutions trace transactions and provide secure services to clients.

Ethical Considerations: Balancing Transparency and Anonymity

While there are clear advantages, implementing XAI for tracking blockchain transactions raises important ethical questions, particularly in the context of blockchain’s core principles of decentralization and anonymity.

Blockchain technology was designed to empower individuals by providing a decentralized and immutable record of transactions, ensuring user privacy, and reducing reliance on centralized third parties. Introducing AI to track and audit blockchain transactions could compromise these principles.

AI could lead to increased surveillance, potentially infringing on users’ privacy rights. Additionally, centralized oversight of transactions through AI models could contradict the idea of decentralization that underpins blockchain technology.

To address these concerns, any implementation of AI for auditing blockchain transactions must be approached cautiously and with a focus on preserving the fundamental principles of the technology.

It is essential to strike a balance between transparency and anonymity, ensuring that AI-driven audits enhance security and compliance without compromising on the features that set blockchain systems apart from centralized systems.

The Impact of AI-Driven Blockchain Auditing 

Introducing XAI-based auditing solutions for blockchain transactions could have far-reaching implications for the industry:

  • Enhanced Compliance: Implementing AI can streamline the process of verifying compliance with regulations and standards.
  • Efficiency: By automating the analysis of vast amounts of transaction data, auditors can focus on higher-value tasks, such as investigating complex cases and making strategic recommendations.
  • New applications: Developers could make use of the advanced features of XAI and blockchain systems – creating more comprehensive data visualizations and algorithms, providing new functionality, and allowing users to better understand processes.
  • Standardization: The development of AI-powered auditing tools could drive the creation of standard frameworks for reporting and documentation across different blockchain platforms. This would facilitate consistent and accurate audits for the benefit of auditors and businesses.
  • Trust and Adoption: Implementing XAI for auditing could build trust among stakeholders, including regulators, businesses, and consumers. As the technology demonstrates its ability to identify and prevent fraudulent activities, it could encourage wider adoption of blockchain solutions.
  • Ethical Innovation: Developing and deploying AI tools that respect privacy and decentralization principles would set a positive example of how technology can align with ethical standards.

The Bottom Line

There are clear challenges to auditing blockchain transactions, given the decentralized and complex nature of the technology. Implementing explainable AI can help address these challenges, providing auditors and regulators with insights into complex datasets.

The ethical considerations must be carefully weighed, but responsible integration of XAI into the auditing process could introduce a new level of transparency and accountability to the blockchain ecosystem. Organizations can save time and money while ensuring they comply with industry regulations.

XAI can play an important role in making the use of blockchain technology in critical transactions more trustworthy. There is also the potential to combine XAI and blockchain technologies to drive innovation in creating new applications.

Advertisements

Related Reading

Related Terms

Advertisements
Nicole Willing
Technology Journalist
Nicole Willing
Technology Journalist

Nicole is a professional journalist with 20 years of experience in writing and editing. Her expertise spans both the tech and financial industries. She has developed expertise in covering commodity, equity, and cryptocurrency markets, as well as the latest trends across the technology sector, from semiconductors to electric vehicles. She holds a degree in Journalism from City University, London. Having embraced the digital nomad lifestyle, she can usually be found on the beach brushing sand out of her keyboard in between snorkeling trips.