The Rumors of “Insolvency”, Banking Partners’ Escape, and the Suspension of Fiat Deposits

On October 8, Hong-Kong-based exchange Bitfinex has announced that it is not under the immediate threat of insolvency and the related rumors are unsubstantiated, as well as false. According to the company’s press release, all cryptocurrency and fiat withdrawals are and have been processing as usual without the slightest interference.

After some mild clarifications, tension is rising in the crypto community – the spread between Bitcoin prices on Bitfinex and other exchanges, on October 15, reached $1,000 against the massive sale of Tether (USDT). In the meantime, Bitfinex is testing its improved solutions, it remains to be seen about the possible consequences for the crypto industry and to be confirmed that this is not a repetition of the story with Mt.Gox, which some traders draw a parallel to, but simply the implementation of a “new and increasingly robust fiat deposit system”.

Banking partner relations

The transparency of the work on one of the leading cryptocurrency exchanges has been questioned as early as October 2. The reason for this was the financial problems of the Puerto Rico’s Noble Bank, which was allegedly engaged in servicing the operations of Bitfinex and Tether Ltd (Bitfinex owners are the beneficiaries of Tether). As reported, the bank has filed for bankruptcy and is now searching for a buyer.

The news about the financial problems of Noble Bank was first published on Sept. 30, 2018. The information came from an insider, who reported on the possibility of a quick liquidation of the bank if it wouldn’t receive support from the holders of large amounts of Tether. The non-publicized connection of the bank with Bitfinex accounts were revealed by the BitMEX exchange researchers.

The cryptocurrency trading platform has dismissed that notion, stating in a Medium post that “stories and allegations currently circulating, mentioning an entity called Noble Bank, have no impact on [their] operations, survivability, or solvency.”

A day before the above post, Larry Cermak, a chief analyst at The Block, tweeted that Bitfinex had engaged HSBC as its new banking partner:

Bitfinex is now banking with HSBC through a private account of Global Trading Solutions. Very good fit if you ask me. It’s also worth mentioning that all EUR, JPY and GBP deposits are paused but Bitfinex “expects the situation to normalize within a week”. Banking issues? pic.twitter.com/1pxQ13NO0m

— Larry Cermak (@lawmaster) October 6, 2018

Bitfinex has faced challenges with banks before. Thus, on April 18, 2017, the exchange suspended fiat withdrawals and reported that several Taiwanese banks, with which it cooperated, had repeatedly blocked its transactions.

A cryptocurrency fund manager, Jacob Eliosoff, suggested that those withdrawal issues could create new pressures within the industry of digital money:

“This is a dynamic many of us remember from the Mt. Gox days when there were problems with fiat withdrawals. Investors responded by converting fiat they had on the exchange to Bitcoin so they could withdraw it. They buy Bitcoin to withdraw, pushing up the price on the exchange.”

A little earlier, in the second half of March, U.S. bank Wells Fargo & Co. suspended its services related to processing Bitfinex’s transactions. On April 5, the latter filed a lawsuit against the bank which was quickly dropped.

The rise of allegations

On Medium, a user called Proof of Research, wrote a detailed article titled “Bitfinex is No Longer Solvent – Remove Your Money Now” where he highlighted the difficulties in withdrawal issues that many users of the exchange have been facing.

The article is no longer available publicly, since the user’s account is now suspended. The blogger pointed out complaints, posted on Reddit, by users who were censored by Bitfinex moderators. Additionally, throughout the previous week, there were a series of complaints about poor customer service and the inability of stopping the infinite loop of currencies being loaned out on the platform. All of these reasons could have accelerated rumors that Bitfinex has become insolvent.

Tether’s in the mix

The concerns over Tether are not new. Bitfinex has been accused, by numerous media and industry representatives, of not being transparent on the audit of Tether, raising a lot of concerns over the 1:1 peg of the stablecoin. Notably, the crypto market is dependent on Tether currency, which is the eighth largest cryptocurrency, with a market cap of $2.2 billion. Furthermore, there are many crypto exchanges like OKEx, which are dependent on this cryptocurrency, as Tether is the second most traded crypto coin.

Last time Tether and Bitfinex proved the existence of real fiat money behind their tokens, after the community had repeatedly expressed scepticism with regard to banking audits and the source of funds. On June 20, Tether’s general counsel, Stuart Hoegner, stated that the number of USDT issued was equal to $2.54 billion, which almost coincided with the numbers…

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