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> Lightning network opponents argue that these supernodes will become mini banks in some ways and will need to follow KYC norms. This is an interesting theory.

> Lightning network opponents argue that these supernodes will become mini banks in some ways and will need to follow KYC norms. This is an interesting theory. Why don't money transmitter laws apply to standard bitcoin nodes which authenticate more than $10,000 of transactions a year?

jlrubin 9y ago
Laws would probably have to be re-written to categorize them as a money transmitter, because there is no fiduciary duty for the Lightning Network Node (they cannot wrongfully claim funds). These changes shouldn't happen, there are lots of companies who provide services where it doesn't make sense for them to act like money transmitters. For instance, BitGo is a 2-of-3 multisig wallet where they hold one key. They aren't a money transmitter because they can't send funds without your approval nor can they prevent you from sending funds.
- AlexCoventry 9y ago
  Thanks. Do you know of any other existing legal frameworks which would require super-nodes to follow KYC protocols? Maybe it was just a general concern about centralization resulting in easy targets for regulation.
- JumpCrisscross 9y ago
  > Laws would probably have to be re-written to categorize them as a money transmitter, because there is no fiduciary duty for the Lightning Network Node American law draws two circles. One is for entities with know your customer (KYC) requirements. The other is for entities with a fiduciary duty to their clients. The second circle is inside the first. Lots of entities with no client fiduciary requirements are required to know their customers. TL; DR If you’re handling others’ money, or helping others transmit money, directly or indirectly, you have a KYC liability under current law. Disclaimer: I am not a lawyer. This is not legal advice.
- bitxbitxbitcoin 9y ago
  Laws take time to be rewritten. And as we've seen with the BitLicense - there are many, many jurisdictions that are content to take a wait-and-see approach. Essentially, let one state take the charge, see if businesses all of a sudden stop servicing customers from said state, and learn from their mistakes :).
xasos 9y ago
I feel like this could be useful for Lightning Network though. Banks that incentive which supernode to route payments through, inherently creates a competitive marketplace
bitxbitxbitcoin 9y ago
They're essentially arguing that governments will view them in that way. If they will or will not really remains to be seen.
toomim 9y ago
Only a business must do KYC. KYC is regulated by FinCEN. FinCEN requires every “Money Services Business” to register with them and do KYC. If maintaining a supernode is so costly that only businesses will do so, to make a profit, then supernodes might require KYC. If supernodes run non-profit, they don’t need to.
- AlexCoventry 9y ago
  > Only a business must do KYC. If you're skirting KYC requirements on the basis of this belief, you should seek legal counsel.
- AdamSC1 9y ago
  A non-profit is legal considered to be a type of business that simply gets a different tax treatment. A business is considered to be a type of entity (just like a person) that gets different tax treatment. Anyone who transfers money, by any manner including, but not limited to, electronic, financial, debt ledger, cash or traditional methods like hawala, hundi, fei ch'ien, and chit is considered to be a "Money Transmitter." Money Transmission classification and registration varies by state, to receive money from, or transfer money to someone in said state (regardless of your jurisdiction) you must register with the state and usually put up an insurance bond. Then you must also register with FinCEN and enact an appropriate AML policy that would include KYC.
- k_sh 9y ago
  A non-profit is still legally structured as a business entity (be it a corporation, LLC, whatever). Non-profit status is given by the IRS, allowing the entity to avoid taxes. It doesn't change the underlying entity's structure. NB: I'm not a lawyer.
nickodell 9y ago
There are several reasons why that wouldn't make sense. 1. Bitcoin nodes have no special knowledge of transactions. There is nothing that you can get from a subpoena of my Bitcoin node that you cannot get from blockchain.info. 2. Bitcoin nodes can't meaningfully object to transactions that they're not party to. You could refuse to validate a block that contained an illegal transaction, but that would have no effect unless pretty much everybody did the same thing. 3. These laws don't make sense applied to Bitcoin nodes. For example, there's a law saying that transactions over $10,000 must be reported to the government. There are several thousand Bitcoin nodes. Does that mean that FinCEN wants to receive 5000 copies of a report saying that a high-value transaction just appeared? No, of course not. In contrast, lightning nodes do have meaningful non-public information about transactions, and they can refuse to relay a transaction.

