The uptick in regulatory scrutiny amid this year’s re-emergence of cryptocurrencies is driving some of the speculative asset classes’ biggest advocates further into the darkest corners of finance.
With Bitcoin’s price having more than tripled this year, regulators and politicians are tightening oversight of online exchanges. Users are increasingly being required to submit information such as IDs and addresses. Even LocalBitcoin.com, a site long used to exchange fiat for tokens, in June prohibited cash transactions and began requiring more personal information to comply with tighter local laws. The shift is giving a boost to a cottage industry of sites that typically don’t ask for any personal data: peer-to-peer exchanges.
One such beneficiary is Local.Bitcoin.com, which debuted in June and doesn’t collect any personal information. Started by Roger Ver, an early crypto evangelist who earned the moniker Bitcoin Jesus, the site has already attracted 23,000 users. Bisq, which doesn’t even store data on who trades with whom, had seen its weekly volume grow more than 50-fold from a year ago to more than $10 million, according to tracker Coin.Dance. Hodl Hodl, which debuted in early 2018, said it has added a quarter of its users in May and June.
“The major exchanges do not work for the kinds of businesses that use crypto and aren’t accepted in polite society — think legal cannabis businesses, sex workers, political dissidents,” said Nic Carter, co-founder of Cambridge, Mass.-based crypto trading tracker Coin Metrics. “There will always be a need for P2P exchanges.”
The sites effectively let sellers advertise Craigslist-style and to find buyers, and often never take custody of customer funds. Before Bitcoin became the darling of speculators, it was envisioned by its early software developers as a way for people to transact with each other without government intervention.
In places like Kenya, people may have trouble meeting Western banking know-your-customer requirements — they may not have fixed addresses, for instance — and these sites are the main way to buy cryptocurrencies. Plus, many Bitcoin “hodlers” — old-timers with unshakable belief that cryptocurrencies will take over finance and only appreciate in price — like the sites’ low fees, and the fact there’s usually no need to worry about the exchange stealing your funds or losing them to a hack.
“Local.bitcoin.com is non-custodial, so we have no KYC or other obligations,” Ver said in an email. Because many P2P exchanges don’t maintain order books or hold customer funds in escrow, they believe they aren’t subject to the same rules as traditional crypto exchanges. If they are wrong, that may not make a difference, since regulators may not even be able to track their owners down or shut them down: Bisq, for instance, is not even a company but a piece of software coders contribute to.
Such freedom from having to provide personal data is becoming a rarity as the Financial Action Task Force (FATF) — focused on preventing money-laundering and terrorism financing globally — just required that most countries’ exchanges collect more information about their customers and transactions. In response to the greater scrutiny, Malta-based Binance, the largest crypto exchange by trading volume, announced it will stop serving U.S. customers.
“There is a significant element of the community that has long felt decentralized exchanges best represent the ethos of crypto,” Josh Gnaizda, chief executive officer of San Francisco-based CryptoFundResearch, said in an email.
The functionality of the sites has been improving as well. A site called Paxful, for example, is seeking money-transmitter licenses in various states, such as New York. The idea is to protect its customers from being prosecuted, as multiple U.S. customers of Finland-based LocalBitcoin.com have been — for running an unauthorized money-transmitter business by selling large quantities of Bitcoin through the site, said Ray Youssef, CEO of Paxful.
“We are hoping that by getting these licenses we can extend that umbrella to them,” Youssef said. The company, which has a mailing address in Wilmington, Delaware, facilitates about 60,000 trades a day, and it recently began performing ID verification on customers who reach $1,500 in trading volume or wallet activity — an arbitrary number the company decided on internally, he said.
Peer-to-peer trading volumes are still a drop in the bucket compared to traditional crypto exchanges. And there is additional risk of manipulation on certain exchanges, run largely by software. Posters on Reddit, a forum favored by the crypto crowd, often complain that many have sent their Bitcoin to a wrong address, or a wrong amount to a person they dealt with — and they have no way to get their money back. Bitcoin transactions are irreversible, and using peer-to-peer exchanges often means less hand-holding and support than on traditional crypto exchanges.
“It’s definitely more cumbersome to use a P2P exchange,” Carter said. “But if I live in Iran and have a great desire to buy Bitcoin, you may not have any other options. So people often use these peer-to-peer exchanges out of necessity.”