American Consumer Protection Rules and Bitcoin

Juan Llanos points in an interesting blog post to potential problems for Bitcoin from American consumer protection laws. It’s titled “The Hidden Rule That Could Kill Bitcoin’s Irrevocability“. I recommend reading it.

The basic idea is that American rules on consumer protection might actually require payments to be reversible, at least for a short period of time (the blog post mentions 30 minutes).

That basically makes sense. Of course it is better for the consumer if he can reverse a payment. If this rule would be applied to all payments (including those that don’t involve any payment service provider), that would be a potential reason to make use of the Bitcoin network illegal, or require some kind of escrow for all transactions.

It will be interesting to see how this plays out. Here is a short comment I entered at the blog post:

Thanks for pointing to this issue. It seems to be relevant for service providers like Bitpay.

What they would need to do, they would need to delay irrevocability of the payment for thirty minutes after the consumer instructs them to pay. There are several ways to do that.

A blanket solution would be to just send off an e-mail to the consumer who has requested the payment, informing them that their instructions have been entered into the process, and that he can cancel the process by clicking on some link.

An even simpler solution would be to just wait for that half hour before actually going through with the transaction.

Another solution would be to have two groups of costumers. If the payment provider has reason to trust the customer (past performance, small amount of the payment) they could just go ahead with the payment to the payee and hope that the consumer doesn’t initiate any fraudulent reversals.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

2 thoughts on “American Consumer Protection Rules and Bitcoin

  1. Would this stuff even apply to someone like BitPay? They don’t seem to think they’re a money transmitter:
    http://blog.bitpay.com/2013/03/how-fincen-guidelines-affect-bitpay.html?m=1

    I guess one nasty case would be if you run an e-wallet service. If they’re holding your money for you it sounds like they’d be a money transmitter, and they’d also have the technical ability to do this, by making you wait 30 minutes before they handled your payment. But the 30-minute wait would completely destroy their usability, compared to their non-centralized competitors where the money goes from the client side directly to the Bitcoin network.

    These American regulations are crazy, but maybe we should look on the bright side:

    1) They destroy any centralized competition to proper peer-to-peer digital cash. If someone tries to do what Facebook does with the free internet and drag everybody into their own closed system, the US government will shut them down for us.

    2) They’ll force people in the Bitcoin community to design their services properly, without a bunch of unnecessary middlemen in control of everybody’s private keys…

    Like

    1. It is quite possible that Bitpay is not a money transmitter for the reasons they note in their blog post, but that they still need to comply with this new consumer protection requirement.

      The same may apply to online wallet services like blockchain.info; it is one question if they need to jump through all the hoops to get a license as a money transmitting service in the United States, and it may well be a different question if this consumer protection rule applies.

      Like

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