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NEW YORK (InsideBitcoins) — Bitcoin transactions aren’t covered under the Fair Credit Billing Act, which prohibits customers from disputing transactions with chargebacks. Credit cards and payment services like PayPal offer such reversal of charges when a consumer has a customer service issue or disputes a purchase.
The lack of chargeback options carries both positive and negative implications for bitcoin. Customers and merchants are best served by understanding the issues involved.
How does the lack of chargebacks affect bitcoins?
Barry E. Silbert, the founder of the Bitcoin Investment Trust, claims bitcoin’s limited customer protections have made some customers ambivalent about using the virtual currency. In a New York Department of Financial Services hearing, Silbert stated additional regulation and customer protections may be necessary.
While additional protections may facilitate bitcoin sales, many customers use the cryptocurrency without a chargeback option. CheapAir.com and Overstock are among the companies that have generated over a million dollars in bitcoin sales.
On the other hand, the lack of chargeback options may benefit merchants worried about chargeback fraud. According to Total Systems Services, credit card chargebacks cost U.S. retailers an estimated $15 billion a year, making bitcoin an appealing alternative.
Bitcoin sparks customer protections debate
With over 13 million bitcoins in circulation, Merrill Lynch recently stated that the currency will become more widely used as customers recognize its value.
“To the extent that Bitcoin offers users many benefits and efficiencies as a medium of exchange, this means it possesses some fundamental value that may increase over time as it gains wider use,” analysts told Bloomberg.
Bitcoin exchanges have attempted resolving disputes on their own, but their efforts have been met with skepticism. A 2012 lawsuit between Dwolla Corp and bitcoin exchange TradeHill illustrated the credibility issues bitcoin faces. TradeHill had an “all transactions are final” policy to limit consumer fraud, but Dwolla was concerned that policy violated consumer protection laws.
“We will not play accomplice to sources of ongoing fraud. In such cases, we move quickly and act appropriately to facilitate restitution on behalf of the financial institution and its members (the victims). This is required by federal and state consumer protection laws, but more importantly it’s the right thing to do,” Dwolla told American Banker.
As bitcoin becomes more popular, consumer protection discussions will intensify. The Consumer Financial Protection Bureau issued a warning about bitcoins earlier this week.
“Consumers are stepping into the Wild West,” CFPB Director Richard Cordray stated. Cordray feels bitcoins are beneficial for merchants, but insists consumer protections are needed. Interests of merchants and consumers will need to be carefully balanced.
In a move to protect consumer rights, the CFPB will begin accepting and investigating consumer complaints regarding bitcoin transactions. The consumer watchdog says it will also use the complaints to help enforce federal consumer financial laws and, if necessary, develop additional consumer protection policies regarding cryptocurrencies.
Filling a consumer protection void
As regulators propose consumer protections for bitcoin users, private businesses are introducing their solutions. In February, Bitrated launched an arbitration process for bitcoin consumers. Bitrated cofounder Nadav Ivgi is confident the service will reduce both merchant and consumer fraud, making bitcoin a more popular ecommerce option.
“The groundwork for third party arbitration has existed for a long time, since [Bitcoin founder] Satoshi’s days,” said Nadav Ivgi told ReadWrite. “It just required someone to step up and build a system that implements it and is usable to the general public.”
Ivgi claims Bitrated is more equitable than traditional chargeback options and considers the interests of both parties in a dispute. He says the system is also less expensive to implement, reducing the barriers to entry for online merchants.
Regulators and third-party developers intend to enhance consumer protections for bitcoin users. Their solutions could make the virtual currency more widely accepted.
Written by Kalen Smith