An Ode to LocalBitcoins (and a Lesson About Maintaining Bitcoin’s Public Goods)
Yesterday, storied peer-to-peer crypto exchange LocalBitcoins said it will wind down services due to financial pressure. The news is a loss for the industry. The Helsinki-based firm was founded by Jeremias Kangas in 2012 and became a critical, if increasingly unused, part of the Bitcoin “circular economy.” And it’s possibly a wake up call for the contemporary Bitcoin scene about incentivizing on-chain payments and conserving or building foundational infrastructure needed for Bitcoin adoption.
LocalBitcoins was one of a few onramps into bitcoin markets that offered users a way to transact more-or-less directly with peers. The company facilitated transactions by holding coins in escrow, interjecting an intermediary in Bitcoin’s native P2P design to help people find buyers and sellers. Users typically charged a premium for BTC on the platform, a price worth paying especially in regions facing capital controls, economic instability and financial isolation or sanctions.
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Decrypt published a moving account of LocalBitcoins’ legacy in Venezuela, an oil-rich but politically unsteady country largely cut off from the global economy following U.S. sanctions, which has become a hotspot for crypto adoption. “LocalBitcoins was the main reason for the huge use of Bitcoin in Venezuela during the 2017-2019 period,” Ernesto Contreras, head of business development of Dash, said. The company facilitated intra- and international transactions when banks and remittance firms like MoneyGram could not. LocalBitcoins competitors including U.S.-registered Paxful and U.K.-based Uphold withdrew from Venezuela, citing sanctions and political risks, as have most centralized exchanges.
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According to the company’s data, Russia, Venezuela and Colombia accounted for 41% of LocalBitcoins trade volumes in 2020. Russia was later cut off from the platform to conform with the unilateral economic stranglehold targeting the country following its invasion of Ukraine. Putting aside the real need to punish war criminals like Vladimir Putin, this situation may speak to why LocalBitcoins ultimately failed. Only when pariahs can transfer value on-chain can the public be sure that everyone is free to transact – perhaps the greatest (or only) good crypto can provide.
For several years, LocalBitcoins faced political pressure, in part due its lax identification procedures. In 2015, the company pulled out of New York after failing to obtain a BitLicense from the state. In 2016, two people were charged with violating anti-money laundering laws while using the exchange (though, funnily enough, before pleading guilty they looked to dismiss charges because “bitcoin is not money”). Similar cases followed. In 2019, following a CipherTrace report that called LocalBitcoins a “go-to” destination for illicit coins and the introduction of new regulations in Finland, the firm instituted a cash ban as well as know-your-customer (KYC) procedures in compliance with the Finnish Financial Supervisory Authority.
Before the imposition of those compliance mechanisms, LocalBitcoins was a useful tool for people to enhance their privacy on-chain. But even after, the stripped-down service helped facilitate a native bitcoin economy – the platonic ideal of which would look like alphanumeric addresses interacting with similarly pseudonymous entities relying on Bitcoin’s architecture to estable mutual “trust.” The company onboarded and verified users from 189 countries. At its peak, in 2018, some 2,400 BTC traded hands weekly. By 2021, average weekly volumes dropped below 1,000 BTC. Last week, only 283 BTC were traded.
There are likely several causes of LocalBitcoin’s slow demise. It had a bare -bones user interface (which some loved but didn’t exactly scream stability like ensconced bank buildings). For years, it remained “Bitcoin-only,” limiting potential use from other crypto holders (and then alienating self-identified “bitcoiners” when it integrated Dogecoin and Cardano). And, surely, the Bear Market bit through margins. But I’d wager, even if LocalBitcoins leadership disagrees, that the company failed simply because it was a company.
By subjecting itself to the law of the land, LocalBitcoins was transformed into a money transmitting business that I find hard to believe Kangas envisioned for himself in 2012. No one is to blame for this process, what some might even call maturation; the company today reportedly has some 50 employees and when dealing with other people’s livelihoods tough decisions need to be made beyond ideological commitments. That includes calling it quits.
It’s worth noting here that in Venezuela, LocalBitcoins faced some competition from P2P platforms such as KYC-less HodlHodl and noncustodial Bisq. Of course, all three were dwarfed by Binance’s entrance into the world of unmediated transactions in 2019, offering more tokens – including coveted U.S. dollar-pegged stablecoins. Further, Binance P2P, which I think launched without even an official name, does “not have a transparent policy for auditing its P2P market transaction volume,” to use Decrypt’s parlance.
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Bitcoin needs fully-P2P services that protect people’s privacy – a niche (and it is a niche) LocalBitcoins once cornered. If there is a lesson here – it’s that companies will not be able to sustainably provide these services. Skirting the law is also not viable in the long term, as the collapse of BTC-e, Silk Road and countless other “non-corporate” entities demonstrates. It’s here that I suggest bitcoiners take a leaf from Ethereum’s book, and consider seriously what it means to build, fund and maintain “public goods,” the essential pieces of infrastructure that must remain open for all.
Ethereum is not perfect, but its community of developers has experimented with new models of distributed organization and protocol maintenance – to greater and lesser success. I say this amid a period of debate in Bitcoin Land, where, following the creation of Bitcoin NFTs [non-fungible tokens], a non-financial use case that is generating more fees for miners that has been seen in years, some are questioning the correct use of an open protocol. Bitcoin itself seems destined to reliably provide a way for peers to interact indefinitely. But community – nay, the world! – also needs a platform where peers can find one another. (Because, not everyone wants to set up a Telegram chatbot.)
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