Why LocalBitcoins Gave Up Users’ Privacy | COO at Oldest P2P Bitcoin Exchange Explains

We are helping and providing financial inclusion to those people and helping them connect to modern economy if there is no other way for them to do it.

We found out that verified local bitcoin accounts are being sold on Hydra, which is Russia's darknet marketplace. Are you aware of that and what are you doing to address this issue?

Well, striving to eliminate fraud is like a game of wake a wall. You can never win the battle.

What's up YouTube? I'm your host, Giovanni. Today I'm joined by Elena Tonoian, CEO at LocalBitcoins. How are you doing, Elena?

Good, thank you, Giovanni, and thank you for having me.

LocalBitcoins is a peer to peer bitcoin exchange based in Helsinki, Finland. Founded in 2012, it is one of the earliest crypto marketplaces. Its revenue for 2019amounted to over $29 million. What are the main characteristics that set aside the experience of buying and selling bitcoin and local bitcoins? The same experience on traditional crypto exchanges?

Good question. I mean the main, I think difference between us and centralized exchanges is in the fact that we're more serving the developing countries and centralized exchanges are serving developed countries. Except that of course, in local bitcoins we support a lot of local and regional payment methods. While the situation is a bit different with centralized exchanges, they're mainly supporting bank transfers as form of payment method. Of course, another big thing in our opinion is the human factor, because in local bitcoins you're buying or selling to another person just like you. So it's Elena buying from Giovanni, which creates trust on certain level. Actually majority of our users, and to be precise, over 85% of our users. During surveys they say that the reason they're using local bitcoins is because it's very intuitive and easy to use. So even for people who are not very tech savvy, it is a really easy thing to do to buy and sell bitcoins.

So you mentioned the fact that you are serving the developing countries while centralized exchanges are serving developed countries. But why do you think is that so? Do you think it's because the centralized exchanges require people to have some access to traditional banking services while you don't require that?

I think that's one of the reasons. Of course, obviously bank transfers are one of the main payment methods on local bitcoins as well. But along with that, we offer many others. And people who are unbanked or have limited access to those, like let's say to traditional banking, they have much easier time to actually trade on local Bitcoins because we have a lot of mobile payments, a lot of online payments. So it's a lot easier, it's a lot faster. I suppose that's one of the reasons.

Now I would like to talk about your geographical position. So what are the advantages and the disadvantages of being a Finland based crypto exchange?

There are a lot of positive sides obviously because Finland is a relatively safe and stable country, like politically and economically to run a business in. Many administrative processes are very transparent, like company registration and taxation. Overall, I think in Finland we have quite high level of education, which puts us in a good position when making hiring decisions and getting talents. But besides that, I think the bitcoin scene has been developing in Finland from quite early years. So we have a lot of bitcoin enthusiasts and people with knowledge and even experience, which once again puts us in a good position to hire good talents to our team. This has been the case with us. We also find it increasingly more easy to hire nowadays to Finland from abroad. And currently we have over 20 nationalities working in our tiny little Helsinki office. So I think all of those are pretty positive things. On a negative side, you probably know that Finland is not very centrally located, so we're far away from everything. Well, if we compare it to London and New York, you are in the middle of all the happenings, all the events, so it's quite a lot easier for you to be in the center of it. But from Finland it's a bit harder for us though after Corona, things might be shifted to a different direction and we might be attending probably a lot of things remotely, but this remains to be seen. On the negative side, probably the fact that Finland is generally not very cheap country to run a business.

Yeah, I've been there. I didn't have the feeling it was a cheap country in general.

That is true, that is true.

So that's another curiosity that I have. Why are you not supporting any other cryptocurrency apart from bitcoin?

Well, to be entirely honest with you, I don't think there is a specific reason why we are not supporting any other coins. It's just that initially the company's focus has been on bitcoin and this is what we have been putting all our focus and efforts to actually serve the bitcoin users as well as we can. Though I'm not sure if you know, but currently and for I think last two, three years, supporting Altcoins as a payment method to buy and sell bitcoins. So that is one of the available options. And in the Future, we are also considering that we might actually provide full support for other coins, but this remains to be seen.

According to a report by cipher trace, LocalBitcoins is the number one platform for the amount of criminal crypto Funds received in 2019. That was the third year in a row that you were ranked first in the ranking. What have you been doing to address this issue?

Local bitcoins has always been proactively seeking ways to fight illicit activities happening on the platform. And as you know, in September 2019 we implemented the AML and KYC procedures, which actually had direct and significant effect on this issue. So on transactions sent to dark market, to give you more numbers, I think in December 2019 the volumes sent to dark market transact like dark markets have dropped by 50%. And by spring 2020, if I'm not mistaken, it was already by May, volumes sent to dark markets have dropped by over 70%. So while we have no means to validate the third party reports, we do definitely acknowledge the fact that prior to implementation of AML KYC procedures, those volumes of transactions sent to dark markets were a lot higher. But we are doing continuous work and putting a lot of efforts into solving this issue and we expect the dark market transaction volumes to drop even more within time. So to answer your question, the outcome for 2020 is expected to be a lot different.

