- Hansen says regulatory risks associated with Bitcoin lightning network and under-discussed.
- He suggests that assets routed via the lightning network should be high-risk under AML standards.
- He said that this does not apply to payments made via pure peer-to-peer lighting.
Patrick Hansen, an advisor for cryptocurrency ventures and an expert on European policy, yesterday stated on Twitter that in the wake of the recent events involving Tornado Cash, he believes that the regulatory risks, especially AML, associated with the Bitcoin lightning network is “generally under-discussed.”
1/ In light of the recent Tornado Cash situation, I feel like regulatory risk (esp. AML) for the #Bitcoin lightning network is generally under-discussed.
I will have a closer look in the next weeks, but here are a few initial thoughts 👇
— Patrick Hansen (@paddi_hansen) August 16, 2022
He started out by stating that any custodial lightning services, such as strike and cash app, would be required to conform with the FATF travel regulation and any implementations of it, such as in the EU. It will be challenging and difficult for several experienced lightning service providers to put this into action.
Additionally, professional lightning nodes may be considered regulated payment services, which would result in a plethora of legal obligations being imposed on them.
He went on to suggest that more broadly, assets that were routed via the lightning network and perhaps nodes that engaged in illicit activity may be viewed as high-risk under AML standards and that it would be extremely difficult to off-board such assets to regulated companies like exchanges and assets that went through mixers.
According to Hansen, the answers to the questions raised are not yet completely obvious since decision-makers and supervisors have rarely spoken on this technically complicated matter. However, they need to be addressed as soon as possible in the process of developing the lightning network.
In conclusion, he said that this does not apply to payments made via pure peer-to-peer lighting, however, went on to add: “But let’s be honest lighting has a scaling limit for pure P2P usage and the network benefits heavily from professional high-liquid, well-connected nodes (businesses).”
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