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Bitfinex, the largest USD to Bitcoin exchange in the world, has been making headlines recently with their banking troubles. Fiat deposits on Bitfinex were officially halted for about a week, while simultaneously the Bitfinex subreddit is filled with complaints that fiat withdrawals are not functioning correctly, even though Bitfinex says fiat withdrawals never stopped working. Bitfinex launched a new distributed banking solution on 16 October 2018 and has restarted fiat deposits for USD, GBP, JPY, and EUR.
With the new system, users initiate a request to deposit fiat, specifying the exact amount of fiat they wish to deposit. The user’s account is then reviewed, and then they receive a deposit notification telling them where to deposit the fiat. The user then deposits the fiat, which is processed in 6-10 days. The minimum deposit is USD 10,000, and there is a deposit fee of 0.1%.
This distributed banking solution for fiat deposits sounds similar to the method used by Bitcoin dealers on LocalBitcoins for many years. Large Bitcoin dealers generally have accounts with multiple banks, often under many different names, and they tell their clients where to deposit fiat on a case by case basis. This sort of system is done to distribute deposits between banks so that the load on each bank account is minimized. If a Bitcoin dealer uses the same bank account for every deposit they usually have their accounts shut down since a huge volume of deposits from many different people is suspicious to the bank.
Bitfinex is the largest USD exchange in the world, so even if they distribute fiat deposits between numerous different banks, the volumes in each bank will likely be high enough to raise suspicions. This system might work for a temporary period at each bank, but there is a large risk of Bitfinex’s bank accounts getting closed sporadically. It seems Bitfinex is removing risk for themselves by putting a 6-10 day wait period to approve a fiat deposit, but that certainly does not remove the risk for their customers who could end up getting deposits stuck in limbo if the bank they deposit to freezes the bank account.
Bitfinex seems to welcome the challenges that will come from dealing with banks like this, saying “We believe this system to be significantly more durable in the face of sustained attacks by our competition and their supporters. Ongoing campaigns against us will only result in our company becoming stronger and better”. This is the same sort of attitude that Bitcoin dealers have when dealing with banks. Generally, as Bitcoin dealers lose bank accounts, they simply add more bank accounts under different names, generating a prolific underground network to send and receive fiat. It seems Bitfinex is on track to doing something like that.
This distributed banking solution launched by Bitfinex is certainly not ideal. It is better for a crypto exchange to have a solid banking relationship with a single bank, rather than trying to circumvent the system with many banks. Coinbase processes fiat deposits and withdrawals relatively quickly when compared to Bitfinex since it is compliant and follows all regulations. This makes the customer experience much less stressful and more efficient on Coinbase versus Bitfinex. Generally, the longest a fiat deposit or withdrawal should take is 3-5 days with ACH, and Bitfinex’s deposit system is much slower than that.
The price of Bitcoin on Bitfinex continues to be more than USD 300 higher than on Coinbase and Bitstamp as of 17 October 2018, suggesting that arbitrage mechanisms are not working. This indicates that fiat functionality on Bitfinex continues to be inefficient, since if it was efficient then arbitrage traders would bring Bitfinex’s Bitcoin price down to the global market price.
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