Monday, June 10, 2013

LocalBitcoins.com bank account frozen - how to deal with SEPA transfers

On Tuesday 4.6.2013 the LocalBitcoins.com bank account used for trading bitcoins using SEPA (Single Euro Payments Area) transfers was frozen. The account was unfrozen three days later.

A cold day in a bank in Finland

  • We received a large bitcoin buy request from Switzerland on Monday 3..62013 (a day before). A LocalBitcoins.com user wanted to buy bitcoins with Euros using a SEPA bank transfer.
  • The same user had traded with us before with smaller sums of euros
  • Thus, we believed the trade request was legitimate
On Tuesday 4.6.2013 10:00 AM we received a phone call from our bank that the Swiss bank of the trading party would like to chargeback the SEPA bank transfer. As we had already transferred  bitcoins to the trading party, naturally we declined the request.

The trading party had deleted the user account immediately after receiving bitcoins.We could not contact the party any longer.

Later on Tuesday 4.6.2013 13:00 AM we receive another phone call from our bank. The Swiss bank had remade the request to chargeback the SEPA transfer, with an additional request to freeze our bank account. Our bank complied with its international contracts and froze our account until the situation was resolved.

To resolve the situation, we send our bank the LocalBitcoins.com receipt of the transaction, as the proof of legitimacy. All trades made on LocalBitcoins.com automatically generate an electronic receipt. The receipt is signed using bitcoin addresses, using strong cryptography. You can find the receipts on your LocalBitcoins.com account by going to your user profile, clicking Dashboard, clicking Closed escrows, clicking Reference id and  scrolling down the page.




By the laws of Finland, the originating bank of a wire transfer (the Swiss bank in our case) is responsible for clearing the money and making sure the transfer is legit. We had all the reasons to believe that our trading party is not involved any criminal activity, as we had traded with the party before without any complications. Thus, after showing the receipts, on Friday 7.6.2013, three days later, our bank unfroze the account.

The banks did not disclose what happened between them. Here are our theories
  • The bank account of our trading partner was stolen and the trading partner was clearing the stolen money by exchanging it to bitcoins. The trades that happened before the freeze did not trigger statistical threshold points which will alert the bank staff for manually intervention. 
  • The trading partner was a scammer who was relying on the fact that the Swiss bank would automatically chargeback the SEPA transfer in the case a claim was made. The prior bitcoin purchases had been done to build reputation on LocalBitcoins.com reputation system to make the larger trades seem more safe. We are not aware what are the legislation and contract obligations of Swiss banks regarding SEPA transfers. If the Swiss banks refund the SEPA transfers without due diligence this would mean the scammer could keep both bitcoins and euros.
  • This was an attempt from a hostile party, like a government or a competitor, trying to stab us and hinder our operations.
The LocalBitcoins.com operations were not in risk in any point of the events.  LocalBitcoins.com uses a separate account for trading operations. These kind of events do not effect daily operations which are funded from non-trading accounts. In fact, we keep minimum balances on all of our accounts to minimize the impact of asset freezes due to political and criminal risks in the virtual currency industry.

We do not know how the losses between banks are dealt in these kind of situations. However, if the events like this are likely to repeat, one might get the status of persona non-grata in a bank.

LocalBitcoins.com operates in Helsinki, Finland. We pay taxes to Finland, we follow the laws of Finland and European Union. However, the virtual currencies in online networks are a contemporary phenomenon. Resolution processes are not everyday for all involved parties yet. Thus, we recommend our traders to take the following safety measures

Bitcoin will prevail.

13 comments:

  1. Why are you acting as a currency exchange yourself? Isn't the fact that you're NOT a currency exchange rather the point? Otherwise you will have to be licensed and do all the usual regulatory stuff.

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  2. We are not acting as a currency exchange - we are just using our own platform to sell our bitcoins. We are not buying any bitcoins. As we need to sell our bitcoins for euros to pay the taxes etc., we have to use some service for this. We have discussed this with our advisors, and it should be ok.

    We want to use our own platform for selling the bitcoins because it helps us to develop and test our own platform practically. So called "eat your own dog food" strategy.

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  3. How much is a suspiciously large amount?

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  4. Suspicious amount depends on the bank and the country. In some countries banks have clearance requirement set by law. I suggest you ask your bank how they handle these kind of cases.

    Also, there are import and export regulations which usually apply when you are travelling with cash. E.g. in Finland the customs threshold for cash is 10 000 EUR and sums larger than this must be declared.

    http://www.iatatravelcentre.com/FI-Finland-customs-currency-airport-tax-regulations-details.htm#currency



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  6. I have been thinkg about this today when I was having a shower. The main reason I use Localbitcoins is because you don't take or send money to operate, so there is no way anyone can block or freeze your site. But apparently now, you do. I understand you take bitcoins (from the fees), but you should try to do not relate trading your bitcoins under the name of Localbitcoins, because that will mean they can close the site in 1,2,3

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    1. In fact, just today we decided to stop selling the bitcoins on our own platform.

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  8. This is pretty much what happened to me. Sigh

    Maybe I should just sell my ASIC blades.....NOT!

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  9. Yaqoob Jamal, how did that end? The same happened to me today. My bank called me and asked me if I agree to give back money I received (1000 EUR) for sold bitcoins. Claiming the transaction was "a mistake".

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