The Network Access Exception To The Money Transmitter Rule \ stacker news ~bitcoin

The Network Access Exception To The Money Transmitter Rule

12.6k sats \ 44 comments \ @siggy47 28 Apr bitcoin

I apologize for all these posts about this topic. It really has me obsessed, as you can probably tell since I'm posting on a Saturday night. I do believe, though, that there is some good news.

I downloaded the government's response to defendant's motion to dismiss in the Tornado Cash case: #521222

Based upon the government's own submission, it seems that lightning products are not money transmitters under federal law. The relevant statute is cited by the government in the opposition papers.

31 C.F.R. § 1010.100(ff)(5)(ii)(A) contains an exception for "network access services".

As the government explains, this exception

is typically used in the law to refer to a provider of access to a general network such as the Internet. See, e.g., In re WorldCom, Inc., 371 B.R. 19, 23 (Bankr. S.D.N.Y. 2007) (describing WorldCom’s provision of “network access services” to “computer networks,” which were “in turn linked to other computer networks, collectively forming the global digital communications network generally described as the Internet”)

It seems that the lightning network is exactly the type of general network contemplated by the statute exception. Those who provide access to the network fall under the exception to the money transmitter rule.

Therefore, the FBI Advisory could be seen as intentionally misleading, and even more puzzling.

Keep in mind that nothing contained herein should be construed as legal advice.

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156 sats \ 9 replies \ @windward 28 Apr

It seems that the lightning network is exactly the type of general network contemplated by the statute exception. Those who provide access to the network fall under the exception to the money transmitter rule.

This makes the most sense to me as well after reading & re-reading these cases. Please note I'm not a lawyer, just an autist who is also reading along.

It seems that they are treating the lightning network in a similar fashion to torrent uploaders - if you aren't uploading anything you don't have the rights to distribute, it's a perfectly legal way to distribute large files. Similarly, if bitcoin is not money (according to the state, it's treated as property in the US) simply running a node that connects to the network is not running a money service -provided users have 'exit' and autonomy.

Because user access is not solely dependent on a provider's node (like say, an LNbits wallet running on your Uncle Jim's Umbrel server, or in the case of wallets like Phoenix or Nayuta where you can't open your own channels to elsewhere), I think the LN network is mostly in the clear.

Everyone else in the states that is running something like that that I know of is basically a KYC app ( Cash App, Strike et.al)

Therefore, the FBI Advisory could be seen as intentionally misleading, and even more puzzling.

Speculation - the advisory was designed as a chilling effect in the industry to get the intended result the state wants but can't immediately legislate.

Every pleb should be investing in self custody immediately, if they haven't already.

141 sats \ 8 replies \ @siggy47 OP 28 Apr

I would agree with just about everything you said. Just keep in mind that the distinction is not the bitcoin is property, not money thing. As the papers also indicate:

Courts have uniformly held, and the defendant does not dispute in his motion, that “funds” and “money” for purposes of this statute include cryptocurrencies. E.g., Murgio, 209 F. Supp. 3d at 705-10 (Bitcoin exchange covered by 18 U.S.C. § 1960); United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014) (“Bitcoin clearly qualifies as ‘money’ or ‘funds’” for purposes of 1960 prosecution); United States v. Harmon, 474 F. Supp. 3d 76 (D.D.C. 2020) (applying Section 1960 to Bitcoin mixing service).

75 sats \ 7 replies \ @windward 28 Apr

ty for the update -they tax it like property so I assumed courts would treat it as such -nice to know the gov't will change it's definitions to suit it's needs

127 sats \ 5 replies \ @SpaceHodler 28 Apr

30 sats \ 0 replies \ @siggy47 OP 28 Apr

Yep

10 sats \ 0 replies \ @MiddleWay 28 Apr

amen

0 sats \ 2 replies \ @nerd2ninja 28 Apr

The SEC does not call Bitcoin a security however.

30 sats \ 1 reply \ @SpaceHodler 28 Apr

Good catch! It wasn't my own.

20 sats \ 0 replies \ @nerd2ninja 28 Apr

Remember that scammers believe they are part of us. They project their problems and say "Bitcoin" when complaining about it. Be careful about sharing around their propaganda. It will enable them to grift on our efforts and create the reputation with the general person that we are scammers like them.

40 sats \ 0 replies \ @siggy47 OP 28 Apr

Exactly. The taxable event crap is ridiculous if they call bitcoin money.

127 sats \ 4 replies \ @0xIlmari 28 Apr

I personally think that the TC case is pretty clear cut, so either I'm misunderstanding something (in which case, I'm happy to be corrected) or it's insanely difficult to establish the technicalities in court with the judge and jury being all normies.

The TC guys wrote some software. That should be free speech-protected activity. If it isn't then God help us all, because it means we're already living in a dystopia.

They deployed it to the Ethereum Virtual Machine. You could argue that this constitutes "enablement" (or whatever the legalese term is) but the court must understand that this is FOSS, and anyone can do it.

