Since Paxful, a leading peer-to-peer (P2P) bitcoin platform, announced suspension of its operations and possibility of shutting down, a number of P2P crypto traders and industry followers have been asking if this also means that the P2P crypto market is going down. Understandably, for the safety of their funds, many users consider the announcement a shutting down notice. Will the P2P crypto market also shut down too?
First, Paxful announced that it would be “suspending its marketplace”. It didn’t announce a shutdown, whether immediate or scheduled. Paxful may however decide to shut down eventually, just as LocalBitcoins, another P2P bitcoin platform, did recently.
Second, while it is true that the global P2P crypto platform Paxful will be suspending its operations, this does not mean that the P2P crypto market is also under suspension. Paxful’s impending shutdown does not also mean that the P2P crypto market is shutting down.
On the one hand, Paxful is a centralized platform that offers an open market for peer-to-peer crypto trading. Paxful is only one of the many marketplaces. In such marketplaces, individual traders from various parts of the world are able to carry out crypto transactions amongst themselves, while Paxful ensures KYC and charges transaction fees. This is why Paxful describes itself as “a peer-to-peer platform to buy and sell” bitcoin. Paxful offered over 350+ payment methods and had up to 10 million people “just like you” who wish to buy or sell bitcoin.
On the other hand, the P2P crypto market is not a monopoly of any centralized or decentralized platform. No one single platform or entity controls the P2P crypto market. To access a P2P crypto marketplace, you either have to create an account with a centralized P2P platform such as Paxful or a decentralized P2P platform that offers a P2P marketplace.
How about the impact a Paxful shutdown may have on the P2P crypto market?
The P2P crypto market offers peers in the crypto market a decentralized exchange platform or marketplace to trade directly with each other without any trusted intermediary, middlemen, or third party processing their trades or holding their funds.
Considering Paxful’s size in the P2P crypto market, a Paxful shutdown will definitely impact negatively on the global P2P crypto market. This negative effect will apply particularly to markets where Paxful had the most users, including Nigeria. At the time it announced its decision to suspend operations, Paxful had up to 10 million users globally. Reportedly, Paxful has up to 1.5 million Nigerian users. In 2022, Paxful reported that Nigeria is its largest country based on trade volume, according to The Punch.
Narrowing down to the P2P crypto market in Nigeria, Paxful has been home to many Nigerians who are involved in P2P crypto transactions. Particularly after the cryptocurrency directive in February 2021 by the Central Bank of Nigeria (CBN) which restricted crypto-related transactions in Nigeria’s banking and financial system, Paxful became a leading platform that offered Nigerians access to the P2P crypto market. Indeed, it was as if Paxful had seen such a restriction coming.
Now with Paxful’s impending shutdown, millions of Nigerians—as well as users globally—will need to find another platform that meets their P2P transaction needs. Temporarily, although Paxful has assured its users that their funds are safe and withdrawable, network congestion is expected to cause initial delays, discomforts, and understandable distrust. Such congestion is usually due to a spike in withdrawal or trading activities. If treated efficiently and transparently, the withdrawal process is expected to be only a matter of time. The Paxful suspension/ shutting down notice provides users adequate notice and time to withdraw their funds, just the way it was done by LocalBitcoins in February 2023.
Does this also mean that the P2P model or P2P crypto platforms are gradually becoming endangered and may soon become extinct?
Paxful announcing a suspension of its operations and an impending shutdown does not necessarily equate to the P2P model or P2P crypto platforms being under threat.
The major reason behind Paxful’s decision to suspend operations and possibly shut down is due to internal operational issues. This was triggered by the ongoing legal battle between the Paxful founder & CEO Ray Youssef and a co-founder. Although Ray Youssef did not expressly mention Artur Schaback, Youssef is most likely referring to Schaback who sued Youssef in Delaware, US. As Youssef pointed out in a Twitter Space on the matter on 4 April 2023, the legal battle has prevented Paxful from being able to pay salaries to its compliance and IT team, thus impairing operations.
A remote reason—which appears to be minor compared to the immediate trigger—is the “regulatory challenges for the industry”. This regulatory challenge continues “to grow, especially in the peer-to-peer market and most heavily in the U.S”. According to Paxful, it decided to take “the most secure option” by asking users “to explore self-custody and trade elsewhere”. While this is nearer to being a P2P-model issue and not peculiar to Paxful, the level of risks depend on the jurisdiction in question, as well as the P2P crypto platform’s model in terms of custody of user funds. Some jurisdictions may regulate custody of user funds on P2P crypto platforms. Typically, at least for trading purposes, P2P crypto platforms do not hold users’ funds except for escrow purposes. In a trading scenario, user funds are held in escrow accounts, preventing the P2P platform from having any access to users’ funds. But the implication may be different in the scenario where a user is not carrying out a trade but simply leaves his or her funds in his or her wallet.
In any case, Paxful has proposed that users “explore self-custody”. But custody is clearly not the sole reason for deciding to suspend operations. There is technology already available in the crypto market that offers self-custody to users. Other platforms, whether centralized or P2P, may start exploring the idea of adopting self-custody wallets hosted on their own platforms.
Could Paxful suspension/ shutting down be another FTX, or an FTX contagion effect?
From the facts available in the public at the time of answering this question, Paxful’s impending shutdown is not another FTX. And it is not also the effect of an FTX contagion. Paxful suspension/ shutting down notice is not the result of a misappropriation or unavailability of user funds.
First, Paxful has assured its users that their funds are safe and anyone can make withdrawals. Users have started withdrawing funds, although not without network congestion, typical with mass withdrawals. But there is no ‘bank run’, at least so far. So this is unlike the FTX implosion where most users’ funds were no longer available due to questionable reasons. Paxful’s Youssef has also given his word, in a tweet, that he would not be withdrawing his own bitcoin from Paxful until users have successfully withdrawn theirs. This is integrity.
Second, unlike the FTX implosion, there is no record to show that anyone blew the whistle on Paxful. Paxful’s Youssef literally blew the whistle on the company after willingly stepping out last week to transparently disclose to its users and the general public the operational challenges Paxful has been experiencing. At the time of writing, Paxful, led by Youssef, continues to work tirelessly to ensure that all users successfully withdraw their funds from the platform. This shows transparency.
Read also: FTX Collapse: Does FTT have a future?