BitCoin mass-adoption challenges

Crypto currencies, specifically BitCoin, are touted as the next big thing in financial

services. A secured, encrypted, technologically advanced platform that can support

monetary transactions across the globe is a dream come true for a lot of financial

services innovators hoping for a borderless financial world. This wave of innovation,

while still nascent, bears a lot of advantages.

It’s important to note, though, that not everything is green in the realm of BitCoin. While

some disadvantages are obvious – exchange rate volatility and lack of sufficient market

making are two obvious ones – some are less obvious, and are sometimes mistakenly

presented as advantages by newbies to the industry. Specifically, I am referring to fraud

using or on the BitCoin platform, and misconceptions about its feasibility – while some

may think it is much safer than other means of payment, that is absolutely not the case.

With BitCoin’s no-recourse movement of funds, transactions are subject to two types of

fraud: supply side fraud, and social engineering. Their prevalence might hinder mass

adoption of crypto currencies and must be addresses by the ecosystem before those

can be used the proverbial “normals”, the majority of consumers.

When a consumer purchases online using a credit card, the merchant charging the card

isn’t protected from fraud the same way they would be if charging the card in the offline

world. No issuer, acquirer or card network provides any fraud protection and merchants

can easily be victims of stolen cards or “friendly fraud”, a term describing customers

making actual purchases then charging back alleging fraud, while keeping the goods.

Defending oneself from chargebacks is difficult for merchants and fraud constitutes a major line item in retailers’ financial statements. However chargebacks serve a purpose: they

protect consumers from fraudulent merchants, failure to provide service and other

issues. With no ability to reverse transactions, no consumer protection is possible,

hence more and more fraud is perpetrated by those who pretend to be merchants. As

merchants, they can sell a service or product while charging in advance, and never ship

the product (or never own it in the first place). Consumers who pay find themselves out

of their money and the product they were offered, with no ability to reverse a payment.

Thus, demand side fraud becomes much more appealing to fraudsters.

This lack of protection hurts consumer trust. It also amplifies the damage from each

fraud case. A single fraudster using a stolen credit card may shop for $1000 in stolen

goods; a single fraudulent shop can easily scam dozens and hundreds of consumers.

The other thing to consider is social engineering. Fraud wasn’t invented in the 20th

century nor is it dependent on credit cards. There is a reason why Western Union or

MoneyGram was and still is a favorite for 419-type (“Nigerian”) scams; it, too, has no

option to reverse a payment. Every complex system is as strong as its weakest link, and

BitCoin is no different; the human element is its biggest failure point. As the SEC brings

to trial a man accused of running a BitCoin ponzi scheme, it becomes obvious that no

encryption beats greed and no sophisticated technology beats lack of good judgement.

In that sense, BitCoin isn’t different than any other means of payment, for better or for

worse. It is just not any safer.

Crypto-currencies hold a big promise for a more sophisticated financial infrastructure,

but the discussion about them is still limited to a small group of techies. As the world of

those currencies expands to meet the average user, questions regarding consumer

protection and social engineering must be dealt with, otherwise BitCoin will fail to be

adopted. We cannot just trust the users to be sophisticated, as we have all consistently

demonstrated that as a crowd, we are not sophisticated at all. In a sense, the same lack

of a governing 3rd party guaranteeing at least some protection or recourse, justifiably

hailed as the platform’s greatest advantage, is also one of its biggest disadvantages.

That, too, needs to be a part of an informed discussion.


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