P2P crypto trading: Back to the basics, for the next wave of adoption

One of the core principles behind the creation of Bitcoin, the original cryptocurrency, was to facilitate peer-to-peer electronic transactions. The intent was to allow people within the network to transact freely without the intervention of a third party. For this system, it had to stay true to the ethos of decentralisation.

P2P platform acts as a marketplace that connects interested buyers and sellers to transact with each other.

Buyers and sellers place their requests on the platform, and interested parties can either match these requests or set up their own requests. The platform acts as an escrow and locks the digital assets of the seller so that the funds are inaccessible to either party (to prevent failure of execution). Once an order is matched, the buyer sends the fiat payment to the seller (USD, EUR, INR, etc), and once the seller confirms receipt the digital assets are unlocked and released to the buyer. This makes hacks on P2P platforms virtually non-existent as funds are distributed and not held on centralised servers. At any point of time, the escrow is also not holding huge amounts of crypto and this disincentivises hackers.

A P2P platform is not much different from eBay.

Advantages of P2P platform:

No centralised entity or middlemen: Most people in crypto are aware of Binance, Coinbase, Huobi, WazirX India (now owned by Binance) and these are centralised exchanges that operate as corporates. While some of these have been quite successful, they are considered anti-thesis to bitcoin’s original ethos of decentralisation. Typically, P2P platforms are very lean corporates and the platform can continue operating without any intervention from the entity.

Control of assets: On P2P platforms, the users can maintain complete control over their assets. The platform offers either an escrow or a multi-sig wallet to protect the buyer. While one can withdraw from centralised exchanges as well, most users prefer leaving their assets on the exchange. The ethos of crypto, however, dictates, “not your keys, not your coin”, ie. if your assets are on an exchange then you are susceptible to any hacks or internal malpractices at the exchange.

More privacy: More and more exchanges are adopting stringent KYC checks to conform with regulations. All exchanges that offer fiat gateways (USD, EUR, INR, etc.) have to compulsorily undertake KYC as they are handling regulated currencies. P2P platforms, however, do not handle any fiat currencies and therefore, are typically not subject to the same level of KYC rigour. However, this is changing, as seen by the Finnish regulator’s insistence on Localbitcoins having to undertake KYC on their users.

Greater adoption: P2P platforms do not need to have bank accounts as their transactions happen between two people. Therefore, P2P platforms can operate and proliferate in almost all jurisdictions and provide an on-ramp into crypto.

Challenges of P2P platform:

Liquidity: Centralised exchanges provide a lot of liquidity on their platforms and any user can utilise this liquidity to execute their orders. P2P platforms do not offer such liquidity and will typically scale slower than centralised exchanges.

Optionality: P2P platforms offer only market orders and similar functions. However centralised exchanges offer limit orders, stop losses, APIs, etc. A high frequency trader will usually prefer centralised exchange over a P2P platform.

Trust: Even though P2P platforms do not custody assets (except for escrow), there could be instances of buyers or sellers looking to game the system. For instance, a seller could claim to not having received the fiat, or a buyer may claim to have sent the wire without actually having sent it. In such cases, the P2P platform acts as a mediator and takes the final decision based on proofs provided by both sides.

In the recent times, users have switched to P2P for better trade placement and competitive pricing, and since centralised exchanges are being hacked (even Binance, the largest exchange, was hacked earlier this year). Since buyers and sellers are actively searching for users to match their order, a third party is not needed in peer-to-peer cryptocurrency trading.

P2P platforms are more reliable as central dependency is almost eliminated. When one thinks of trading cryptocurrency, many people imagine complex charts, crypto jargons and conventional exchanges. Yet many are still not aware of an easier way to trade cryptocurrency that doesn’t involve any of these complicated features and is used by millions of people around the world, every day -- P2P.

These P2P platforms roughly provide crypto accesses to almost 250+ countries.

With stringent regulations, banking issues, and high overheads of operating exchanges, P2P could take up a lot of slack in the system and pave the way for the next wave of adoption in this space.

Ever since the Reserve Bank of India (RBI) banned financial institutions from providing any kind of services to users dealing in cryptocurrencies in February 2018, many local crypto exchanges have pivoted and begun offering ‘P2P’ trading to their users. This is, however, not the typical P2P trading offered globally, as the exchanges have tied up with HNIs who allow users to convert INR into USDT that the users can then use to buy any other cryptocurrencies on the exchange. It is unclear how the exchanges manage the two-way liquidity on this conversion. The most popular Indian platforms are WazirX (recently acquired by Binance), Bitbns and Giottus.

Since the banking ban, global P2P platforms have witnessed an uptrend in trading volumes in India. In the last week of October this year, Peer-to-peer Bitcoin trading platforms like LocalBittcoins and Paxful recorded an all-time high for BTC/INR, around Rs 83 million was traded on LocalBitcoins compared to Rs 53 million on Paxful. Some other popular global names in this space are HodlHodl and BisQ. P2P has similarly done well in other countries where the government has not shown active confidence in crypto.

We at Tandem have just launched our own (traditional) P2P mobile application that enables users to transact BTC with 28+ local currencies on the go. With #TradeOnTandem we are setting for wider adoption and awareness in crypto.

It is a clear sign that over-the-counter and P2P trades are becoming more common in India and other jurisdictions, and this appears to be the next wave of cryptocurrency adoption.

 

Prashanth Swaminathan is an alumnus from IIT Guwahati and IIM Calcutta, who spent 10 years in investment banking at Morgan Stanley London. Along with esteemed advisors within this space and crypto, he is currently building a global product called ‘Tandem’ that aims at higher adoption of digital assets.