Kraken Discontinues Lightning Withdrawals for German Clients Amid Regulatory Shifts

14 Sept

Kraken, a centralized cryptocurrency exchange (CEX), has recently halted Bitcoin Lightning Network withdrawals for its German customers, citing regulatory changes. The Lightning Network, a layer-2 scaling solution for Bitcoin, has been lauded for its low-cost, instant transactions. This shift is a downgrade in service for German users who have relied on Lightning withdrawals since Kraken introduced the feature in April 2022.

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The update stems from Kraken's decision to migrate German clients to a different custodian due to regulatory requirements imposed by the German Federal Financial Supervisory Authority (BaFin). From September 10, 2024, verified Kraken users in Germany now interact with BaFin-regulated entities such as DLT Securities GmbH and DLT Custody GmbH for crypto services, while fiat transactions are handled by Payward Ireland Limited, which is regulated by the Central Bank of Ireland. Although Kraken assured users that the overall experience would remain largely unchanged, the absence of Lightning withdrawals has taken many by surprise.

The Lightning Network had been a major benefit for German Kraken users, offering zero-fee withdrawals and improved privacy. By handling the transaction above the main Bitcoin blockchain, Lightning allowed users to obscure their post-withdrawal transaction history, providing an additional layer of privacy from blockchain analytics. Many users have expressed disappointment over the loss of this feature, with some considering switching to decentralized or peer-to-peer (P2P) platforms, like RoboSats, which continue to support Lightning transactions.

Initially, Kraken customer support cited maintenance and platform upgrades as the reason behind the Lightning Network’s unavailability. However, after multiple inquiries, Kraken confirmed that Lightning withdrawals had been permanently disabled for German users due to new regulatory constraints. This change was quietly referenced in a support document on the platform’s website, under “Supported Address Formats for Cryptocurrency Withdrawal for German Clients,” where Lightning addresses were no longer listed.

Kraken has not provided a clear timeline for when, or if, Lightning withdrawals will be re-enabled for German clients. The exchange has also been silent on the potential support of BOLT12, a newer and more flexible protocol for Lightning, which many users have been eager to see implemented.

The discontinuation of Lightning withdrawals has led to frustration among users, many of whom were drawn to Kraken specifically for its Lightning integration and fee-free withdrawals. For those who prefer small, frequent Bitcoin purchases, the Lightning Network offered both convenience and cost savings. One user described their disappointment after realizing the feature was no longer available, stating, “I only stayed with Kraken for the Lightning withdrawals.”

The loss of Lightning support has prompted some users to explore alternative exchanges or decentralized exchanges (DEXs) that still support the Lightning Network. RoboSats, a P2P platform, has been suggested as a possible alternative, although it comes with its own trade-offs, including potentially longer wait times for trades and concerns about bank account scrutiny.

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