jlrubin 9y ago

Laws would probably have to be re-written to categorize them as a money transmitter, because there is no fiduciary duty for the Lightning Network Node (they cannot wrongfully claim funds). These changes shouldn't happen, there are lots of companies who provide services where it doesn't make sense for them to act like money transmitters. For instance, BitGo is a 2-of-3 multisig wallet where they hold one key. They aren't a money transmitter because they can't send funds without your approval nor can they prevent you from sending funds.

AlexCoventry 9y ago
Thanks. Do you know of any other existing legal frameworks which would require super-nodes to follow KYC protocols? Maybe it was just a general concern about centralization resulting in easy targets for regulation.
JumpCrisscross 9y ago
> Laws would probably have to be re-written to categorize them as a money transmitter, because there is no fiduciary duty for the Lightning Network Node American law draws two circles. One is for entities with know your customer (KYC) requirements. The other is for entities with a fiduciary duty to their clients. The second circle is inside the first. Lots of entities with no client fiduciary requirements are required to know their customers. TL; DR If you’re handling others’ money, or helping others transmit money, directly or indirectly, you have a KYC liability under current law. Disclaimer: I am not a lawyer. This is not legal advice.
bitxbitxbitcoin 9y ago
Laws take time to be rewritten. And as we've seen with the BitLicense - there are many, many jurisdictions that are content to take a wait-and-see approach. Essentially, let one state take the charge, see if businesses all of a sudden stop servicing customers from said state, and learn from their mistakes :).

xasos 9y ago

I feel like this could be useful for Lightning Network though. Banks that incentive which supernode to route payments through, inherently creates a competitive marketplace

bitxbitxbitcoin 9y ago

They're essentially arguing that governments will view them in that way. If they will or will not really remains to be seen.

toomim 9y ago

Only a business must do KYC. KYC is regulated by FinCEN. FinCEN requires every “Money Services Business” to register with them and do KYC. If maintaining a supernode is so costly that only businesses will do so, to make a profit, then supernodes might require KYC. If supernodes run non-profit, they don’t need to.

AlexCoventry 9y ago
> Only a business must do KYC. If you're skirting KYC requirements on the basis of this belief, you should seek legal counsel.
AdamSC1 9y ago
A non-profit is legal considered to be a type of business that simply gets a different tax treatment. A business is considered to be a type of entity (just like a person) that gets different tax treatment. Anyone who transfers money, by any manner including, but not limited to, electronic, financial, debt ledger, cash or traditional methods like hawala, hundi, fei ch'ien, and chit is considered to be a "Money Transmitter." Money Transmission classification and registration varies by state, to receive money from, or transfer money to someone in said state (regardless of your jurisdiction) you must register with the state and usually put up an insurance bond. Then you must also register with FinCEN and enact an appropriate AML policy that would include KYC.
k_sh 9y ago
A non-profit is still legally structured as a business entity (be it a corporation, LLC, whatever). Non-profit status is given by the IRS, allowing the entity to avoid taxes. It doesn't change the underlying entity's structure. NB: I'm not a lawyer.

nickodell 9y ago

There are several reasons why that wouldn't make sense. 1. Bitcoin nodes have no special knowledge of transactions. There is nothing that you can get from a subpoena of my Bitcoin node that you cannot get from blockchain.info. 2. Bitcoin nodes can't meaningfully object to transactions that they're not party to. You could refuse to validate a block that contained an illegal transaction, but that would have no effect unless pretty much everybody did the same thing. 3. These laws don't make sense applied to Bitcoin nodes. For example, there's a law saying that transactions over $10,000 must be reported to the government. There are several thousand Bitcoin nodes. Does that mean that FinCEN wants to receive 5000 copies of a report saying that a high-value transaction just appeared? No, of course not. In contrast, lightning nodes do have meaningful non-public information about transactions, and they can refuse to relay a transaction.