Base does not custody user funds and there are no related legal issues.
Original author: Adam Cochran, Partner at Cinneamhain Ventures
Original source: Twitter
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Base, the L2 scaling network launched by Coinbase, has gained popularity due to the success of friend.tech. However, blockchain analytics firm ChainArgos has pointed out that Base may violate US federal laws. In response, Adam Cochran, a partner at Cinneamhain Ventures, criticized ChainArgos’ view as a misconception lacking technical and legal knowledge. He believes that decentralized L2 is fully compliant with US laws. Foresight News has compiled Adam Cochran’s tweet:
Base, launched by Coinbase, does not violate federal laws.
ChainArgos’ viewpoint is a dishonest legal argument and lacks technical knowledge, attempting to sell more on-chain risk monitoring/reporting software to L2 than they actually need. Ultimately, ChainArgos either maliciously interprets or lacks technical understanding of the meaning of “custody” in blockchain or the actual meaning of L2.
Now let’s analyze why Coinbase’s L2 network does not violate any laws.
First and foremost, in this debate, concepts related to futures, licensed exchanges, over-the-counter brokers, and money transmission businesses are often confused.
So we must first clarify the meaning of “custody” in cryptocurrency.
When you hold, control, or transfer user funds, US laws regarding money transmission apply.
FinCEN (FIN-2019-G001) provides clear guidance, with a key point being key control in the concept of “non-custodial wallets”:
This makes sense, as when you deposit cryptocurrency into a custodial wallet, Coinbase becomes a money transmission business. However, if your keys are in MetaMask, then MetaMask is not a Money Services Business (MSB); it is merely a tool you use to interact with the wallet.
In fact, one of the few explicit laws in the US financial industry is the definition of “money transmission” – if any of the following criteria are met, you are a money transmission business:
This led some legal enthusiasts in the 90s to believe that internet service providers were actually money transmission businesses. At that time, the legislature enacted section (ii)(A), which stated that service providers offering communication and delivery networks are not money transmission businesses.
Base is a public blockchain network based on the OP Stack, providing communication for self-custodial wallets and DApps, and anyone can participate.
Although its sequencer is currently centralized, it does not automatically mean that it is a custodial institution.
You can use “OptimismPortal” to transfer currencies between L1 and L2. The Merkle tree will continue to publish the state back to Ethereum L1, and the underlying bridged assets are stored in the cross-chain bridge of L1.
This means that even if Coinbase shuts down all servers and disappears completely tomorrow, you can still:
Sort the transactions yourself (with a 12-hour delay) to include them in L1 without going through L2.
Force withdrawal with a 7-day delay.
You can sort the following transactions yourself. After the transactions are included, you can call the following transactions on the Ethereum L1 Base bridge contract and publish the Merkle proof of your withdrawal transaction.
Then, even if Coinbase shuts down the Base network tomorrow, you can regain control of your assets.
So, let’s recap:
Coinbase does not operate the market on Base.
Coinbase does not control your keys on Base.
If Coinbase shuts down all infrastructure tomorrow, you can still transact.
And you can withdraw your assets from L1 at any time.
The ChainArgos team said that because any address can deposit funds into Base, this may bring legal troubles to Coinbase.
In fact, the opposite is true. It is precisely because it is an open and permissionless network layer that such behavior is legalized.
Coinbase performs KYC/AML on transactions conducted through Coinbase and also has on-chain monitoring tools.
But legal responsibility does not extend to their Base chain or the DApps running on it.
Although there is still more work to be done in terms of security and robustness for decentralized L2, in terms of legality, they are already decentralized enough, and their simplest form is just a smart contract.
It is this fundamental technological difference that defines the boundary between L2 and centralized L1 sidechains, which is also why Coinbase did not establish some PoA private operating networks.
If L2 is an MSB, then all blockchain networks and all smart contracts are de facto currency transmission institutions.
This is foolish and ridiculous, and the legal and technical expertise of those who propose such views should be questioned.