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Chainalysis to Allow Bitcoin Deposits on Lightning Network

The ‘Know Your Transaction’ compliance software seeks to help bitcoin processing institutions to meet the anti-money laundering practices.


Chainalysis, a blockchain data platform plans to integrate the lightning network by adding support for it in the form of a layer 2 protocol on the Bitcoin blockchain in Feb 2022.

After the integration, all companies that process Bitcoin payments via Lightning nodes will have the Chainalysis Know Your Transaction compliance software available to them. Virtual asset service providers (or VASPs) such as exchanges can also handle Bitcoin transactions in a manner compliant with global standards.

A Chainalysis spokesperson made a statement reassuring users that “There will be no change in the user experience of the Lightning Network.”

Chainalysis used the term VASP in its press release, which comes from the Financial Action Task Force (FATF) guidance that was updated at the end of October. While it definitely holds the best practices regarding money-laundering, it’s interesting to note that it doesn’t in fact have the power to issue fines. However, it does maintain both a grey list and black list, for countries that may need closer inspection and for one’s that have been uncooperative, respectively.

Pratima Arora, Chainalysis chief product officer stated “The Lightning Network solves many of the challenges that prevent the Bitcoin protocol from being used for micropayments and other transaction types that bolster financial inclusion,” and that “By enabling customers to compliantly support Lightning transactions, we hope to grow the network’s popularity and help it scale.”

The adoption of the lightning network released back in 2018 has risen faster this year compared to any previous year. The sheer number of nodes on the network saw a 68% increase in 2020 according to Bitcoin Visuals. This year the number has increased to a 128% since Jan thanks in part to being helped by it being part of the Salvadoran Government’s Bitcoin rollout as legal tender, not to mention Twitter’s bitcoin tipping feature.

The Chainalysis spokesperson mentioned that the Know Your Transaction’s compliance capabilities don’t in fact cover tax reporting provisions in the $1.2 trillion infrastructure package that was signed last month by President Biden.

The bill also has a requirement for companies to treat any crypto payments amounting to over $10,000 as ‘cash’ payments. This in turn would make them responsible for collecting as well as sending over tax information to the Financial Crimes Enforcement Network within a total of 15 days.

Another provision sees any person or firm involving themselves in a crypto transaction categorized as a ‘broker’, which would require the collection and filing of tax information to the IRS.

This provision has been labeled overly broad by its opponents, with their reasoning being it would not technically be possible for individual developers or crypto miners to satisfy the requirements of tax reporting. This provision has been critiqued by Senator Cynthia Lummis (R-WY), Ron Wyden (D-OR), and Senator Ted Cruz (R-TX).


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