Fraud Risk Assessment: Bitfinex

Bitfinex
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  • Bitfinex
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  • Last modified: December 7, 2017
  • Legitimacy
    Editor: 1%

Bitfinex (bitfinex.com), owned by iFinex Inc. which is registered on the British Virgin Islands (BVI), was launched in 2012 as a provider of cryptocurrency exchange services. The company’s legitimacy has been evaluated based on the items listed below. Every individual item has been checked for the presence of obvious red flags or warning signals. If these are present, an explanation detailing what triggered them has been included. A detailed description of the reasons to evaluate each of the included items can be found below the table.

Business
Total Flags: 5 (3 Warnings = 1 Flag)
Headquarter locationexclamation_warningBritish Virgin Islands (BVI)
Experiencethumb-up-iconBitfinex was founded in 2012
Verified Addressexclamation_warningThe platform is ulyimately owned and operated by iFinex Inc., which is registered on the British Virgin Islands (BVI). The address could not be confirmed (see Business Registration).
Verified Ownerthumb-up-iconJean-Louis van der Velde is the CEO of Bitfinex
Business Registrationexclamation_warningThere are no facilities for carrying out direct online searches for companies registered in the BVI.
Financial Regulator Registrationexclamation_warningThe Financial Services Commission (FSC) is reponsible for the financial sector on the BVI, but a registration could not be confirmed (also see Business Registration)
Operating Licenseflag-iconNot regulated (see Service Disruptions & Unbusinesslike Conduct)
Service Disruptions & Unbusinesslike Conductflag-iconWhen the BitLicense was introduced in New York, Bitfinex responded by announcing the discontinue service to New York residents. In March 2017 Bitfinex stopped servicing Washington State customers, reportedly due to the state requiring a money transmitter license.
Audit
Financial Auditflag-iconBitfinex passed a public “Proof of Reserves” audit, carried out by the CTO of Ripple Labs Stefan Thomas. This was in April 2014 and the platform hasn't repeated it since. Not even after losing 120,000 BTC in due to a hack in July 2016. BVI companies are not required to file statutory accounts.
Governance Auditflag-iconBitfinex lost 1,400 BTC due to its hot wallet being hacked in May 2015, and then 120,000 BTC in the hack of July 2016. These subsequent and successful attacks strongly reduce confidence in Bitfinex.
Website
Website Designthumb-up-iconGood
Grammar on Websitethumb-up-iconGood
Funding Optionsthumb-up-iconVarious
Contact Informationexclamation_warningThe contact page on Bitfinex only lists email addresses.
Risk Disclosurethumb-up-iconThe website features a separate Risk Disclosure Statement.
Persuasion
Source Credibilitythumb-up-iconN/A
Social Proofthumb-up-iconN/A
Reciprocitythumb-up-iconN/A

Note that items with a warning instead of a flag indicate that these could occur at a legitimate company. For example, legitimate companies may hand out some kind of referral bonus. Multiple warnings will, however, still trigger a flag. A description for the listed items is provided below. This list is meant to assist with identifying the most obvious dangers, and therefore does not provide any guarantees.

Headquarter Location
Even though Bitcoin’s legal status is uncertain in most of the developed world, there are certain countries that take a more hostile stance towards the digital currency industry. For example, trading Bitcoin in Bangladesh could lead to a punishment of up to 12 years in prison, and also Russia has considered jail time for Bitcoin users. Another example is China. The country didn’t ban Bitcoin, but it did ban banking institutions and employees from engaging in Bitcoin business through banking, as well as servicing or doing business with the Bitcoin industry.

Experience
Exchanges that have been running for a long time are more likely to have a battle-tested trading platform, as well as proper policies/procedures to deal with regulatory requirements and uncertainties.

Business Verification
First, you should never hand your hard-earned money over without knowing where it is going. Second, you should do a background check to avoid handing it to a known scammer. Be weary of people without an online identity. Scammers will typically try to hide their identity or conceal their true identity to avoid being easily discovered.

Business Registration
Businesses are typically required to register at the local Company Register. However, not every registration is equal, for example, Companies House (United Kingdom) does not actively check addresses and names. Hence a registration here doesn’t hold any real value. In any case, a failure to register would indicate that the company is most likely operating illegally.

Financial Regulator Registration
Similar to a regular business registration, some countries require Bitcoin exchanges and payment processor to register with the financial regulator. In the United States the Financial Crimes Enforcement Network (FinCEN) ruled that these types of companies are money transmitters, and should therefore register as Money Services Businesses. As a result, these platforms must also comply with stricter regulation such as anti-money laundering laws.

Operating License
Being registered doesn’t equal having the proper operating license. To achieve a fully legal status the license needs to cover the activities of the company. In fact, even exchanges with a money transmitter license may still be operating in a regulatory grey area, because Bitcoin exchanges are special cases. This is why New York invented the BitLicense, and why some platforms are applying for an even stricter banking license.

Service Disruptions &  Unbusinesslike Conduct
A businesses can be expected to behave professionally. This means that at a minimum a professional must comply with relevant laws and regulations. Besides the rules, professionals should also respect their customers and act in their best interests. It is hard to specify these “unwritten rules” of ethical behavior, but we certainly do know when they are broken.

Audits
Audits certainly do not root out every instance of fraud, but independent (public) audits do provide some comfort in the sense that systems, numbers and policies/procedures have at least been reviewed by a third party (preferably a professional).

Website Design
Amateurish, cluttered and disorganized websites can point to a scam as many scam sites use text and images from legit websites and other sources which may not work together very well.

Grammar on Website
Similar to the website’s design, limited English proficiency can point to a scam.

Funding Options
Even though cryptocurrency funding options are logical for a cryptocurrency company, it is also very convenient for scammers as the recipient essentially remains anonymous. Hence a lack of alternative funding options should still be considered a warning signal.

Contact Information
Legitimate companies have very little reason not to list their contact information.

Risks Disclosure
Fraudsters will do anything to provide a false sense of security. Actions may include misrepresenting, or even non-disclosure of risks involved.

Source Credibility
Persuasion is more likely when the source presents itself as being credible, expert and trustworthy. Common tactics used by scammers to make themselves look legitimate is to pretend to be someone they are not. Alternatively, credibility can also be attained externally with claims such as “Warren Buffet is already using this service”.

Social Proof
Fraudsters take advantage of herd behavior by creating the illusion of consensus or social proof that the service is legitimate with claims that “everybody is already using it”, or by setting up extensive referral programs in which members encourage their friends and associates to invest as well. This automatically triggers something in the mind that says: “if everybody [or someone from the inner circle] wants it, it must be good”.

Reciprocity
A business is likely to receive far more of our trust when it provides a lot of free value. This happens because of the rule of reciprocity, which causes us to tend to feel obligated to return favors after people do favors for us.

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