If you are unfamiliar with Bitcoin, you may have heard the phrase “Layer 2” or “Layer 3” used in connection with blockchain networks. Phemex.com offers a helpful summary:
• Layer 1 blockchain refers to the underlying blockchain architecture.
• Layer 2 blockchain refers to various protocols that are built on top of layer 1 to improve the original blockchain’s functionality.
• Layer 3 is represented by blockchain-based applications, such as decentralized finance (DeFi) apps, games, or distributed storage apps.
Among the notable layer 2 projects on Bitcoin are the Lightning Network, Liquid Network, and Omni Layer. Lightning Network (LN) is a layer 2 Bitc oin protocol that offers users a fast micro-payment platform. While crypto payments conducted via layer 1, the BTC chain itself, are slow and expensive, payments conducted via LN are executed very quickly and involve very low transaction fees.
The average transaction on Lightning Network is confirmed within seconds, and virtually all transactions are confirmed in less than a minute. In contrast, BTC layer 1 transactions take several minutes to confirm on average, and some transactions may remain in an unconfirmed state for days. For those who prefer a visuals, this graphic from Bitcoin Magazine, an online publication dedicated to Bitcoin news and developments, shows the connection between blockchain network layers:
Treasury Secretary Janet Yellen and SEC Chairman Gary Gensler have each publicly stated that they do not view Bitcoin as a Security. Chairman Gensler has gone so far as to state Bitcoin is the only digital currency that isn’t a security.
The SEC has rejected dozens of requests from financial groups to sanction a Bitcoin Spot ETF. This has led Forbes to predict the regulation of a spot Bitcoin ETF may be contingent on the passage of the Responsible Financial Innovation Act (RFIA) by Wyoming Senator Cynthia Lummis, which seeks to clarify what digital currencies are (under US law), how they can be classified (commodities, ancillary assets, and securities) and how tax laws apply to them. Furthermore, the bill aims to establish the bodies in charge of regulating specific digital assets, as well as how anti-money laundering regulations may be applied.
Grayscale Investments (“GBTC”) has pushed back on the legal propriety of these decisions. Saying they mount to arbitrary, capricious and discriminatory actions. "The Administrative Procedure Act and Exchange Act require rules and regulations to be applied without favoritism for one type of product or another," said Grayscale Chief Legal Officer Craig Salm.
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