Lightning Network Privacy using Lightning Pay

Written by Brandon - Lightning Pay Team

Updated Sept 9, 2024

 

Privacy at Lightning Pay

Lightning Pay is a regulated entity. We have a number of compliance obligations that require us to collect information about our customers to ensure we are following New Zealand Law.

We’ve gone to great lengths to ensure that all of the data we have is as secure as possible, and we take the responsibility we have over that data very seriously. 

Here are some privacy considerations when you use Lightning Pay’s services:

  • We know your identity, and your history of bitcoin buys, bitcoin sells, and for merchant customers, a general transaction history. 
  • We may be compelled to share that data with government or law enforcement under certain circumstances

Recent regulatory changes have defined cryptocurrency transactions from institutions like Lightning Pay similarly to international wire transfers. Thus, Lightning Pay will have to follow, where possible, the same reporting requirements as your bank does for international wire transfers over NZ$1,000.

However, your use of Lightning Pay does offer you certain privacy guarantees.

  • Your personal details provided during onboarding are not shared with third parties who do not already have it. We only use your bank data to verify your identity. 
  • Once you withdraw from our platform via the Lightning Network, Lightning Pay is completely unaware of, and cannot monitor your future transactions, whether spending or sending to cold storage.

We want you to be fully aware of the choice you are making in working with Lightning Pay in terms of your financial privacy, for more information, please take a look at our Privacy Policy.

 

Privacy on the Lightning Network

Once your bitcoin leaves Lightning Pay and arrives in your wallet, the Lightning Network natively provides a number of privacy advantages over conducting your transactions on-chain. Specifically, privacy on the Lightning Network, as it stands, is very good for an individual when sending a transaction, less so for a payment recipient.

This privacy on offer by the Lightning Network comes from the means by which payments are arranged and sent. Typically, payments pass through the hands of a number of entities on the way to its destination. The sender of a payment must know its destination, but the transaction is sent in such a way that the receiver only knows the last participant in the transaction before it arrived in their wallet. In addition, each participant on the payment path only knows the participants just before and after them along the route. This privacy protection is done by a mechanism called onion routing.

However, there are few areas you should consider before you use the lightning network for payments:

  • Custodial Wallets - Wallets that custody your funds on your behalf will have knowledge of your balance and the destination of your payments from their wallet. 
  • Self-Custody Wallets using LSPs - An LSP (Lightning Service Provider) manages your lightning channels on your behalf. This management of your channels means that they may have marginally more information about your payments than if you run your own Lightning Node.
  • eCash - A new and emerging type of Lightning Network custodian offers near perfect privacy for its users, assuming a relatively large user base.
  • Network Structure - Depending on the nature of your payment, its route, and that route’s participants, additional information may be available to nodes in some circumstances (too nuanced for this article).

 

Summary

The Lightning Network as a payments layer offers many privacy advantages over Bitcoin’s main layer, and traditional payment systems with fiat currency. 

Lightning Pay has access to your personal information and history of bitcoin purchases and sells on our platform and will be compelled by law to share this with regulatory authorities as necessary. However, in contrast to other regulated exchanges who only use the first layer of Bitcoin, with Lightning payments, we cannot follow your payments once they leave our platform. In addition, we do not give any third-party access to your personal identification documents.

The Lightning Network offers us an opportunity to more selectively choose how our financial information is stored, shared and distributed. This financial privacy is essential in the digital age, and while the privacy guarantees on the Lightning Network are not perfect, they are improving as the technology evolves.

At Lightning Pay, we believe that the continued improvement of financial privacy on Bitcoin should be celebrated. You should have a choice on who has knowledge of your private information.