What is a Peer-to-Peer Exchange?
Peer-to-peer (P2P) exchanges are online platforms for people to buy, sell, and trade cryptocurrencies with each other without the regulatory oversight and consumer protections of a major commercial exchange.
A seller advertising on a P2P exchange will place the offered cryptocurrency in escrow through a smart contract. The coins are automatically released to the buyer once payment is received.
P2P exchanges include Paxful, Bitquick, LocalBitcoins, LocalCryptos and LocalCoinSwap.
How are Peer-to-Peer Exchanges Used in Cryptocurrency Fraud?
P2P exchanges are often used by people who want to maximize their financial privacy or avoid scrutiny from government regulators, law enforcement and intelligence services.
Purchases of cryptocurrency on a P2P exchange can be funded with a variety of payment options, including cash, prepaid cards and gift cards. Cash purchases create an extra layer of anonymity for the person acquiring the cryptocurrency, since the acquisition of these new assets will not appear in their banking records or credit card statements.
Compared to traditional exchanges, P2P exchanges typically require few (if any) steps to verify the identity of buyers and sellers. Proponents of P2P exchanges contend they do not need to comply with KYC/AML regulations because they are merely “facilitating” deals by connecting buyers and sellers, without processing any fiat payments or holding funds in their custody.
Although not all P2P transactions are illicit, the mix of cash payments and anonymous users make it easier to launder money and evade taxes. Peer-to-peer transactions may also occur ‘below the radar’ in countries that have banned cryptocurrency or commercial exchanges, such as China and Columbia.
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