Finland-based P2P Bitcoin exchange LocalBitcoins will close its doors after ten years as crypto winter proves too much.
The exchange suspended new sign-ups on Feb. 9, 2023, and will stop trading on Feb. 16, 2023. Customers have 12 months to withdraw funds from their LocalBitcoins wallet.
LocalBitcoins Cites Crypto Winter but Remains Mum About Bitzlato
A notice on LocalBitcoins’ Twitter blames the company’s woes on the ongoing crypto winter that shrunk its market share and trading volumes.
Founded in 2012 by Jeremias Kangas, Helsinki-based LocalBitcoins connected 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 Bitcoins to the buyer for a 1% fee. On LocalBitcoins, sellers could receive higher-than-market prices for their Bitcoin.
LocalBitcoins’ shutdown could adversely impact Nigerian citizens defying the nation’s central bank digital currency. The exchange was named as one of the top P2P exchanges driving Bitcoin trading 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 heft of future compliance burdens as contributing factors.
Crypto Industry Faces Existential Threat of Poor Risk Management
LocalBitcoins becomes the latest victim of an ongoing crypto winter that, despite recent signs of thawing, caused several companies to go bankrupt and chipped away at the health of others.
U.S. crypto lender Genesis Global Capital filed for bankruptcy on Jan. 19, 2023, despite heroic risk management efforts after a major borrower defaulted in 2022.
While failed crypto companies cite the declines in crypto prices as the reason for their downfall, closer inspection suggests that some of the pain could have been prevented with more careful consideration given to risk management. Specifically, risk management around minimum capital reserve requirements and recourse. Regulations can foster robust risk management in crypto firms that protect all the counterparties in a transaction.
As an example, collapsed lender Celsius could have incorporated a minimum capital reserve requirement to prevent a bank run scenario after the collapse of the TerraUSD stablecoin in May 2022. After the TerraUSD collapse, customers pulled $2.5 billion from the firm, whose $24 billion asset base at the start of 2022 had halved to $12 billion in May. The company could not continue honoring withdrawal requests with depleted assets and filed for bankruptcy.
P2P exchanges like LocalBitcoins offer users greater privacy than centralized exchanges, but can present fraud and money laundering counterparty risks.
Despite the exchange implementing a new KYC system to address those risks, the U.S. Justice Department recently named LocalBitcoins as one of the top three sending counterparties of a P2P exchange with Russian ties.
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