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 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. This sort of system is followed 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 can raise flags, even if the Bitcoin dealer is 100% compliant with regulations. This is likely the problem Bitfinex has been encountering, such as when they lost their Wells Fargo account in 2017.

This system might work for a temporary period at each bank, but there is a 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 since customer’s deposits could get frozen or reversed if a Bitfinex bank account gets shut down. That being said, Bitfinex still holds more than 130,000 Bitcoins, and would likely ensure that customers who experience deposit trouble don’t lose their money.

Bitfinex seems to welcome the challenges that will come from dealing with multiple banks, 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 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. Coinbase processes fiat deposits and withdrawals relatively quickly when compared to Bitfinex since it has a primary bank it can rely on. 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 as they should. Usually, arbitrage traders would buy Bitcoin on Bitstamp or Coinbase and sell it on Bitfinex until the price of Bitcoin on Bitfinex dropped to the global average. Since this is not happening at this time, Bitfinex’s fiat functionality is probably less efficient compared to other exchanges.

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