So perhaps Ethereum itself should be prosecuted for allowing this in the first place? Perhaps a muddied issue, but I still wouldn't call this "providing a service".

That's it, technically speaking. You can already "launder" money with it. You can invoke the contract from command line, you can use any generic Ethereum blockchain explorer that allows you to invoke any deployed contract.

So they wrote and operated a website which made it easier for a wider audience to use. But again, the court must understand that a) the website is not a prerequisite to using the service, b) anyone can host a copy of it (since it's FOSS) and c) indeed, there are copies running out there, both on the clearnet and as Tor onion services.

Okay, so maybe the case is a bit more muddied, but what's clear to me:

the shutdown of the website is not technically preventing anyone from using the service
prosecuting the developers is not preventing anyone from using the service
the legal system is completely broken and unable to handle intricacies of FOSS

83 sats \ 3 replies \ @siggy47 OP 28 Apr

The purpose of the post was just to discuss the likelihood that lightning wallets, nodes, or LSPs will be targeted next. In arguing against Tornado Cash, the US Attorney's Office actually argued in favor of lightning providers not being money transmitters. So, the FBI advisory inaccurately, and probably intentionally, left the impression that lightning products could be targeted under a similar theory as Tornado Cash and Samourai. It seems that by their own admission they can't.

All your points make sense legally. We'll see how the courts rule. I'm just saying that IMO it's far less likely that LN products will be attacked next.

54 sats \ 1 reply \ @wingalt 28 Apr

Last time I checked three letter agencies don't care much about laws, even if their next attack doesn't stand legally they will do it anyway because the legal procedures can last long enough to scare away users, let alone attracting new people to the field

10 sats \ 0 replies \ @siggy47 OP 28 Apr

Yeah, in the end you're probably right. Maybe pointing out the weakness in their arguments might give a few people the courage to stand tall.

0 sats \ 0 replies \ @clownworld 28 Apr

Lightning is very vulnerable to attack though, because of its architecture. It leads to centralized large nodes run by companies that can be easily targeted.

105 sats \ 3 replies \ @Satosora 28 Apr

Interesting. Very interesting. You think they are misleading out of fear or misinformation? In theory, they should have quite a big legal team behind them. They would have been stopped from posting something wrong, right? Headaches to come lol

75 sats \ 2 replies \ @windward 28 Apr

You think they are misleading out of fear or misinformation?

Yes? Both?

The unit that issued the warning about MSBs and crypto was the Internet Crime Complaint Center - their role is to basically record & track internet fraud and tie the money to other crimes the FBI are investigating.

The release was made just after the most well known BTC privacy tool for obscuring the source of funds was shut down & its developers arrested - the two are probably related.

Separate how we feel about privacy or what Samorai devs are specifically accused of - as people start to adopt cryptocurrencies(including bitcoin, but let's not deny that shitcoinery will abound) there are going to be services that offer to make the process easier by taking custody/manage things for people and rug them as a result of malice or ineptitude.

They( the FBI) can't actually legislate things. It feels like the ATF and gun laws in the US - they don't make the law, but they will set rules that they treat like the law.

The only option the Feds have short of banning the stuff entirely (which they don't have the power to do) is to advise self custody/dealing with people the state knows they can go after if things go sideways.

20 sats \ 1 reply \ @Satosora 28 Apr

Setting precidences? In order to make things work in their favor?

0 sats \ 0 replies \ @windward 28 Apr

absolutely

they want to have things to throw at people when they go to prosecute - wildcat neo banks are going to be a thing, and it'll be really hard to reign in a parallel polis if they also have a 1:1 system to go into.

exit will have a little friction to it - but they can't legalize it away, yet.

75 sats \ 0 replies \ @DEADBEEF 28 Apr

Very interesting and I agree that this makes sense. I just worry the government will try and twist the law in order to come after individuals anyway.

I’m thinking the FBI is being intentionally misleading to scare normal people away from Bitcoin by making it sound illegal.

75 sats \ 0 replies \ @Lux 28 Apr

You are being too kind to the FBI :)

54 sats \ 13 replies \ @om 29 Apr

the lightning network is exactly the type of general network

wha? it's obviously a money-transsmitting rather than a general-purpose network.

40 sats \ 12 replies \ @siggy47 OP 29 Apr

General in the sense of the case law does not refer to the purpose of the network or the type of data. It refers to whether the network is open to the general public and widely distributed. The LN is obviously worldwide.

64 sats \ 0 replies \ @SatoshiNakanodo 29 Apr

Is there a supreme court judge in the house?! Anybody!?

54 sats \ 10 replies \ @om 29 Apr

So you think the government has permitted anybody to open a money laundering shop as long as the services are open to the general public?

I still believe that my interpretation makes more sense.

20 sats \ 4 replies \ @siggy47 OP 29 Apr

I ran out of edit time. There's another issue. How can the government treat bitcoin as money for this purpose, then treat it as property for IRS tax purposes? This is an obstacle to the prosecution as well.

