Existing L2s on both Bitcoin and Ethereum are money service businesses (MSBs)

@nikzh
@nikzh

Existing L2s on both Bitcoin and Ethereum are money service businesses (MSBs) and are likely to fail under regulatory pressure right after privacy services! 🧐 1. All L2s (whether sidechains or rollups) are custodial. Customer funds are either locked in a multisig contract controlled by some federation (Liquid Network) or fully controlled by some emergency council (Arbitrum One, Optimism, etc.). Yes, they can steal all user funds if you didn't know. L2s enable transmitting funds from one person to another. 2. All L2s are a) centralized, b) for-profit businesses. a) While some might pretend to be "D"AOs, in fact, they're still fully controlled by their developers or initial investors due to how the tokens allowing to elect the said "security councils" are distributed. Technically speaking, they are all just ordinary companies. Lightning Network also consists of centralized authorities, which already go down one by one. These centralized parties transmit funds for their users. b) Their business goal is to earn on transaction fees. These fees are pocketed in and distributed amongst the token holders (i.e. shareholders). 3. None of these L2 companies have any banking licences. This makes them and the persons behind developing them a low-hanging fruit for virtually any three-letter agency. Hopefully, no sanctioned persons use Base? 🤔 4. Unlike L1 miners and validators, all those who run L2s are easily identifiable and targeted. It's known who's developing them, who's holding the admin keys to control the security councils, and so on. Many privacy services (Samourai, Wasabi, Tornado) and Lightning service providers (Phoenix, WoS, IBEX, Mash to name a few) are already down at least in some jurisdictions. L2s are a huge legal liability waiting to happen: blockchains need L1 scaling to win. Which L2 will go down first do you think? 🤨

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by timdaub.eth12379 🥝 • 2y • x.com
AI summary of the linked article

Existing Layer 2 networks on Bitcoin and Ethereum are described as money service businesses that are likely to face regulatory pressure, with the author suggesting they could fail after privacy services. The argument rests on the claim that all L2s are custodial, since customer funds sit in a multisig controlled by a federation (Liquid Network) or under an emergency council (Arbitrum One, Optimism). It also holds that L2s are centralized, for-profit companies whose fee revenue goes to token holders, and that none hold banking licences. The piece adds that many privacy services (Samourai, Wasabi, Tornado) and Lightning providers (Phoenix, WoS, IBEX, Mash) are already shut down in some jurisdictions.

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This is the scariest bear post I've read this cycle
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But sadly he makes a valid point.

What is Base but just the company chain of Coinbase. Also Zora chain is a chain of a brand. All fine to me, but it’s good to be conscious of the implications.

And thinking, why if you want speed and low transaction fees not go for a stellar L1 EVM solution like Gnosis chain?

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Why can't Eth scale on layer 1? it did the transition to PoS

Monero and Bitcoin Cash are ready for the crackdown. Ethereum is living in a fantasy tale. It’s unfortunate because I want it to succeed. It’s shame devs will have to be jailed for you to get it.
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Do you really think it is true what the author is saying and that L2s are money transmitters?

It would be kinda entertaining, but also good for the space, I guess, because it, once again, means that they‘ll have to decentralize better to forgo this classification.
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I'm not a lawyer, but I think the law could be interpreted that way. And I agree that long-term this risk is net good for the ecosystem - finally L2s will have some strong incentives to decentralize. I just hope no one ends up in jail before we get there :)

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Let me rephrase, I don't want anyone jailed. And it sounds like everyone here has the same goals of decentralization.

Btw I read timdaub's piece on why multi-chain world won't work, and it made solid points.
I agree it kills the network effect to have all these other coins. The thing is that people don't agree on cultural values. So like a Monero user, a Bitcoin maxi, and Ethereum dev, these people all have different ways of responding to the "L2 money transmitter" issue.
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