Because of the inability to incentivize the participants properly, Lightning Network’s – Bitcoin’s famous second layer meant to help scaling – growth came to a stall. Routing is far from being profitable, given today’s traffic and mempool size. Moreover, investing your own bitcoins to operate a Lightning Network node can have its own drawbacks that can result in losing your funds, if you’re not careful.
Yet, what happens when LN becomes a finished product, secure & optimized for mainstream adoption? What happens when the masses turn their eyes on BTC & starts flooding the main blockchain? What happens when LN becomes relevant?
Is Lightning Network A Money Transmitter System?
If the second layer succeeds and indeed scales, then it’s only logical the authorities will try to regulate it in some way. That means LN could be treated as a money transmitter service or, at least, that is what crypto enthusiast DJ Chan suggests in one of his recent Twitter storms:
According to Chan, US laws are clear: any party that invests his money to facilitate payment between others is subject to a money transmitter license.
With LN, to actually send and receive off-chain Bitcoin transactions, you have to open a channel to the party in question. What about the case when you don’t have an opened channel with the party you want to transact? You don’t have to open a new channel, but instead, you can use the routing system the layer proposes. You may not have a channel opened with Collin as DJ Chan shows in his example, but Bob – you, as in Alice have an opened channel with Bob – has, thus Bob routes your BTC payment to Collin.
There could be a legal workaround, though that could exempt the Lightning Network nodes from actually needing a money transmitter license. Nevertheless, this would include legal bindings among all your counterparties that may interact in the future.
Anti-Money Laundering (AML) In The Spotlight
Of course, there is also a money-laundering problem that LN may not solve.
If Alice is a money launderer and Collin is her accomplice, Bob would be caught in the middle, even though he isn’t part of the scheme. Bob is routing Alice’s payment to Collin, therefore he helps the two in the authorities’ eyes.
Bitcoin critic & Bitcoin SV advocate Craig Wright wrote about the money-laundering issues LN could encounter.
In Wright’s opinion, the traditional blockchain system is exempted from needing a FinCEN license as it facilitates ‘the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller.’ Lightning Network is not a clearance or settlement system, it’s an opaque payment system that renders the Anti-Money Laundering (AML) regulations useless. All LN nodes keep an off-the-chain unofficial ledger and most of the info is thrown away (like the routing payments – including the linking – which is how LN could scale in the first place). The Bitcoin blockchain only receives the final numbers when the channel is closed, without the ‘intermediary’ steps, which could lead to serious money-laundering repercussions.
To Regulate Or NOT To Regulate
Many Bitcoin enthusiasts aren’t sold by DJ Chan’s and Craig Wright’s ‘concerns’. They say Bitcoin has, so far, survived ignoring all legal challenges.
Well, yes and no. Indeed, the blockchain technology is alive and kicking, but, already, there are steps authorities are taking to regulate the environment. Miners may be exempted from any taxes, in some countries (by law, by the way) or may be forced to actually pay taxes in some other states. Cryptocurrency exchanges DO need to have licenses to operates in many developed countries while other crypto-based companies still need to comply with the local regulations to operate.
If LN will become the payment system we all dream of, then the authorities, most certainly, will look the regulate the environment and make it KYC- and AML-friendly. The same goes for the cryptocurrency market, overall. Don’t you agree?
Is the Lightning Network prone to fail because of its legal challenges? Should we actually care? Why and why not? Let us know your take in the comment section below!
Images courtesy of Alpha Stock Images, 1ML & Flickr.