Bitcoin Lightning Network at regulatory risk after Tornado Cash saga

policy advisor Patrick Hansen Posted his thoughts on the regulatory risks currently facing the Bitcoin Lightning Network following the sanctions against crypto mixer Tornado Cash.

US authorities added Tornado Cash to the Office of Foreign Assets Control (OFAC) sanctions list on August 8. The Treasury Department claimed that since 2019, through the protocol he has laundered more than $7 billion in illicit funds.

Since then, the Tornado Cash address has been blacklisted, the developer has been banned from Github, and the website has been taken down. The team announced he would cease operations on August 13th.

This story has revealed questions about individual privacy and the authorities’ authority to oversee the crypto space. Furthermore, consider that Tornado Cash is a code-neutral tool, not a sanctioned “person”.

Bitcoin Lightning at risk of being flagged as high risk

Commenting on this, Hansen Bitcoin Lightning services held in custody will be forced to comply with the Financial Action Task Force (FATF), it said. travel rulesThis indicates that service providers should share relevant originator and beneficiary information alongside cryptocurrency transactions to combat money laundering and terrorist financing.

VASPs and other financial institutions share relevant originator and beneficiary information along with virtual asset transactions, which helps prevent criminal and terrorist abuse.

However, Hansen notes that it’s difficult for Lightning Node to actually implement this. This issue is further complicated by the node’s potential classification as a regulated payment service provider, which may require additional requirements such as customer authentication.

The problem is that flows traversing the Lightning Network may be considered high-risk under existing anti-money laundering frameworks. However, policymakers have yet to state their position on the issue.

Any desire for privacy after the Tornado Cash saga?

CEO of Aztec Network (Ethereum-based privacy layer) on government overreach Zach Williamsonhe is optimistic that Web3 technology will help protect individual privacy.

“Despite the current gloom, there are grounds for optimism about the future of web3.“

Williamson says the Web3 network may be able to comply with regulatory goals and protect user privacy.However, it does not fit into the existing regulatory structure.

He explained that the above scenarios may exist when regulators target application layers such as lamps and wallets rather than the network level. This was further clarified using the analogy that internet service providers are not responsible for “data in the cable”.

“web3 has a place of regulation. Not at the network level. This is application level. Companies and organizations that leverage web3 to provide services to users and businesses. Cryptocurrency on/off ramps, hosted wallets, and more.“

Despite the heavy-handed approach taken against Tornado Cash, Williamson Expressed confidence that regulators will gradually embrace and legislate financial privacy. Ultimately, staying on the current path will only lead to innovation going somewhere else.