No Chargebacks: Good for merchants and scammers

15 October, 2020

Some 12 years ago early Bitcoin adopter James A. Donald complained that BTC transactions were not finalized instantaneously. Bitcoin creator Satoshi Nakamoto responded by acknowledging the complaint as being true, but then pointing out that his system of finalization and irrevocable permanence was still better than what paper checks and credit cards offered.

Nakamoto and other Bitcoin promoters eventually went on to explain that BTC was superior to other forms of payment, especially credit cards, because it did not allow chargebacks. In the years since, this has become one of cryptocurrency's primary selling points to merchants.

Chargebacks and merchant losses

No chargebacks is definitely a benefit to merchants who otherwise stand to lose significant revenues to credit card customers. Chargeback losses are attributed to two different scenarios in the credit card arena: customers claiming unauthorized transactions and customers who buy merchandise and then return it.

Because cryptocurrency transactions cannot be reversed, accepting BTC payments can reduce a merchant's chargeback losses. A merchant can still refund the customer's money, but that requires a separate transaction sending coin back to that user's wallet. Merchants have more discretion over which refunds they issue, something they have little control over when credit cards are involved.

Unfortunately, the lack of chargeback is also good for scammers. All they have to do is convince a victim to pay them in cryptocurrency and they are golden. There is no getting the money back once the transaction has been finalized and added to the ledger.

A typical crypto scam

So, how do scammers get people to part with their cryptocurrency? They run a variety of scams. One of the more popular scams targets investors. The fraudsters make it appear as though they are selling some kind of security or investment. They may disguise themselves as Forex traders, for example. Then they work to convince potential investors to buy currencies from them.

Just before a victim is ready to make the purchase, the scammer requests that cryptocurrency be used. The victim then goes out and buys BTC, ETH, etc., to fund his investment account. Little does he know that the coin is going directly to the scammer. His cryptocurrency deposit is finalized and stolen within minutes. He doesn't discover for hours or days after that the fiat currency he allegedly bought doesn't exist.

A more nefarious scam involves contacting people and acting as a government employee or law enforcement personnel. The fraudster tells the victim that he or she owes the government money - for taxes, a traffic violation, or something else. The fraudster then instructs the victim to use a Bitcoin ATM to settle the bill and avoid prosecution.

Slowing cryptocurrency adoption

Coin Telegraph contributor Michael Kapilkov suggested in a recent piece that this type of fraud may be partially responsible for cryptocurrency's slow adoption.1 He made the case that people ripped off by scammers are less likely to recommend cryptocurrency to others. That makes perfect sense. However, it is hard to know how many people have actually been ripped off.

If you are an online gambling operator, this sort of thing might concern you. You want to encourage your customers to deposit BTC, BCH, LTC, and other cryptocurrencies. You like the fact that you are protected against chargebacks. You also like being able to conduct business directly with your clients, knowing that there will be no bank interference.

At the same time, online gambling is already a tough sell in some places. Though completely undeserved, the gambling industry has a reputation for being a haven for undesirable activity. The last thing you need is fraudsters scaring your customers away from cryptocurrency. You do not need customers distrusting you as an operator.

Such is the dilemma of pro-cryptocurrency merchants the world over. They see crypto as a favorable payment system that offers a lot of features that they cannot get from credit cards and bank transfers. But no chargebacks is a double-edged sword.

No chargebacks undoubtedly protect merchants. But it also protects scammers. In the end, the ones most likely to lose on the no chargeback policy are consumers themselves. It is reasonable to suspect that a fair number of consumers refuse to use cryptocurrency for this very reason. They have no recourse against unauthorized payments or unscrupulous vendors who would take their payments but then fail to deliver.

Trying to find a solution

The cryptocurrency community recognizes the problem of no chargebacks for consumers. However, coming up with a solution is not so easy. The one thing most crypto developers are against is allowing chargebacks as that would create a scenario in which distributed ledgers become modifiable.

That is a nonstarter for the simple fact that permanency is one of the security features that allows cryptocurrency to operate on a distributed ledger. As soon as you allow transaction modification, security is lost.

In the absence of a good way to change cryptocurrency transactions themselves, authorities are looking to exchanges to help them stamp out fraud. Authorities see the exchanges as an important tool because of the role they play in the scamming process.

Fraudsters collect coins from their victims through any number of scams. Then they take those coins and deposit them in exchange accounts where they sit for a time before being cashed out. The fraudsters never deposit alarmingly large volumes of coin at any one time, nor do they use a single account.

Tracking scammers through the ledger

It is possible to trace scammers through blockchain ledgers as they go about their business. Kapilkov discussed this in his piece. According to him, reputable exchanges are enthusiastic about helping identify and stop scammers. Just in case there are exchange owners unwilling to cooperate, the U.S. Department of the Treasury has begun issuing warnings to those exchanges willing to process proceeds from malware attacks.

Kapilkov also reports that U.S. government officials have targeted BitMex as an unregistered trading platform. Whether or not that means the exchange was laundering criminal proceeds is unclear. But it seems likely that this is the case.

Another interesting development is the recent revelation that multiple U.S. government agencies have teamed up to offer a bounty program in hopes of encouraging people within the cryptocurrency community to figure out how to hack distributed ledgers. The goal is to 'decrypt' cryptocurrencies, if you will, so that criminals cannot hide behind anonymity.

The chargeback issue remains

Let us say that government authorities are successful in enlisting the help of exchanges to track potential scammers across the various ledgers. Let us also say they are successful in gaining access to user information. The combination of both tools could go a long way to limiting the amount of fraud that occurs within the crypto universe. Still, the chargeback issue remains.

It is not reasonable to expect the people who make the decisions to change their code in order to facilitate chargebacks. As discussed previously, that would open the door to a whole host of security vulnerabilities. The only solution might be one involving merchants and payment processors getting together to establish a framework whereby refunds could be issued to unhappy customers.

Such a framework would have to protect the interests of both consumers and merchants. It couldn't be a system whereby merchants have no say in the refunds they issue. Otherwise they are right back to where they are with credit card chargebacks. On the other hand, a policy that is too restrictive does not give the consumer the recourse he or she needs in the event of fraud or poor vendor service. Somewhere there is a middle ground. It just needs to be found.

The big benefit to gambling operators

In the meantime, gambling operators are among those merchants who truly appreciate the no chargeback feature of cryptocurrency. They are able to accept Bitcoin payments with the knowledge that there will be no credit card company or bank forcing them to refund customer money.

If you do not know why this is such a big deal, consider how easy it is to take advantage of an online gambling site. You can make a credit card deposit, take advantage of some sort of bonus promotion, win a bit, and withdraw your winnings. Then dispute the original deposit with your credit card company and demand a reversal.

This happens to gambling operators more frequently than you might know. Unfortunately, operators willing to do business with credit card companies do not have much recourse themselves. They are held hostage to chargebacks whether they like it or not.

Is it any wonder that growing numbers of gambling sites are warming up to cryptocurrency deposits? Not really. Gambling operators run businesses no different from any other commercial enterprise. They need to protect both their revenue streams and their assets from people who think nothing of taking advantage of them. Chargebacks represent just one area in which this plays out.

Not allowing chargebacks in the crypto universe protects merchants. It also protects distributed ledgers and the records they contain. Unfortunately, it also protects scammers and leaves consumers on the losing end when unauthorized transactions take place. Such is the give-and-take that is cryptocurrency.

1) Coin Telegraph.