Most Bitcoin users have high hopes for the Lightning Network. It is a new scaling solution which will – hopefully – enable instant Bitcoin transactions at very low cost. At the same time, there are some concerns over how certain companies and service providers will implement this technology. It seems Coinbase plans to offer Lightning-connected custodial accounts. This is not how things are supposed to work, especially not when it comes to a decentralized cryptocurrency.

Coinbase and the Lightning Network

It’s become evident rather quickly Coinbase may be a critical player in the future of the Lightning Network. The company has not officially confirmed it will do anything along these lines, and there is a real chance the company will not run a Lightning hub. To some people, this may sound strange, but one has to keep in mind Coinbase must adhere to KYC and AML regulations. Running a Lightning hub is, by default, impossible with the LN as it currently stands.

Looking at it from a more technical perspective, the Lightning Network routes transactions. This could be considered a clear violation of Coinbase’s KYC and AML obligations, as it is not directly possible to identify the sources of money in this model. Nor can the company be 100% sure as to where the money ends up, which is not ideal either. 

Assuming Coinbase wishes to get involved in some form of Lightning-related activity, the company will have to tackle this problem from a completely different angle. More specifically, setting up a Lightning-connected custodial Bitcoin account is something the company can explore in the future. Again, this has not been officially confirmed by the company, but one has to keep every possibility in mind when it comes to the future of Bitcoin and the Lightning Network. Custodial accounts on LN would be a very problematic development, though.

With a custodial account, Coinbase would be able to make proper LN transactions on behalf of its customers. Since the company will know who requested a given transaction and where funds will be sent, it will be in accordance with all KYC and AML regulations. Moreover, Coinbase may front the costs to establish a payment channel, which would have to be paid by users themselves. Plus, users would not have to run LN nodes themselves, which would make this option far more appealing to the average user.

As of right now, Coinbase is best known for its custodial Bitcoin services. Users choosing this option are not in full control of their own funds, which doesn’t seem to bother most of them all that much. If Coinbase was to offer a similar service based on the Lightning Network, it could do a lot of harm in the process. More specifically, the company could censor transactions, force users to explain the nature of their transactions, and so forth. There is no indication that the company would ever do something along those lines, but one can’t ignore the possibility either.

It is evident some people on Reddit are singling out Coinbase in this regard, mainly because it is one of the largest cryptocurrency exchanges in the world. Any other exchange would certainly be capable of taking a similar approach if it wanted to, but for now, no one even plans to do anything along these lines. There is a genuine concern over how the Lightning Network will affect Bitcoin in the future, even though the technology is very promising on paper.