The closure of two major P2P cryptocurrency exchanges in the first quarter of 2023 has raised concerns about the future of P2P exchanges in the crypto ecosystem. While many are blaming increased regulatory scrutiny for their downfall, experts are calling for better alternatives.
P2P exchanges were once a lifeline in the crypto ecosystem due to their ease of exchange and privacy features. However, some of these key features have driven them to fall under increased scrutiny from regulators in 2023.
In February 2023, LocalBitcoins, a Finland-based P2P exchange platform, announced its closure after 10 years of service. The platform cited tough market conditions due to the ongoing crypto winter, along with increasing regulatory pressure and declining market share. The abrupt closure came within weeks of the United States Financial Crimes Enforcement Network (FinCEN) naming the platform as one of the largest Bitcoin counterparties to the Russian-affiliated exchange Bitzlato.
Another prominent P2P Bitcoin exchange platform, Paxful, founded in 2015, suspended its operations on April 4. The platform cited the ongoing regulatory environment and staff departures as the reason behind its closure. The ongoing court battle between Artur Schaback and CEO Ray Youssef over control of the firm was also seen as a prominent reason behind its downfall.
The closures will be painful for unbanked and underbanked traders, hindering their ability to transact locally and globally. These platforms were instrumental in flourishing crypto adoption, especially in developing nations, and offering banking services to the unbanked. Freelancers often used the platform to convert their wages to and from Bitcoin and make payments to each other, while traders made use of its escrow service to conduct business. As such, the closure has left many of these users in developing countries wondering about the future of the domestic crypto marketplace.
However, experts believe that P2P platforms will still play a key role in developing nations, and these nations will move toward launching their native platforms to overcome the closure of popular global platforms. Former WazirX CEO Nischal Shetty said that P2P platforms with proper Know Your Customer protocols “help onboard users, especially in developing countries without banking access, and will continue to exist.”
The declining popularity of P2P platforms and the recent closure of some of the oldest P2P platforms are also attributed to the new availability of better alternatives, as there are now more practical on-ramps that enable users to buy cryptocurrency using their bank accounts and credit cards. Saponaro told Cointelegraph that the only way new and existing P2P exchanges will survive is as ancillary services offered by licensed operators. P2P markets will still exist, and they will likely evolve just like decentralized exchanges. Ultimately, governments want to tax these transactions, and cash-to-crypto and crypto-to-cash will likely end up where most if not all regulation will be enacted.
While the closures are a sign of evolving regulations, experts believe that P2P platforms will still have a role to play, particularly in the developing world, and will continue to evolve with better alternatives. It will be up to the industry to develop solutions that balance innovation and consumer protection with the increasingly complex regulatory landscape.
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