Why regulated and 'legal' exchanges will not use Lighting Network

The proposed Lightning network has each node performing routing for any participant on the network.

A licensed exchange cannot transmit money for anyone without KYC/AML.

So either exchanges won't use Lightning, or they're demand that anyone that wants routing must have KYC/AML. If Lightning can circumvent KYC/AML, then that will exclude exchanges and payment processors and anyone else that, you know, obeys the law, from using LN; and since the vast majority of buyers and holders buy on Coinbase, Bitstamp and other regulated exchanges, and since the vast majority of merchants use Bitpay and other regulated merchant gateways, and since your local coffee shop doesn't want to be in the clandestine Lightning Hub business any more than they want to be an illegal credit card processing gateway or uninsured mobster credit union, that Lightning is basically a non-starter for most use legal, typical cases.

Before anyone says "yeah but" the answer is no, this is nothing like onchain transactions and miners. Miners don't route funds. Onchain transactions are broadcast, not point-to-point routed. There is no onchain intermediary routing funds, as there is with Lightning. Miners merely timestamp blocks of preexisting transactions. No one of them is responsible for your funds or ever has custody of them, even partially, as with Lightning.

Comments

  1. Yeah, but, Lightning nodes don't actually take custody of your money. They enable the transmission of payment information like an internet router does with packets. In fact, the intermediate nodes don't even know the source or destination of transactions that they forward. Using your logic, every bitcoin node would be a money transmitter when it forwards transactions across the network.

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