LocalBitcoins becomes latest victim of crypto winter

Founded in 2012 by Jeremias Kangas, Helsinki-based LocalBitcoins connects Bitcoin buyers and sellers in a peer-to-peer marketplace. It allowed users to exchange local currency for Bitcoins and advertise exchange rates and payment methods for trading Bitcoins. LocalBitcoins would lock funds involved in a trade in escrow until the seller released the Bitcoins to the buyer for a 1% fee. On LocalBitcoins, sellers can receive higher than market prices for their Bitcoin.

LocalBitcoins’ shutdown could have a negative impact on Nigerian citizens defying the country’s digital central bank currency. The exchange was named as one of the best P2P Bitcoin trading exchanges for Nigerians in July 2022.

P2P exchange LocalCryptos announced in October 2022 that it would close its doors after five years, citing the crypto winter and the weight of future compliance burdens as contributing factors.

The crypto industry faces an existential threat of poor risk management

LocalBitcoins becomes the latest victim of an ongoing crypto winter that, despite recent signs of thawing, has left several companies bankrupt and broken the health of others.

US crypto lender Genesis Global Capital filed for bankruptcy on January 19, 2023, despite heroic risk management efforts after a major borrower defaulted in 2022.

While failed crypto companies cite the decline in crypto prices as the reason for their downfall, closer examination suggests that some of the pain could have been prevented with more careful consideration of risk management. In particular, risk management around minimum capital reserve requirements and recourse. Regulations can promote robust risk management in crypto firms that protect all counterparties in a transaction.

As an example, collapsed lender Celsius could have incorporated a minimum capital reserve requirement to prevent a bank-run scenario following the collapse of the TerraUSD stablecoin in May 2022. Following the TerraUSD collapse, clients withdrew $2.5 billion from the firm, whose $24 billion asset base at the time of entry to 2022 had halved to $12 billion in May. The company could not continue to meet withdrawal requests with depleted assets and filed for bankruptcy.

P2P exchanges like LocalBitcoins offer users greater privacy than centralized exchanges, but can pose counterparty risks for fraud and money laundering.

Despite the exchange implementing a new KYC system to address these risks, the US Department of Justice recently named LocalBitcoins as one of the top three senders of a P2P exchange with Russian ties.

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