Wells Fargo sued for suspending Bitfinex wire transfers

The parent company of the Hong Kong-based bitcoin exchange, Bitfinex, recently filed a lawsuit against Wells Fargo & Company and Wells Fargo Bank. “This is an action for intentional interference with contractual relations and injunction relief arising from Wells Fargo’s interference with plaintiffs’ customer contracts,” states the court document.

Filed with the United States District Court of Northern District of California, San Francisco Division, the lawsuit lists four plaintiffs: iFinex Inc, BFXNA Inc, BFXWW Inc, and Tether Limited. A jury trial is demanded.

“Wells Fargo has suspended U.S. dollar wire transfer operations needed to remit to plaintiffs’ customers U.S. dollars that the customers deposited with plaintiffs to purchase digital currency, causing imminent and irreparable harm to plaintiffs.”
— – Bitfinex Vs Wells Fargo Complaint

Wells Fargo & Company is a diversified, community-based financial services company with $1.7 trillion in assets. The company provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,700 locations, 12,500 ATMs, the internet, and mobile banking.

The Company has offices in 36 countries to support its customers that conduct business in the global economy. With approximately 266,000 active, full-time equivalent team members. Wells Fargo & Company serves one in three households in the United States.

Three of the four plaintiffs represent Bitfinex, which is operated by iFinex. BFXNA and BFXWW are wholly-owned subsidiaries of iFinex, incorporated in the British Virgin Islands, but with a principal place of business in Hong Kong and offices in Taiwan.w

The fourth plaintiff, Tether Limited, is incorporated in Hong Kong, with offices in Taiwan. Tether leverages Blockchain technology to allow users to store, send and receive digital tokens pegged to dollars, euros, and yen. Tether Platform currencies are backed by fiat currency assets held by the company. As such, one USD-denominated tether is always valued at one dollar, at least as long as the company is in business.

While the plaintiffs and defendants are located in different jurisdictions, Wells Fargo’s decision to suspend the aforementioned wire transfers occurred at its headquarter, giving the San Francisco court jurisdiction for the lawsuit.

"For these platforms to work, customers depend on Bitfinex’s and Tether’s ability to send back to them the U.S. dollars they deposited."
— – Bitfinex Vs Wells Fargo Complaint

The relationship between Bitfinex and Wells Fargo is not a direct one. Bitfinex uses four Taiwan-based banks: Hwatai Commercial Bank, KGI Bank, First Commercial Bank and Taishin Bank. The court document reveals that the exchange currently has $430 million USD worth of digital currencies and approximately $130 million of customer deposits in these Taiwan-based banks.

Bitfinex has contracts with and has been relying on these Taiwan-based banks to make and receive wire transfers to fulfill its customer orders and send back their funds in U.S. dollars as well as pay its employees and suppliers.

The Taiwan-based banks conduct cross-border wire transfers with and through Wells Fargo, as a correspondent bank. For two years, Wells Fargo has been conducting incoming and outgoing wire transfers in U.S. dollars on accounts which listed Bitfinex and their customers as beneficiaries using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.

During the latter half of March, Wells Fargo informed the Taiwan-based banks that it would no longer service outgoing wire transfers from Bitfinex’s correspondent accounts. The company has neither provided any explanation for this action, nor sent any inquiry or request for information to Bitfinex. While outgoing wire transfers have been halted, Wells Fargo continues to process incoming wires to Bitfinex accounts.

“Plaintiffs expressly informed Wells Fargo that its decision to suspend outgoing wire transfers in U.S. dollars from plaintiffs’ correspondent accounts presented an existential threat to their businesses. They informed Wells Fargo that if plaintiffs could not remit to customers U.S. dollars that belong to their customers, plaintiffs’ businesses would be crippled as of Wednesday April 5, 2017. They would be brought at a standstill.”
— – Bitfinex Vs Wells Fargo Complaint

Wells Fargo’s decision to suspend U.S. dollar wire transfer operations from Bitfinex’s correspondent accounts and refusing to converse with Bitfinex has, “substantially interfered with plaintiffs’ ability to operate their businesses and honor their contractual obligations to their customers," the court document reveals, citing that Bitfinex’s customers have already begun complaining about the delay in wire transfers. It will "almost certainly” undermine plaintiffs’ reputation and customer goodwill, “resulting in the loss of both current and prospective customers,” which will likely view the failure as Bitfinex’s own wrongdoing.

Bitfinex alleged that Wells Fargo knew that the Taiwan-based banks were conducting these wire transfers on behalf of the company, with a strict know your customer (KYC) process which also reveals that Bitfinex’s business involves purchasing digital currencies.

The plaintiffs ultimately seek a preliminary and permanent injunction against Wells Fargo, preventing it from suspending, rejecting, or refusing to process wire transfers in U.S. dollars from plaintiffs correspondent accounts without notice and without the opportunity for plaintiffs to address any possible due diligence concerns.

Citing damages it has suffered and will suffer in the future, Bitfinex is seeking damages "in an amount to be determined at trial.” The four plaintiffs request compensatory damages in excess of $75,000 as well as “further relief,” that the court may deem just.

The court documents release lead many in the biticoin community to believie that hundreds of millions of Bitfinex’s funds had been frozen by Wells Fargo. Bitfinex’s employee quickly dispelled the rumor, while confirming that outbound wires are experiencing delays. However, “we have other outbound channels available,” Bitfinex said.

"We do not bank with Wells Fargo; they serve as a correspondent bank only. Funds are not frozen. This isn’t a regulatory action."
— – Bitfinex

The problem of correspondent banks severing the relationship with overseas banks is not an uncommon one. Last June, the International Monetary Fund (IMF) published a discussion note on the subject, stating that several countries have reported a reduction in correspondent banking relationships (CBR) by global banks.

The IMF details that the withdrawal of CBRs has reached a critical level in some countries. Smaller emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europea and the Pacific may be the most affected.

The withdrawal of CBRs by banks is often referred to as “de-risking.” The decision for a financial institution to de-risk is a business decision based on a number of considerations, the IMF states. This decision usually reflects each bank’s cost-benefit analysis, re-evaluation of business models, changes in regulations and enforcement such as anti money laundering and combating the financing of terrorism (AML/CFT) as well as tax transparency.

The IMF states that  pressures to withdraw CBRs, “may arise where regulatory expectations are unclear, risks cannot be mitigated, or there are legal impediments to cross-border information sharing.”

“Pressure on CBRs could disrupt financial services and cross-border flows, including trade finance and remittances, potentially undermining financial stability, inclusion, growth, and development goals. The current limited economic consequences partly reflect the ability of affected banks to rely on other CBRs, find replacements, or use alternative means to transfer funds.”
— – International Monetary Fund

This disruption to Bitfinex is one of many battles the company has faced since founding in October 2013. A hack in May 2015 struck Bitfinex, but was not enough to inconvenience customer accounts. The exchange became quickly integrated BitGo wallets, becoming the first exchange to do so. After starting to offer margin trading to their customers in the following year, the CFTC fined Bitfinex for the coincidental amount of $75,000 for failing to register with them.

A second, larger hack in August 2016 resulted in the exchange “sociaizing” the losses across all user accounts. The exchange then issued BFX tokens that represented the debt. On Tuesday the company announced that they have paid off the entire balance, 119,756 bitcoins, following a record performance in March.