Bank Transfer Reversals Causing Headaches For Bitcoin Exchanges
These attributes are important to individuals and businesses when accepting payment and Dwolla is seen as an improvement over the U.S. ACH banking network. For the customer, getting funds into Dwolla isn’t any faster than ACH because ACH is what Dwolla uses when adding funds but once the transaction clears the Dwolla customer has full control over those funds from that point on.
Money transferred by the Dwolla customer to any other Dwolla account occurs instantaneously and the recipient can spend the funds that were received immediately as well.
There are other money transmitters that use ACH as well, including PayPal, but Dwolla painted themselves as being different — funds in Dwolla accounts were described by the company as being “like cash”. This difference of being cash-based is, presumably, how Dwolla can maintain its low fees — $0.25 per transaction.
Clarification on being “like cash”
Last week, however, at least two Bitcoin exchanges learned that Dwolla was not quite the same animal that they at first portrayed themselves to be. Dwolla funds are not necessarily “like cash” and instead have come to resemble funds from other payment networks. Dwolla indeed will pass on to its customers any losses resulting from ACH reversals. Additionally Dwolla will reverse a payment should the sender be successfully in presenting a case when filing a dispute.
The second largest Bitcoin exchange, TradeHill, last week revealed that it has suffered more than $37,000 USD in losses on $1 million of transactions resulting from these reversals and that the number would have been much higher even had the exchange not acted as quickly as it did to stem the losses.
Though Dwolla hasn’t publicly responded on the situation with TradeHill it has updated the Terms and Conditions agreement that is presented to new signups to specifically mention chargeback risk. Additionally, the help category on Dwolla’s website now includes several articles that address ACH reversals and disputes.
TradeHill no longer uses Dwolla for either deposits or withdrawals and a second exchange, ExchangeBitcoins.com has dropped Dwolla support as well after it too suffered reversals.
Bitcoin’s own Euro crisis
Bitcoin exchanges are continually having issues with banks. Three weeks have passed now since the largest exchange, Mt. Gox, first had to stop accepting SEPA bank transfers. The exchange has been trying a number of different approaches to regain the ability to accept SEPA transfers at an EU bank but has not yet announced a working solution.
Further problems for TradeHill occurred last Friday when its EU bank, Banco Sabadell of Spain, froze the exchange’s account leaving the exchange with no way for its customers to add or withdraw EUR funds. A relationship with another EU bank had already been established, according to one of the exchange’s founders, though a date for when transactions through that bank will first be allowed has not been announced.
Both Mt. Gox and Tradehill now support transactions to and from a banking intermediary, Paxum. Paxum enables the exchanges access to funds sourced from SEPA bank transfers as well as from USD and CAD bank transfers.
Customers of the exchanges paying Paxum to transfer their money to and from their banks will find Paxum’s fees to be signficantly higher than what they had been paying previously.
Paxum manages the fraud risks allowing them to provide P2P payments without risk of reversal to the recipient of the funds. TradeHill is hoping that providing Paxum as an option will pacify its U.S. customers now that the exchange has pulled its Dwolla support.
Bitcoin is not the first financial network to have difficulties meshing with banking networks. The nature of bank ACH transfers is that a bank customer can have the transfer reversed by filing an affadavit declaring that the transaction was not authorized.
Where these reversible bank funds are converted to non-reversible funds is the point where the risk of losses mainly occur. It is the intermediary that performs the conversion to “hard money” where the risks due to fraud are felt the most. Dwolla’s communications now clearly convey that they are not providing non-reversible funds.
The losses passed on by Dwolla likely originated as the result of fraud occurring when criminals use identity theft to gain access to bank accounts. Once those bank funds reach a Bitcoin exchange they can be converted to bitcoins and within minutes those bitcoins can be in the hands of the criminal. Once bitcoins are withdrawn Bitcoin’s technology, by design, allows no method for the exchange, the bank or law enforcement to later reverse the transaction.
Banks are for the most part successfully transferring away to the intermediaries such as Dwolla much of the losses when identity fraud occurs. Dwolla in turn, then passes those losses on to the customer account where the funds landed by reversing the transfer. Instead of dealing with identity fraud by implementing proper security banks are instead treating those incidents as exceptions and in turn burdening their customers and those customer’s trading partners each time these incidents occur.
The limitations of ACH are protecting banks in the U.S. from being exposed to even further levels of fraud though. This is because ACH transactions take days to clear and because bank consumers cannot themselves push funds to merchants. Instead a consumer authorizes the merchant or intermediary such as Payal or Dwolla to draw funds from the bank. During these delays some of the identity fraud is discovered and losses prevented but the reliance on these delays is a poorly performing crutch, at best.
Another type of bank transfer, a wire transfer, cannot be reversed. Many Bitcoin exchanges accept domestic and/or international wires. Fees to send a wire run around $40 USD or more per-transaction, including the receiving fees thus wires aren’t economic for consumer level transfers or for anything other than larger amounts.
Bitcoin marches on
These frictions with the banking systems have been a wet blanket with traders looking for momentum to help trigger Bitcoin’s next rally. Trading volumes are at the lowest levels in weeks, even though there has been an explosion in the number of exchanges where bitcoins are traded.
The overall impact to Bitcoin from these latest difficulties should be muted though as long as one or more exchanges with decent market liquidity continue to support each of the funding methods that directly touch the banking systems. Both Intersango and Bitcoin7 continue to accept SEPA deposits, and no less than three exchanges still support Dwolla transactions.
The exchanges may still be able to accept these funds by responding with better anti-fraud measures themselves. As organizations go, the Bitcoin exchanges are very young yet — TradeHill launched just in May, for example, and several others started operating just last month. Keyur Mithawala, founder of Camp BX described how they established prices expecting a certain level of fraud and could make adjustments to be able to accommodate even higher risk levels should those adjustments be made necessary.
As long as Bitcoin exchanges aren’t shut out completely from having access to funds from the banking systems, these difficulties will be seen just as speed bumps that only temporarily slow Bitcoin’s ascent towards it becoming a widely used method for transmitting money to anyone, anywhere in the world. Perhaps these bank transfer weaknesses will instead show why Bitcoin could become a preferred method for transferring funds even.