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There’s a lot of misinformation online about blockchain technology particularly in the wake of the FTX debacle from last year.
However, there’s also a lot more to the blockchain than you might expect.
Thanks to blockchain technology, fintech might be on the verge of fantastic new innovations that could revolutionize the payments industry.
The technology offers convenience, enhanced security and open-source payment independence that other payment models lack.
For consumers, the appeal is obvious.
Consumers and enthusiasts aren’t the only ones who stand to benefit from blockchain technology, though merchants and financial institutions are taking notice as well.
One reason for this is the model’s relationship or lack thereof to payment reversals.
What are chargebacks
For the uninitiated, a chargeback is a forced payment reversal carried out at the banking level.
This generally happens when a customer is dissatisfied with a purchase but fails to receive a refund from the merchant.
The customer will dispute the charge with their issuing bank, and then the bank will file a chargeback against the merchant with their acquiring bank.
Chargebacks are never a ‘good’ thing for a merchant. The bank doesn’t just claw the money for that transaction out of the merchant’s account they also charge a fee for each chargeback filed.
Aside from the fees, damage to the merchant’s reputation is another issue with serious potential consequences.
The chargeback process is mandated by law for all credit and debit purchases.
It’s codified in US Uniform Commercial Code, which requires banks and card networks to facilitate this process.
This is what sets crypto payments apart in this regard, though. There’s no process by which cardholders can demand a chargeback because there’s no central authority to mandate or facilitate one.
Crypto payments are not subject to chargebacks
Cryptocurrency transactions, including payments, are not subject to chargebacks due to the nature of the blockchain technology that underpins them.
Cryptocurrencies operate on a blockchain a distributed and decentralized ledger on which all transactions are recorded.
Once a transaction is confirmed and added to the blockchain, it is practically immutable.
Altering a single entry would require altering all subsequent blocks and getting the majority of the network to agree to this change, which is computationally impractical.
Cryptocurrency transactions are also secured by digital signatures. When a sender initiates a transaction, they ‘sign’ it with their private key.
The network then verifies the transaction using the sender’s public key. If the verification is successful, the transaction proceeds.
This process ensures that only the owner of the cryptocurrency can spend it, thus making fraud more difficult.
Furthermore, traditional payment methods use a ‘pull’ mechanism, where the store initiates the payment and pulls the amount from the buyer’s account.
Cryptocurrencies are a ‘push’ model, meaning the buyer initiates a purchase by sending the payment.
It’s important to note that, while the lack of chargebacks makes transactions more final, it also means that mistakes can be very, very serious.
If a mistake is made for example, if you send money to the wrong address there is no way to retrieve the funds.
Similarly, without chargebacks, there is no built-in consumer protection against fraud, misrepresentation or non-delivery of goods and services.
Users must take additional precautions to ensure the trustworthiness of parties with whom they transact.
Will crypto payments ever be subject to chargebacks
Cryptocurrency transactions are fundamentally not subject to chargebacks due to the decentralized and immutable nature of blockchain technology, which underpins cryptocurrencies like Bitcoin (BTC).
As mentioned above, once a transaction is confirmed and added to the blockchain, it cannot be reversed or altered without a majority of nodes in support, which is very rare.
Disputes resulting from major hacks have been addressed in the community before.
The 2016 DAO hack, for instance, was a major outlier even in which a ‘redo’ actually gained agreement from most miners.
Even then, the situation resulted in a fork in the Etherum blockchain, giving rise to Ethereum and Ethereum Classic.
So, it is theoretically possible for a cryptocurrency transaction to be reversed.
However, this would significantly deviate from the decentralization, immutability and security principles that characterize most existing cryptocurrencies.
It would also require some form of centralized control or arbitration, which could introduce its own risks and vulnerabilities.
Furthermore, adding a chargeback mechanism would fundamentally alter the trust model of the cryptocurrency.
Instead of being able to trust in the finality of transactions a key selling point for many users participants would need to trust the entity or mechanism that decides whether or not to initiate a chargeback.
Advantageous to business but a hurdle to adoption
Chargebacks, as a consumer protection mechanism, were crucial for establishing customer trust in card payments.
Lack of this protection could ultimately hinder adoption, as customers can’t trust that they’ll have recourse in case of fraud or abuse.
Primary concerns here include the following.
Customer trust and satisfaction
Chargebacks exist primarily as a consumer protection mechanism. They allow customers to dispute transactions in the case of fraudulent activity or dissatisfaction with goods or services.
Without this option, customers may be less willing to use cryptocurrencies for payment, reducing their utility for merchants.
Risk of mistakes
In legacy payment systems, a mistake like an overcharge can usually be rectified with a refund or chargeback.
With crypto payments, once a transaction is made, it can’t be reversed. This could lead to losses for customers or merchants due to human error, reducing their willingness to adopt such a system.
Lack of legal framework
The irreversibility of cryptocurrency transactions may also present legal challenges.
For instance, in many jurisdictions, consumers have the right to dispute credit card transactions.
A system that doesn’t allow for this could potentially run afoul of consumer protection standards, making it less appealing for merchants.
Possible for fraud
The irreversible nature of cryptocurrency transactions can decrease certain types of fraud ike chargeback fraud. However, it could potentially lead to an increase in other types of attacks.
For example, individuals might falsely claim that goods were never delivered to try and receive goods or services without paying.
Business practices adjustment
Businesses are usually well accustomed to traditional payment systems, which offer chargebacks and dispute resolutions through banks or credit card companies.
Adopting a system without these safeguards would require considerable changes in how disputes are managed. It could demand more complex or costly solutions, like more detailed pre-purchase verifications.
The future of payments ’s too soon to tell
Ultimately, while there are challenges to using blockchain for fintech and ecommerce, there is also significant potential for innovative solutions that could help protect consumers while also taking advantage of this technology’s unique benefits.
The lack of some consumer dispute mechanism can indeed make crypto adoption more challenging.
This is something that the community is going to have to wrangle with if we’re to see the public embrace crypto for any purpose beyond storing value.
Monica Eaton is an entrepreneur and business leader in the technology, ecommerce, risk relativity and fintech fields. In 2011, she founded Chargebacks911, developing the world’s first end-to-end chargeback management solution for merchants. Monica is also a valued subject matter expert, whose insights have been featured in outlets including Forbes, The Wall Street Journal, The New York Times and more.
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