TradeHill, the Bitcoin exchange that shut down unexpectedly in February, is now blaming Dwolla Corp. for its demise and suing the payment provider for $2 million.

The suit, which revolves around chargebacks, underscores one of the challenges facing emerging payments companies: the lack of defined mechanisms for settling disputed charges. TradeHill claims Dwolla fraudulently advertised a no-chargeback policy.

"Visa, MasterCard and the other card providers have well-established chargeback practices that are well-understood by nearly all of the participating parties," says Beth Robertson, director of payments research at Javelin Strategy & Research.

Dwolla, of Des Moines, is a person-to-person payments provider that lets consumers pay each other digitally with just an email account or through social networks. TradeHill, of San Francisco, is one of about a dozen exchanges that allow people to trade traditional government currencies for Bitcoin, a purely digital currency that does not depend on any central issuing authority. As with cash, once a Bitcoin is spent, it's gone.

Like the other Bitcoin exchanges, TradeHill depended on providers like Dwolla to act as funding conduits from consumer bank accounts. Similar providers include Liberty Reserve and Paxum.

The suit — which Jered Kenna, the chief executive officer of TradeHill, wrote about on his company's blog Tuesday — alleges TradeHill incurred fatal losses last summer when Dwolla reversed $100,000 in credited transactions and "unjustifiably blocked an attempt by TradeHill to transfer $70,000 of its funds from Dwolla's control."

"As a result of these losses, TradeHill was unable to pay its employees and was forced to shut down exchange operations," Kenna wrote. The complaint accuses Dwolla of racketeering and bank and wire fraud.

Dwolla said Tuesday afternoon it was working on a response.

When TradeHill shut down in mid-February, it cited compliance burdens and the need to pursue proper licensing. At the time, Kenna wrote on the TradeHill blog that it was closing "due to increasing regulation" and to pursue proper money transmission licensing.

That blog post said the company would focus on a new site called, which was to have been a kind of supermarket of Bitcoin services including, but not limited to, exchanging Bitcoin for other currencies.

When asked about the discrepancy between that explanation and the claims in the suit, Pierre G. Basmaji, TradeHill's attorney, said: "TradeHill had been referring to [problems with Dwolla] since last year, but wanted to keep things quiet and first put together their allegations before coming out with the complaint."

Basmaji confirmed the amount of damages being sought but would not discuss the suit further. It was filed in U.S. District Court for the Northern District of California.

"We spent months attempting to contact Dwolla to resolve this dispute but were met with silence or obfuscations," Kenna wrote on the TradeHill blog Monday.

Dwolla recently raised $5 million from the venture capital firm Union Square Ventures.

In February American Banker asked Jordan Lampe, Dwolla's chief executive, whether his company was the unidentified payment processor that Kenna, in the earlier blog post, claimed had removed $100,000 from TradeHill's account "without notice."

In response, Lampe wrote in a Feb. 17 email, "We operate legally under a very defined set of laws and regulations [and]…we can't/won't comment on individual accounts, past or present. We are extremely focused on our financial institution products right now."

TradeHill also alleges that Dwolla's actions hurt its reputation and scuttled its plan for On Tuesday afternoon, that domain appeared to be disabled.

The blog BetaBeat reported the suit earlier Tuesday.