LocalBitcoins falls victim to crypto winter

This tip came from the blog of LocalBitcoins, an international P2P platform founded in 2012 in Helsinki. Back in February 2023, LocalBitcoins opted to follow its own advice – to steer away from crypto – as it announced that it would shut down. As always, the notorious crypto winter phenomenon was cited as the reason why. However, a closer look at the project reveals its dark side.

LocalBitcoins' business model was at odds|contradicted with modern crypto-industry standards

In December 2021, Bitcoin hit an all-time high of nearly $67,000 per BTC. With the bullish trend in full swing, there was no impact on the dismal pattern of total LocalBitcoins’ trading volumes plummeting. No crypto winter is yet in sight. However, the long history of LocalBitcoins was clearly coming to an end.

Global trading volume of LocalBitcoins, 2013 – 2023 RIP

Source: coin.dance

LocalBitcoins' business idea was similar to Nokia's “Connecting people” strategy. Essentially a noticeboard where users can post offers to buy (or sell) Bitcoins. One specifies the rate they are interested in and one's location. Afterwards, the transaction could be conducted face-to-face, in cash (completely anonymous) as well as remotely, via online banking. 

Under this scheme, LocalBitcoins had been operating until June 1, 2019, at which point their users were only able to buy and sell crypto via bank transfers. The change had a bombshell effect. It was precisely the possibility to trade Bitcoins in total privacy that kept some customers with LocalBitcoins for years. “RIP, LocalBitcoins. Hello, another centralized exchange,” they said.

Imminent demise is at hand: Withdrawal from the Russian market

Naturally, this coin had a reverse side as well. LocalBitcoins was actively pumping illicitly-earned crypto. CipherTrace, an analytics company, made the platform “renowned” in 2020. According to their report, about 12% of global cryptocurrency traffic of criminal origin has passed through LocalBitcoins for three years in a row. As a result, Finland, where the P2P platform is located, topped the global anti-rating.

It appears that LocalBitcoins were frightened by the legal issues back home and tightened their AML and KYT regulations. In the wake of these changes, Binance's P2P division offered a zero listing fee for selling and buying crypto. While LocalBitcoins was asking for 1%. People flocked to competitors in droves thereafter.

The history of LocalBitcoins on the Russian market is also rather murky. At an early stage, in 2016, the platform's operations were temporarily suspended by Rospotrebnadzor. In lieu of comment, LocalBitcoins detailed ways to circumvent the blockade for Russians. And by 2020, roughly a fifth of all transactions on the platform involved Russian users. LocalBitcoins attributed such a statistic to a growing desire among Russians: a desire to escape from the authorities' control over capital and strict regulation.

Yet, in defiance of their business logic, at the end of 2021, LocalBitcoins leaked data to Russian tax authorities: data regarding the top 100,000 current users of the platform. The latter, meanwhile, have begun collecting “chain letters” demanding them to declare income and pay taxes. These instances were hotly debated within the local cryptocurrency community. 

In October 2022, LocalBitcoins will block Russian wallets altogether. During the eighth month of Russia's full-scale invasion of Ukraine, European sanctions forced LocalBitcoins to stop its service to the aggressor country's residents.

At that point, LocalBitcoins' trading volume declined to a similar degree to where it had started 12 years earlier. While the Finns had relied on anonymous access to the platform, they had failed to realign the business with the updated KYC-identification requirements. The “complicated relationship” with the Rashists was the final nail in the coffin of the P2P platform LocalBitcoins, which had run out of steam.

At that point, LocalBitcoins' trading volume declined to a similar degree to where it had started 12 years earlier. While the Finns had relied on anonymous access to the platform, they had failed to realign the business with the updated KYC-identification requirements. The “complicated relationship” with the Rashists was the final nail in the coffin of the P2P platform LocalBitcoins, which had run out of steam.