The takeaway: The closure of LocalBitcoins is a loss for the industry – and a chance for the bitcoin community to rethink how it maintains “public goods” like P2P exchanges.
Takin’ on Stakin’
Thursday, the U.S. Securities and Exchange Commission (SEC) settled with crypto exchange Kraken, which will “immediately” end its staking-as-a-service platform for U.S. customers that began in 2019 and pay a $30 million fine after being charged with offering unregistered securities. Kraken said any U.S. clients’ assets will be automatically unstaked except for ETH, which must wait until Ethereum’s Shanghai upgrade, expected next month. Customers may have earned yields as high as 21% and were offered “very little protection,” SEC Chair Gary Gensler said, adding that exchanges offering staking services “must register and provide full, fair and truthful disclosure and investor protection.” Meanwhile, the U.S. Internal Revenue Service is again seeking information about Kraken and its subsidiaries to ascertain whether users paid correct federal income taxes, following a summons in 2021 the exchange allegedly failed to comply with. Finally, the New York Department of Financial Services (NYDFS) is probing Paxos, the issuer of the Binance USD (BUSD) and Pax dollar (USDP) stablecoins, though the scope of the investigation is unclear. Paxos, which has a legal bank charter and New York “BitLicense,” is rumored to have its application to receive a full banking charter denied by the U.S. Office of the Comptroller of the Currency. Paxos has denied these rumors.
Ride Again!
Anton Shkurenko, a co-founder of Russian crypto exchange Bitzlato shuttered by the U.S. Department of Justice (DOJ) in January, said his team could restart operations and pay back customers affected by investigators’ asset seizures. The Russian national spoke with CoinDesk after Russian media reported he had been detained in Moscow on Monday. Separately, discredited traders Zhu Su and Kyle Davies have teamed with CoinFlex on the “world’s first public market place for crypto claims trading and derivatives,” called Open Exchange. The Three Arrows Capital co-founders are reportedly dodging investigators’ probes into the collapse of their hedge fund. Celsius Network, another bankrupt firm, is looking to sell $14 million of Bitmain discount vouchers before they expire to help refund creditors. The coupons offer 10%-30% off future mining machine purchases. Finally, PayPal holds a total of $604 million of bitcoin (BTC), ether (ETH), litecoin (LTC) and bitcoin cash (BCH) for its customers as of Dec. 31, according to an SEC annual report, down from $690 million held as of the end of September.
Real Enough
Microsoft (MSFT) has closed a metaverse division four months after it was formed – though the company says it “remains committed to the industrial metaverse.” The entire 100-person Industrial Metaverse Core team – tasked with finding applications and gaining users in sectors like health, financial services and energy – has been laid off, part of a broader plan to trim 4% of Microsoft’s workforce totaling 10,000 employees. Crypto ads may not dominate the Super Bowl like last year, though music artist Rihanna has issued an NFT of her 2015 single “B**** Better Have My Money” on Web3 music startup anotherblock ahead of the Big Game. Token holders will be entitled to the song’s streaming royalties. This comes as the surprise popularity of Ordinal’s Bitcoin NFTs continues to grow, with the launch of a homage to the first NFT series CryptoPunks (now owned by Yuga Labs) called “Bitcoin Punks.” Punk 94 reportedly sold for 9.5 BTC (roughly $214,000). Finally, Optimism Network conducted a surprise token airdrop Thursday, sending 11.7 million governance tokens to more than 300,000 wallets. The Ethereum layer 2 plans to distribute 19% of its initial governance token supply as it takes on its largest competitor, Arbitrum.
Sound Bites: Underlying Protocols
“If Kraken’s staking as a service program was merely a technological connective tissue to an underlying protocol that might have been a very different result.”
– Former SEC attorney Zachary Fallon, on CoinDesk TV’s “First Mover”
Yesterday, storied peer-to-peer crypto exchange LocalBitcoins said it will wind down services due to financial pressure. The news is a loss for the industry – the Helsinki-based firm was founded by Jeremias Kangas in 2012 and became a critical, if increasingly unused, part of the Bitcoin “circular economy” – and possibly a wake-up call for the contemporary Bitcoin scene about incentivizing on-chain payments as well as conserving or building foundational infrastructure needed for Bitcoin adoption.
LocalBitcoins was one of a few on-ramps into bitcoin markets that offered users a way to transact more or less directly with peers. The company facilitated transactions by holding coins in escrow, interjecting an intermediary in Bitcoin’s native 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.