Clear. So last year, as you said, you implemented these KYC and AML procedures in order to comply with EU regulation. So don't you think that for the sake of compliance, local bitcoins lost a major competitive advantage compared to other crypto exchanges, which is customers privacy?

Well, we did lose some competitive advantage, that is a fact. But then again, we are a Finnish company operating under Finnish jurisdiction and Finland was one of the first pioneering countries to implement 5th AMLB. And since we wanted to run a legitimate business, we made a choice to be compliant and to become a regulated entity. And also in the future we expect more and more regulation to come. For example the travel rule, which is going to affect probably all the exchanges. And maybe since we are already regulated and we already have more or less developed processes, this will actually give us competitive edge in the future. I would like to point out also that in the early days people used local bitcoins because it was anonymous, but nowadays they use local bitcoins because they need Bitcoin and want safe and legit service to buy bitcoins. And this also reflects a change in the profile of a bitcoin user. And also last few months we were seeing positive growth across all regions and people like obviously we still remain profitable, which is a great thing and people have more trust in our service. So yes, we did lose some kind of competitive advantage, but nothing that we couldn't overcome.

Right. But still, as far as I know, the trading volume and local bitcoins but dropped by around 50% from June 2019 to January 2020. So do you think that the new verification procedures are somehow related to this drop? And if not, what is the cause for this drop?

So local bitcoins implemented AML and KYC processes in September 2019. After that we definitely saw a decline in our trade volume finding its bottom in February 2020. There are a few possible reasons for that. First of all, we were, as I mentioned, pioneers to implement 5th MLD. Our processes were not fully developed. There was a lot of uncertainty, we went through a lot of complications. We have done a lot of hard work. But the point I'm trying to make is that it was expected that some of the things will not go very smoothly. For example, customer onboarding and verification processes in the beginning have had some delays and unfortunately this is one of the reasons we lost some of our customers who were trying very actively to gain back. Some people did not want to lose their anonymity and dropped naturally. And something about our fraud rates that might be interesting as well. Compared to the amount of successful trades and over overall volumes that are happening on local bitcoins, the fraud rates have been always low for us. However, after implementing AML and kyc, these numbers have gone even lower, which means that we actually got rid of the bad actors. And yes, this is probably those reasons that affected on the on the drop of trade volume. But we would like to think that us being a regulated entity also is creating and will create more trust in the future for more bitcoin curious people to join. And evidence of trust actually creation can be our for example trustpilot reviews which are almost 5 stars from 20 plus thousand people. I think this is good indication that actually there is a lot of trust in our service. Not sure if this answered the question, but yeah, to say once again that now looking at the last two, three months, we can see growth happening almost across all regions, not just one single region across all regions, which is indicating a wide and healthy growth in demand for bitcoin.

Clear. So talking about this new verification procedure that you put in place, we found out that verified local bitcoin accounts are being sold on Hydra, which is Russia's darknet marketplace. Are you aware of that and what are you doing to Address this issue.

Yes, we're very well aware of the problem and we already have pretty solid measures in place to detect identify those accounts as soon as possible. Currently we block those accounts as soon as we are able to identify that they have been sold or hacked. But obviously more has to be done in that regards. And well, striving to eliminate fraud is like a game of whack a wall. You can never win the battle, but you know, every now and then new problem pops up and you just have to minimize the risks and deal with the problems as they come. Also. Well, I would like to say something about our Bitcoin community because especially our user community, there are being very active players in keeping the platform clean because the moment there is any suspicious activity detected by them on the platform, or like you said, some accounts are being sold, we get actually reports quite quickly from them and hopefully react as soon as possible in order to take measures and block those accounts. So thank you to our Bitcoin community and our users for helping us keep the platform clean.

Sounds good. So this year local bitcoins registered a spike of transaction volumes mainly from Argentina, Colombia and Venezuela. How do you explain the geographical concentration of volume in these Latin American countries?

Yeah, so our volumes in Venezuela increased because there is a real use case for Bitcoin there due to their collapsed financial system. Well, I would say that it's pretty common thing that when market grows this big market can push the trading volumes in neighboring countries as well. And we believe that this might be the case for Colombia and Argentina due to Venezuelan micro migration. Well, with Argentina it's also separately that it has faced its own economical difficulties and capital control restrictions. So we believe the country has a huge potential for Bitcoin due to its, well, first of all, well educated population and a culture of storing value and other assets in their own currency. But generally speaking, we tend to see growth in those markets for us where the economic and political situation is not very stable. And as to Argentina and Venezuela, obviously we're very happy to be in those countries where there is actually a need for us, where we are helping and providing financial inclusion to those people and helping them connect to modern economy if there is no other way for them to do it.

That was Elena Tonoyan, COO at LocalBitcoins. If you like the interview, smash the like button and subscribe to our channel. See you next time.

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