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Bitcoin’s Lightning Network under surveillance by U.S. government agencies

Bitcoin’s Lightning Network under surveillance by U.S. government agencies

Bitcoin’s Lightning Network (LN) is continuing to grow in the face of rising asset usage from both retail and institutional investors.

Consequently, in light of its increasing usage, blockchain analysis platform Chainalysis has revealed in a recent blog post that the firm will be the first company to keep transactions on the network under surveillance. 

“We are excited to announce that Chainalysis will be the first blockchain analysis company to  offer customers a transaction monitoring solution for the Lightning Network.” 

In particular, Chainalysis plans to include Lightning tracking into its “Know-Your-Transaction” (KYT) next year. KYT already surveilles Bitcoin and Ethereum activity, including behaviors marked as suspicious by the US Office of Foreign Assets Control (OFAC).

The firm added: 

“In the beginning of next year we will be introducing Lightning Network transaction monitoring to Chainalysis KYT, the world’s leading cryptocurrency transaction monitoring software. Our customers will be able to use KYT to monitor their Lighting Network transactions, screen for risky activity, and gain valuable insights.” 

Lightning Networks growing popularity

Lightning’s increasing popularity, according to Chainalysis, was the driving force behind the company’s decision to extend its monitoring suite. Users now have approximately 3,400 Bitcoins ($161 million) locked on the Lightning Network, according to the latest data from DeFi Pulse.

TVL in (USD). Source: DeFi Pulse

Compared to the 468 Bitcoin ($22.3 million) on the Lightning Network a year ago, this figure indicates enormous growth.

Relationship with government agencies

Chainalysis routinely collaborates with U.S. government authorities in the course of investigations and regulatory enforcement actions involving cryptocurrencies and blockchain technology, among other things. 

Notably, Chainalysis has made more than $10 million from the US government in the last five years, according to public data, eclipsing its rivals in the blockchain surveillance market. The New York-based firm signed its first contract with the Federal Bureau of Investigation (FBI) for data analysis services for $9,000 in 2015.

Apart from that, Chainalysis has also completed projects for other US government organizations, including the Commodity Futures and Trade Commission (CFTC), the Drug Enforcement Administration (DEA), the Internal Revenue Service (IRS), and the Securities and Exchange Commission (SEC).

Lightning Network adds privacy

It’s worth noting that multiple teams are working on distinct Lightning implementations at different stages of development. The objective is to increase the stability, security, efficiency, privacy, and ease of use of the network while decreasing its cost.

The Lightning Network adds degrees of complexity to transactions make them harder to monitor, and Bitcoin’s Taproot update earlier this year served as a catalyst for more anonymity for the cryptocurrency.

Chainalysis highlighted that there were over 90,000 open public Lightning channels on December 1, up from over 38,000 in January, but now has the capability to monitor them.

Daily number of active lightning channels. Source: Chainalysis

Although many Lightning users route transactions privately through an onion network like Tor, making it complicated for third parties to conduct mass surveillance without permission. 

Chainalysis looks set to launch a tool that has the potential to undermine that value proposition of why the Lightning Network began gaining traction in the first place.

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