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If the Bitcoin lightning network were to become widely used, what will prevent regulators from cutting people off?

The lightning network provides participants with the topography for the purpose of union routing. Having these long-lasting channels between nodes in a high adoption situation means regulators can force major hubs and custodial services to shun parts of the network that allow connections to persona non-grata nodes, am I right?

Onion routing does not solve this, it just means regulators cannot know the exact route taken through the heavily regulated network of channels.

Hidden channels may help, but large hub nodes are open to pressure from regulators to have open books. Combined schnorr signatures replacing obvious 2-of-2 multisigs can probably help. But what more is there to make lightning more resilient?

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Lightning network nodes can be brought online permissionlessly. Most Lightning nodes do not have identity information attached. The Lightning Network topology is multi-dimensional, since it is a scale-free network in which every participant can create a connection to any other participant. If "a region" of the Lightning Network gets split off, the affected nodes are free to create new channels with other nodes, easily healing such imposed segregation.

Onion routing means that each forwarding hop is embedded in its own encrypted package. Each forwarder only gets to peel a single layer of the onion. You cannot see where a multi-hop payment you are routing is ultimately headed. You can only see the next hop and learn which node forwarded the payment to you. The actual destination node can even be hidden from the sender by using routing hints.

So, to even find out which nodes are operated by a persona non grata and then whether a payment is intended for them would likely require the vast majority of nodes to comply with some KYC or surveillance procedures. Especially given the Lightning Network's international user base, it's not obvious to me that compliance of this invasiveness can actually be enforced on private users, let alone on nodes operated e.g. via the Tor network.

While "major hubs" and custodial services can choose not to send directly to nodes classified as part of a "restricted region", it would be almost impossible for them to know when they are forwarding a payment that is routed there. If they generally refrain from forwarding and only send and receive, that would prevent them from becoming "major hubs" in the first place, though. Thus, it seems that such regulation would directly impose economic disadvantages on the compliant nodes, giving an edge to alternative "hubs" operated privately or abroad.

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  • Thanks for answering! A node is nothing without a channel, and my fear is that chain analysis would be used to perma-ban nodes from re-establishing channels into the "public" network. Any node who connects with banned nodes will themselves be banned. Banning could be enforced internationally through FATF-type pressure on exchanges and other hubs, no?
    – lumor
    Aug 20, 2021 at 13:25
  • Only if they were able to prevent the user from even spending their UTXOs. A channel will look like a single-sig transaction after Taproot, and an unannounced channel in combination with a routing hint is not identifiable.
    – Murch ♦
    Aug 20, 2021 at 15:10
  • Governments don’t have to be able to prevent users from spending on-chain. They only need to be able to track “tainted” coins going in to a shnorr-signed UTXO. Then they can ban any regulated channel being associated with that UTXO. There could be something to routing hints, but I’m thinking that mechanism could also be outlawed.
    – lumor
    Aug 21, 2021 at 19:18

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