Decrypt published a moving account of LocalBitcoin’s legacy in Venezuela, an oil-rich but politically unsteady country largely cut off from the global economy following U.S. sanctions, which has become a hotspot for crypto adoption. “LocalBitcoins was the main reason for the huge use of bitcoin in Venezuela during the 2017-2019 period,” Ernesto Contreras, head of business development of Dash, said. The company facilitated intra- and international transactions when banks and remittance firms like MoneyGram could not. LocalBitcoin competitors including U.S.-registered Paxful and U.K.-based Uphold withdrew from Venezuela, citing sanctions and political risks, as have most centralized exchanges.
According to the company’s data, Russia, Venezuela and Colombia accounted for 41% of LocalBitcoin trade volumes in 2020. Russia was later cut off from the platform to conform with the unilateral economic stranglehold targeting the country following its 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 sure that everyone is free to transact – perhaps the greatest (or only) good crypto can provide.
For several years, LocalBitcoins faced political pressure, in part due 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 (though, funnily enough, before pleading guilty they looked to dismiss charges because “bitcoin is not money”). Similarcasesfollowed. In 2019, following a CipherTrace report that called LocalBitcoins a “go-to” destination for illicit coins and the introduction of new regulations in Finland, the firm instituted a cash ban as well as know-your-customer (KYC) procedures in compliance with the Finnish Financial Supervisory Authority.
Before the imposition of those compliance mechanisms, LocalBitcoins was a useful tool for people to enhance their privacy on-chain. But even after, the stripped-down service helped facilitate a native bitcoin economy – the platonic ideal of which would look like alphanumeric addresses interacting with similarly pseudonymous entities relying on Bitcoin’s architecture to estable mutual “trust.” The company onboarded and verified users from 189 countries. At its peak, in 2018, some 2,400 BTC traded hands weekly. By 2021, average weekly volumes dropped below 1,000 BTC. Last week, only 283 BTC were traded.
There are likely several causes to LocalBitcoin’s slow demise. It had a bare-bones user interface (which some loved but didn’t exactly scream stability like ensconced bank buildings). For years, it remained “bitcoin-only,” limiting potential use from other crypto holders (and then alienating self-identified “bitcoiners” when integrating dogecoin and Cardano’s ADA). And, surely, the bear market bit through margins. But I’d wager, even if LocalBitcoins leadership are likely to disagree, that the company failed simply because it was a company.
By subjecting itself to the law of the land, LocalBitcoins was transformed into a money-transmitting business that I find hard to believe Kangas envisioned for himself in 2012. No one is to blame for this process, what some might even call maturation. The company today reportedly has some 50 employees, and when dealing with other people’s livelihoods tough decisions need to be made beyond ideological commitments. That includes calling it quits.
It’s worth noting here that in Venezuela, LocalBitcoins faced some competition from peer-to-peer (P2P) platforms such as KYC-less HodlHodl and noncustodial Bisq. Of course, all three were dwarfed by Binance’s entrance into the world of unmediated transactions in 2019 by offering more tokens – including coveted U.S. dollar-pegged stablecoins. Further, Binance P2P, which I think launched without even an official name, does “not have a transparent policy for auditing its P2P market transaction volume,” to use Decrypt’s parlance.
Bitcoin needs fully P2P services that protect people’s privacy – a niche (and it is a niche) LocalBitcoins once cornered. If there is a lesson here – it’s that companies will not be able to sustainably provide these services. Skirting the law is also not viable in the long term, as the collapse of BTC-e, Silk Road and countless other “noncorporate” entities demonstrates. It’s here that I suggest bitcoiners take a leaf from Ethereum’s book, and consider seriously what it means to build, fund and maintain “public goods,” the essential pieces of infrastructure that must remain open for all.
Ethereum is not perfect, but the community of developers has experimented with new models of distributed organization and protocol maintenance – to greater and lesser success. I say this amid a period of debate in Bitcoin Land, where some are questioning the correct use of an open protocol – following the creation of Bitcoin non-fungible tokens (NFT), a nonfinancial use case that is generating more fees for miners than has been seen in years. Bitcoin itself seems destined to reliably provide a way for peers to interact indefinitely. But community – neigh, the world! – also needs a platform where peers can find one another. (Because, not everyone wants to set up a Telegram chatbot.)
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