Dwolla Being Sued by Bitcoiners for $2 Million
betabeat.com
betabeat.com
Remember, these are cash-based transactions!
No credit card fees, chargeback concerns, or
signing necessary!
Unfortunately, as is a reality with all financial services
(e.g. banks, credit cards, etc.), predators can use stolen
identities to create fraudulent accounts without a victim’s
knowledge. That’s why Dwolla requires numerous identification
and verification steps. A necessary byproduct of this kind of
fraud is bank-level reversals, “chargebacks” issued by the
institutions on behalf of the victim, not Dwolla.
Most all merchants are well aware of the problem, which is why
we’ve always had something in our terms of service about
chargebacks since Day One.
Moving beyond that, I'm also quite shocked at their reversing charges and then retroactively changing records. That seems like a fairly huge breach of trust, and yet Mt Gox confirms it ("the transactions just disappeared from the history at first, without any notice"). I think Dwolla needs to come clean about how the hell that happened, and what steps they've taken to ensure it can't happen again. I'm uncomfortable with a payments processor that thinks retroactive changes to statements could ever even possibly be okay, especially in a post-SOX world. I want to see some acknowledgement on their part that they've screwed the pooch, and that it won't happen again the next time their tinkering with their systems. That's not the sort of think a trustworthy company would try and sweep under the rug, in my book.
Then Dwolla started getting hit with chargebacks from banks. Reminiscent of Madoff, Dwolla was faced with a choice between going out of business or breaking their own rules. People become very ethically flexible when survival is on the line. It's possible that their code and schema didn't even have the concept of reversing transactions. It's possible that they hand-edited their database to reverse transactions, which didn't leave proper audit trails.
Soon after that, they officially changed their TOS and stated that transactions would be reversible from then on. This shifted all risk from Dwolla to their customers, causing some Bitcoiners to immediately drop Dwolla. Others kept using Dwolla and got screwed later.
Look, I understand their position: They're a young and hungry startup, they have an awesome plan, and it doesn't quite work; they end up needing to pass the chargebacks on. I'm okay with that. But it needs to be communicated to their clients, with a date (and not in the past) when the change will take place.
If they changed it without clear communication (or, worse, announces the change retroactively) then they've screwed over their customers, and may well be legally liable. And that brings us to the press release, dated today, where Dwolla is claiming that "we’ve always had something in our terms of service about chargebacks since Day One." In other words, they're saying there was never a change - and if your information is correct, then this is a boldfaced brazen lie that destroys all credibility they might ever have had[1]. I kind of hope you're wrong. :(
[1]: Alternatively, they could be playing word games - maybe they had "something" in their TOS since day one. After all "no chargebacks" is "something", right? In which case they still have destroyed all credibility they might ever have had. And I don't think I'm exaggerating here; so far Dwolla is doubling down and claiming that they've done nothing wrong. Either they're completely right and everyone else is wrong, or their reputation is toast.
IMPORTANT: We're changing our TOS
-----
We've always tried our hardest to be the Good Guys, to not put burdens on our clients. Unfortunately, we're seeing a large amount of fraudulent activity that has forced us to implement chargebacks. We're sorry, and despite this we will continue to fight as hard as we can and then some for you, our clients. Thank you for your patience and understanding.
Then, you're clear. You may lose some clients, but you won't be the assholes who sold your product as, "X, but without the terrible Y!", then went behind your clients' backs and implemented Y after you realized the big boys did it for a reason.
This is getting painful to watch.
Reversing transactions without telling the payee when the payee has previously been given the all-clear is pretty shady though.
It would seem though that one would need a third party transaction 'escrow' (for lack of a better word) which could invalidate bitcoins should they be stolen.
Basically saying "this bitcoin transaction is valid, therefore these bitcoins of value x are valid"
If things are stolen, then you could disable those bicoins.
You literally have to think of bitcoins like real cash. I know that it feels unnatural at first, as usually everything you do software side on a computer is reversible, but that is not the case with the way bitcoins work. Everyone who runs the bitcoin client validates transactions and when a certain threshold is reached, the transaction is successful.
Therefore, to prevent the validation of transactions, you would have to run an astonishing number of clients which refuse validation.
The only way you could intercept stolen bitcoins at this point is, that the services which you can use to exchange bitcoins to dollars keep a db of stolen coins and prevent those from being cashed out.
1. Provides no way of reversing transactions.
2. Has a large enough mass that the currency is trusted.
3. Has a large enough mass that non-nerds can easily use the system.
The feds come in and want to shut it down because it provides a great avenue for the criminal element and con-artists. eGold is the prime example of this.
Also what you have just said applies to cash. In reality merchants who are not thieves will follow consumer regulations that all stores do.
(Obviously you're safe if EU/US/Russia/China can't get you because your service is in country that does not work with EU/US/Russian/Chinese law enforcement).
> I always assumed it was only a matter of time before Dwolla realized they would not be able to offer irreversible transactions. The scams would eventually get big enough that they would HAVE to start chargebacks, and the money train into bitcoin would end.
> Bye Dwolla!
http://tradehillblog.com/2011/07/25/tradehill-audit-discover...
Now for those of you that do not know: Mt Gox is the leading bitcoin exchange that does most of the business. Tradehill was an upstart that tried to compete with Mt Gox and even when active only did a small portion of the business Mt Gox did. Furthermore, Mt Gox does so much business that they were reporterdly Dwolla's top client for a while and that may still be the case.
Please feel free to provide your own speculations as to what all of this means.
As a consequence, the bad guys tend to operate on the less protected exchanges, such as TradeHill, and they get hit by Dwolla's chargebacks, coming mostly from hijacked/fraudulent Dwolla accounts...
MtGox's report of $5000 of Dwolla chargebacks is so small it could very much have been only 1 or 2 incidents. Of course Dwolla is going to have much more time communicating with their largest customer about 1 or 2 incidents, than investigating possibly hundreds of fraud cases involving a customer like TradeHill representing a small fraction of their business...
Best of luck to them.
However I do still currently view bitcoin as mostly just an interesting beta experiment.
If you substitute "TradeHill" for "E*Trade" and "bitcoins" for "stocks" the problem would still be the same, right?
This is in contrast to almost any other exchange system (besides hard cash), which could, at least technically, force reversal of a transaction. See for example Paypal, Facebook credits, money in an MMORPG, shares of stock, and so forth.
With bitcoin if I hold my coins in a currency exchange (which is basically a bank) they can obey the court order and reverse transactions.
And I can become my own bank, and then hide, in which case it would be hard to serve a court order on me. (Although banks often have accounts at the fed, so they don't hold the money themself.)
What's unique about bitcoin is most people hold their own accounts. So you have to find the account holder, which is hard. But, as I said, it's not the exchange the matters, it's the account holder.
It would be trivial if it was that simple, but the stolen funds were of course withdrawn from Tradehill, and so are no longer in control of an exchange.
It's no different from a criminal running off with a bag of cash; how are you going to "reverse" the transaction of the money being physically picked up, put in a bag, and carted off?
I was just pointing out the distinction is not in the type of currency or exchange, it's in who holds the account.
The fact that you sold if for an amount agreed upon by you and the buyer is what matters, not any provable intrinsic value the thing being sold may have. Whether you sell $1M diamond or a 5-cent bottle cap for $100, that's $100 in damages if the processor does a fraudulent chargeback.