54 sats \ 3 replies \ @om 29 Apr

OK, that's a different question but I'll try to answer it as well.

Despite its name money laundering covers not just money but any valuable. A better name would be value laundering. If ML charges could be avoided by shifting value into, say, gold, then somebody would make a gold payment network a long time ago.

10 sats \ 2 replies \ @siggy47 OP 29 Apr

This reminds me of a second amendment discussion-guns don't kill, people do. Just because a network can be used illegally doesn't make it a money laundering network. Every time the US mint produces a dollar bill, are they engaging in money laundering through their physical dollar network?

54 sats \ 1 reply \ @om 29 Apr

Exactly. If cash didn't exist until now and somebody would propose introducing it, the proposal would be brutally shot down on ML grounds.

30 sats \ 0 replies \ @siggy47 OP 29 Apr

I agree. There's nothing preventing the argument that it has become even more so as we move to a cashless society. LN has a much more legitimate use case.

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20 sats \ 4 replies \ @siggy47 OP 29 Apr

The government did not use that argument against Tornado Cash. They have unlimited resources to analyze the law and write these memoranda. If they thought that was a valid argument they would have raised it, I think. Remember, lightning providers don't transmit money, they "provide access". That's the purpose of the exemption. Maybe you can offer your assistance! You raise a good point. Regardless, I just picked out a small issue for this post. There are obviously many more, beginning with "code is protected speech" , which seems well settled. We'll all know a lot more once the trial court rules on this motion. Then we wait around for the appeals process.

0 sats \ 3 replies \ @om 29 Apr

Huh. I think the goverment did use everyting against TC.

don't transmit money, they "provide access".

Suppose you have a channel with Phoenix and you pay somebody through it. ACINQ is by your request negotiating a HTLC with you and with the next node on the path. The way government describes money transmission in the TC case (I mean USB cable / frying pan stuff), that looks rather like money transmission to me.

On the positive side, I believe ACINQ is not a CASP by the EU's definition.

50 sats \ 2 replies \ @siggy47 OP 29 Apr

Huh. I think the goverment did use everyting against TC

I was directly quoting from their memorandum, where they didn't challenge the nature of the mixing network, but rather than limited scope.

54 sats \ 1 reply \ @om 29 Apr

I don't think the goverment cares about nature of things at all. Does that thing allow Alice to pay Bob when the government doesn't want Alice to pay Bob? If yes, then the government will attack it.

50 sats \ 0 replies \ @siggy47 OP 29 Apr

Yes, this is all academic. Playing on their field only buys time. In the end, I'll do what I want. Nodes and LSPs are easy targets, if the US wants to further drive innovation overseas. Plenty of developing countries would love to be hosts.

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54 sats \ 0 replies \ @TheWildHustle 28 Apr

I apologize for all these posts about this topic. It really has me obsessed

Thank god for your obsession.

54 sats \ 0 replies \ @IamSINGLE 28 Apr

Therefore, the FBI Advisory could be seen as intentionally misleading, and even more puzzling.

FBI there and ED here in India. Both work in yhe same way.

54 sats \ 2 replies \ @SpaceHodler 28 Apr

What about mining pools, are they money transmitters?

30 sats \ 0 replies \ @siggy47 OP 28 Apr

Under the same rationale, mining pools could fall under the same network access exception. This stuff is complicated legally, and it's a snapshot in time. Laws can always change, courts can come down with different opinions. Right now, based on the U. S. Attorney's arguments, I would say mining pools are not money transmitters, but it's tough to say whether they can be seen as network access providers. I have not thought this through, and I'm not that familiar with mining pool operations, so don't rely on my opinion. This is not legal advice.

0 sats \ 0 replies \ @garyKrause_ 28 Apr

FPPS is an unregistered security. 🤷‍♂️

54 sats \ 1 reply \ @MoritzK 5 May freebie

Do you have a source for reference of this part:

As the government explains, this exception

is typically used in the law to refer to a provider of access to a general network such as the Internet.

I couldn't find any when I searched for it.

10 sats \ 0 replies \ @siggy47 OP 5 May

I took it from the government's opposition motion to the Tornado Cash defense motion. You can download it from the X/twitter link I referred to above.

0 sats \ 0 replies \ @clownworld 28 Apr

They have no obligation not to be misleading in their “advisories”…. They often try to scare people into thinking the law is much more strict than it actually is in many areas.

0 sats \ 0 replies \ @Coinsreporter 28 Apr

Exception?

That's a victory for Bitcoin in general if they stick to this, but I doubt they would deliberately define it otherwise. They would cite any previous observations where 'Money transmitter licence' was made mandatory for holding or distributing virtual currency in the kind.

As far as I know, in the USA, this is thumb rule that

If your crypto business is subject to money transmitter or virtual currency business activity laws in a given state, it’s your responsibility to maintain that license.

So, they would not clearly mention it as exception.