A peer-to-peer (P2P) cryptocurrency exchange is an online marketplace that connects buyers and sellers of cryptocurrencies such as bitcoin (BTC).. The platform allows them to do business directly with each other without the need for intermediaries.
When buying cryptocurrency on a P2P marketplace, the buyer transfers the agreed amount from his account to the seller. Payment is not made between a consumer and a money service business, but between two different customers.
P2P exchanges were once the mainstay of the cryptocurrency ecosystem, due to the ease of exchange and the privacy features offered by these platforms. However, in 2023, some of these key features have led them to come under increased scrutiny by regulators.
On February 9, 2023, Finland-based P2P exchange LocalBitcoins announced its closure after 10 years of service.. The platform cited harsh market conditions due to the ongoing cryptocurrency winter, along with increasing regulatory pressure and declining market share.
The abrupt shutdown of one of the oldest P2P platforms came just weeks after the US Financial Crime Enforcement Network (FinCEN) named the platform as one of the largest bitcoin counterparties of the Bitzlato exchange, affiliated with Russia.
Bitzlato was the subject of significant enforcement action by US authorities, who accused the platform of violating anti-money laundering rules and helping to evade Russian sanctions.
Another prominent bitcoin P2P exchange platform, Paxful, founded in 2015, suspended its operations on April 4. The platform cited the current regulatory environment and staff departures as the reason behind its closure. In a Twitter Spaces, CEO Ray Youssef spoke about his decision, saying that while US regulators have done a lot to catch up in the last five years, “they still don’t get it. They’re getting more suspicious every day.”
An update from @paxful pic.twitter.com/X3eN5OcKrT
— Paxful (@paxful) April 10, 2023
An update from @paxful
The current court battle between Artur Schaback and Youssef for control of the company was also considered one of the main reasons for his downfall. According to court records, the two co-founders are currently at odds over who will run the business and have made a number of accusations against each other. The charges include, among other things, theft of company finances, money laundering and circumvention of US sanctions on Russia.
In an interview with Cointelegraph, both Schaback and Youssef continued their accusation game and pointed the finger at the other person. Youssef claimed that his co-founder’s legal tactics “bordered on terrorism” and cost Paxful many employees and managers. On the other hand, Schaback said that Youssef took unilateral steps to shut down Paxful on April 4, and that he had no say in the company’s day-to-day operations for nearly 18 months.
Richard Mico, legal director of global cryptocurrency platform Banxa, told Cointelegraph that the breakdown of relations between the co-founders that led to litigation could be one of the many reasons behind Paxful’s downfall. He added that ever-evolving regulatory scrutiny in the US had made it difficult for decentralized cryptocurrency platforms and P2P exchanges to thrive:
“Paxful has faced regulatory scrutiny in the past over allegations of money laundering and fraud on its platform. In May 2021, the New York State Department of Financial Services (NYDFS) ordered Paxful to strengthen its KYC processes /AML. It is very possible that Paxful is afraid of further ongoing investigations and fixes,” Micro told Cointelegraph.
Said, Aside from concerns about changing regulatory requirements, market conditions are driving significant consolidation in the space. However, he is confident that “more transparent regulation in the US will allow both P2P and other exchanges to thrive in a way that strikes the right balance between consumer protection and innovation.”
Closures of P2P platforms affect emerging economies the most
P2P platforms have been instrumental in the flourishing of cryptocurrency adoption, especially in developing countries, and in offering banking services to the unbanked. Paxful pioneered cryptocurrency adoption in Nigeria, and its shutdown hit many users in the country hard.
Many freelancers often used the platform to convert their salaries to and from bitcoin and make payments to each other, while traders made use of its escrow service to conduct business.. As such, the shutdown has left many of these users in Nigeria wondering about the future of the domestic crypto market.
The Indian government imposed a banking ban on crypto exchanges in 2019 cutting off all banking facilities to such platforms. However, WazirX, one of the first crypto exchanges in India, introduced its P2P platform to ensure that people could still trade their assets. Indian crypto traders turned to P2P platforms again in 2021, after the government imposed a hefty 30% tax on crypto transactions.
Former WazirX CEO Nischal Shetty was more optimistic about the future of P2P platforms, especially in the developing world. He told Cointelegraph that P2P platforms with proper Know Your Customer protocols “help to onboard users, especially in unbanked developing countries, and will continue to exist.”
Nick Saponaro, CEO of decentralized payment platform provider Divi Labs, told Cointelegraph that The shutdowns will be painful for unbanked and underbanked traders, hampering their ability to trade locally and globally.
“In countries like Malawi, where citizens are well capitalized but have restrictive banking practices that only allow customers to withdraw a few dollars a day, P2P exchanges are necessary for those people to interact with the global financial infrastructure,” he explained.
Ben Jorgensen, co-founder and CEO of the Web3 Constellation Network interoperability platform, He told Cointelegraph that the shutdown of P2P platforms is unfortunately a heavy blow for developing countries, but these developing countries will most likely see more and more native P2P exchanges emerge.
The rise of better alternatives to P2P
The decline in popularity of P2P platforms and the recent shutdown of some of the older P2P platforms are also attributed to the new availability of better alternatives, as now there are more convenient on-ramps that allow users to buy cryptocurrencies using their bank accounts and credit cards.
The costs of doing business are also significant. For example, exchanges like Coinbase spend millions of dollars just to comply with local regulations. Unbanked communities around the world stand to benefit the most from P2P exchanges, but given increasing regulatory compliance requirements, they are unlikely to produce the volumes needed to sustain them at scale.
Saponaro told Cointelegraph that the only way new and existing P2P exchanges will survive is as ancillary services offered by licensed operators:
“For example, Binance has a P2P platform; however, their business model is not profitable enough to be the only source of income in a fully regulated environment.”
Marc Taverner, a founding member of Xerof, a Swiss regulated fiat and cryptocurrency platform, explained to Cointelegraph that Users often switch from P2P platforms to other trusted solutions because they need to minimize counterparty risk. Naturally, users are migrating to providers that can address these risks:
“We see a growing demand for reliable, transparent and compliant solutions, and it will be licensed operators from established and respected jurisdictions that will onboard the majority of these users. P2P markets will continue to exist. The long-term question is how they are going to cope with increased regulatory requirements,” he said.
Jorgensen stated that P2P platforms will continue to evolve just like decentralized exchanges, explaining: “Although DEXs [exchanges descentralizados] They are technically peer-to-peer exchanges, they are more geared towards a trustless state with much better fees.”. As for current regulation and in the foreseeable future, it is likely that most, if not all, regulation will be enacted on cash-to-cryptocurrency and crypto-to-cash exchanges. Think about it. It makes sense that when entering and exiting the crypto space, just like when trading stocks in and out, these cash entry and exit points would be documented. […] Ultimately, governments want to tax these transactions, and this approach is the least complicated way to do it.”
The closure of large P2P platforms in 2023 has become a sign of regulatory developments, especially in the United States. However, Experts believe that P2P platforms will continue to play a key role in developing countries, and these nations will move towards launching their native platforms to overcome the shutdown of the most popular global platforms.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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