Making a fortune from arranging private bitcoin transactions

By Steve Stecklow

HELSINKI (Reuters) - Exchanges aren't the only way to trade bitcoins and other cryptocurrencies. Some websites help to arrange private transactions between buyers and sellers.

LocalBitcoins.com is a popular website through which buyers and sellers advertise bitcoins, setting their own prices and conducting trades privately. It is operated by two brothers in Helsinki who say it has about 350,000 active users from nearly every country.

The website has recently been facilitating trades worth as much as $72 million a week and may surpass $1 billion worth of bitcoin transactions this year, according to Nikolaus Kangas, its 31-year-old chief executive. His older brother Jeremias, a programmer, set up LocalBitcoins five years ago. It now has about 15 employees and is looking to hire more.

Here's how it works: Bitcoin buyers and sellers place advertisements on LocalBitcoins. The website holds a seller's bitcoins in escrow. A seller releases them to a buyer upon being paid. LocalBitcoins collects a one percent fee in bitcoins for each completed transaction. This year those fees may add up to more than $10 million worth of bitcoins.

Many of the customers are unknown to the two Finns. Providing identification is voluntary. Nikolaus Kangas said about 70 percent of active clients provide ID details; the rest give only a username and email address.

"Right now we don't require it," he said. "We've been considering making ID mandatory."

While some LocalBitcoins sellers require bitcoin buyers to identify themselves, some have openly advertised that they don't. "I accept funds without any security check," stated one seller who went by the user name "wmarbitr" and advertised in Russian and English. The website said he had conducted more than 3,000 confirmed trades on LocalBitcoins with more than 4,200 buyers and sellers. The website subsequently said the account was "banned by staff."

Former U.S. federal prosecutor Kathryn Haun said LocalBitcoins' policy of not requiring its users to provide identification can cause problems for law enforcement. "It becomes really difficult to track the identities of those people, absent physical surveillance," she said.

(By Steve Stecklow. Edited by Richard Woods and Janet McBride)