Making sense of Lightning network nodes and money transmission licensing
An update on Coin Center’s work to avoid unnecessary regulatory burdens on technologists.
The Lightning Network seems to be getting closer to production. This is a promising scaling solution that could greatly reduce the cost, latency, and energy use of Bitcoin transactions.
We have received some questions about the regulatory obligations that participants in the Lightning Network may face. While this is still a gray area, Coin Center has been working for years to ensure that non-custodial roles in cryptocurrency networks, such as Lightning nodes, do not need money transmission licenses.
The reasoning is simple: A Lightning node cannot lose or run away with a user’s money. As a result, Lighting nodes present little to no risk to consumers and so should not require licensing.
Coin Center director of research Peter Van Valkenburgh explains:
Money transmission statutes are state by state and often vaguely drafted. Wrt lightning node, some could be interpreted either way. We argue for a narrow interpretation informed by the policy reasoning behind MTL. Which is…
— Peter Van Valkenburgh (@valkenburgh) December 27, 2017
Businesses who can lose or steal customer funds should be licensed, those who cannot should not. So we would argue that a node in a well architected payment channel should not. B/c multisig and n-lock prevent the node from permanently depriving user of funds.
— Peter Van Valkenburgh (@valkenburgh) December 27, 2017
lack of clarity in the various state statutes & need to rely on a policy-based interpretation motivated us to work with the ULC on a model law that would make this crystal clear: https://t.co/9lY9r6nyLH
— Peter Van Valkenburgh (@valkenburgh) December 27, 2017
That model law (which is up for various state legislatures to consider in 2018) has a clear definition of who has “control” over customer bitcoins and therefore needs to be licensed: only those who can “execute unilaterally or prevent indefinitely a transaction.”
— Peter Van Valkenburgh (@valkenburgh) December 27, 2017
And a similar analysis goes for anti-money-laundering obligations under the federally-enforced Bank Secrecy Act. We’ve previously written about that here.