An Ode to LocalBitcoins (and a Lesson in Maintaining Bitcoin’s Public Goods)
Yesterday, major peer-to-peer crypto exchange LocalBitcoins said it will discontinue services due to financial pressures. The news is a loss for the industry. Founded by Jeremias Kangas in 2012, the Helsinki-based firm became a critical, if increasingly unused, part of Bitcoin’s “circular economy.” And it’s possibly a wake-up call for the modern Bitcoin scene to incentivize on-chain payments and preserve or build basic infrastructure necessary for Bitcoin adoption.
LocalBitcoins was one of the few forays into bitcoin markets that offered users a way to trade more or less directly with their peers. The company facilitated transactions by holding coins in custody, interjecting a middleman in Bitcoin’s original 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 unstable country largely cut off from the global economy by US sanctions, which has become a hotspot for crypto adoption. “LocalBitcoins was the main reason for the huge adoption of Bitcoin in Venezuela in the period 2017-2019,” said Ernesto Contreras, Head of Business Development at Dash. The company facilitated intra- and international transactions when banks and money transfer firms like MoneyGram could LocalBitcoins competitors including US-registered Paxful and UK-based Uphold pulled out of Venezuela, citing sanctions and political risks, like most centralized exchanges .
According to the company’s data, Russia, Venezuela and Colombia accounted for 41% of LocalBitcoin’s trading volumes in 2020. Russia was later cut off from the platform to comply with the unilateral economic stranglehold imposed on the country after the 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 assured that everyone is free to trade – perhaps the biggest (or only) good crypto can provide.
For several years, LocalBitcoins faced political pressure, in part because of 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 (although, funnily enough, before pleading guilty they appeared to dismiss the charges because “bitcoin is not money”). Similar cases followed. In 2019, following a CipherTrace report that called LocalBitcoins a “go-to” destination for illegal coins and the introduction of new regulations in Finland, the firm introduced a cash ban as well as know-your-customer (KYC) procedures in accordance with the Finnish the Norwegian Financial Supervisory Authority.
Before the introduction of these compliance mechanisms, LocalBitcoins was a useful tool for people to improve their privacy on the chain. But even after, the stripped-down service helped facilitate a native bitcoin economy — the Platonic ideal that would look like alphanumeric addresses interacting with similarly pseudonymous entities that rely on Bitcoin’s architecture to establish mutual “trust.” The company registered and verified users from 189 countries. At its peak, in 2018, around 2,400 BTC traded hands weekly. In 2021, average weekly volumes fell below 1000 BTC. Last week only 283 BTC were traded.
There are likely several reasons for LocalBitcoin’s slow demise. It had a bare-bones user interface (which some loved, but didn’t exactly scream stability like built-in bank buildings). For years it remained “Bitcoin-only”, limiting potential use by other crypto holders (and then alienating self-identified “bitcoiners” when it integrated Dogecoin and Cardano). And sure enough, the bear market bit through the margins. But I’d bet, even if LocalBitcoin’s management disagrees, that the company failed simply because it was a company.
By submitting to the laws of the land, LocalBitcoins was transformed into a money transfer business that I have a hard time believing Kangas envisioned for himself in 2012. No one is to blame for this process, what some might even call maturation; The company currently reportedly has around 50 employees, and when it comes to other people’s livelihoods, tough decisions have to be made over and above ideological commitments. That includes resigning.
It is 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 overshadowed by Binance’s foray into the world of unbrokered transactions in 2019, offering multiple tokens – including coveted US dollar-pegged stablecoins. Furthermore, Binance P2P, which I believe launched without even an official name, “does not have a transparent policy for auditing P2P market transaction volume,” to use Decrypt’s parlance.
Bitcoin absolutely needs P2P services that protect people’s privacy – a niche (and it is a niche) LocalBitcoins once cornered. If there is a lesson here – it is that companies will not be able to provide these services sustainably. Circumventing the law is also not viable in the long term, as the collapse of BTC-e, Silk Road and countless other “non-corporate” entities shows. This is where I suggest bitcoiners take a leaf from Ethereum’s book, and take a serious look at what it means to build, finance, and maintain “public goods,” the essential pieces of infrastructure that must remain open to all.
Ethereum is not perfect, but the community of developers has been experimenting with new models for distributed organization and maintenance of protocols – with greater and lesser success. I say this in the midst of a period of debate in Bitcoin Land, where, following the creation of Bitcoin NFTs [non-fungible tokens], a non-financial use case that generates more fees for miners than has been seen for years, raises some questions about the proper use of an open protocol. Bitcoin itself appears to be a reliable way for peers to interact indefinitely. But community – no, the world! – also need a platform where peers can find each other. (Because not everyone wants to set up a Telegram chatbot.)
