Necessary conditions for the long-term success of Bitcoin has shown why widespread availability of over-the-counter (OTC) Bitcoin exchangers is crucial for Bitcoin to succeed in the long-run and give us more freedom. This article will explain how to exchange Bitcoin OTC securely and professionally. It should be of interest for Bitcoin users who want to get their coins anonymously from OTC exchangers and for people who want to earn a second income as Bitcoin OTC exchangers in the counter-economy.
If you are dealing Bitcoin on the OTC market you have to consider two kinds of enemies: the state and evil customers (for example, fraudsters). To deal securely you have to mitigate the corresponding risks. That is, you have to drive up the cost of a successful attack and make it unlikely.
The techniques for risk mitigation can be divided into two categories: secure IT infrastructure (privacy FTW!) and tradecraft.
Secure IT for OTC exchangers
OTC exchanges should be arranged completely online. To do that, you should get
your secure IT infrastructure and privacy basics down:
- email encryption (GnuPG)
- use hard disk encryption
- use IP address anonymization (for example, with I2P/TOR/VPN)
- use (multiple) pseudonyms
To arrange the OTC deal online you can use websites like bitcoin-otc.com or localbitcoins.com. You should agree on the price and the amount beforehand and limit the transaction size. In a single transaction, deal only what you could afford to loose. The actual face-to-face meeting only finalizes the deal, there must be no deviation from the agreement! If you deviate from the agreement, the probability of fraud rises sharply.
The digital arrangement of OTC exchanges protects against the state: you produce less evidence and you make it harder to prove how much Bitcoin you dealt in the past. If you exchange a lot, make sure you are using multiple pseudonyms.
Tradecraft for OTC exchangers
Tradecraft is skill acquired through experience in a (typically clandestine) trade. In the Bitcoin OTC business tradecraft is about methods, customs, and protocols to secure and conceal your transactions.
In general, you should always meet in public places during the day (for example, a café) to reduce the probability that you’ll get robbed. Meeting during the day decreases the probability of robbing, but keep in mind that it makes surveillance easier. During a transaction, the money is kept or placed on the table until the Bitcoin are transferred. Your Bitcoin client should only have the needed amount of Bitcoin on it. Once you received the money, you have to make sure that you don’t leave the protected public places with the money to avoid getting robbed after the deal! There are several methods to do that:
- Brush: You give the money to a second person unnoticed (beware of the toilet, you can easily get robbed there). Such a second person can also spot problems in advance and warn you if necessary.
- Drop/cache: Use a secure place to store the money. For example, a secure mailbox or door where you could put the money.
- Deposit the money: Go directly to the bank and deposit the money. In that case, you have to think of your cash card which could be used to force you to withdraw the money for a robber. You could send the card back by mail or in cases where you are already followed type in the wrong PIN three times in a row to get rid of the card at the ATM.
- Safe deposit box: Deposit the money there. But make sure that you need personal identification to access the box, rendering robbing attempts useless.
Next level OTC
If you follow the advice given above you are already in pretty good shape. But if you exchange a lot (in terms of amount or number of transactions), you should improve your OTC game to the next level.
The best way to do that is to deal in teams of at least two persons. If you have at least one partner you can use the brush technique described above to get rid of the money you receive after the deal. You can also separate the buying of Bitcoin from the selling of Bitcoin: One team member exclusively sells Bitcoin and the other one exclusively buys them. In most jurisdictions, if Bitcoin is not considered a currency this is just simple selling/buying and not money changing. If Bitcoin is considered a currency, you could use goods of exchange (gold or silver) instead of cash for exchanges.
A professional dealer has professional prices, because professionalism has its cost. Make sure that you don’t cut corners to lower your costs, this will defeat you in the long-term. If necessary, explain the benefits of a professional dealer to your customers. In my opinion, if your fee is significantly less than 5%, your are either dealing very large amounts or your are fooling yourself about your security measures. Risk rises with repetition and quantities, make sure you mitigate them appropriately.
Let’s deal Bitcoin in the OTC market securely and professionally — for fun and profit!
The content of this article was presented at the 2012 Bitcoin conference in London [slides].