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On finality of payments

25 Mar 2015

(This is cross posted from Ello.)

Izabella Kaminska writes about what she describes as Bitcoin’s lien problem. The “problem” is that although Bitcoin transactions are final and irreversible within the context of the Bitcoin payment system, a court (or a thug) might force you to pay back the Bitcoin you have received. And what’s worse, if the Bitcoin were illegitimately transferred in the first place, an owner down the chain after multiple transfers—who was not complicit in the original disputed transaction—might be forced to hand it over too.

As I’ve said in the past, Bitcoin is not great, but USD is terrible. In the United States, wire transfers with Fedwire are final and irreversible. If you make a payment to someone and believe you are entitled to get your money back, you will have to sue them (or threaten to beat them up). Appealing to your bank or the Federal Reserve will not help.

A lot of payment systems around the world work like this. Cash transactions are irreversible. Payments in the Danish domestic payment system I described in my 2014 post are irreversible. The British Faster Payments Service also has final and irreversible payments.

Most American systems do not work like this. If you charge something to your credit card, you can dispute the transaction and often get an immediate refund. The dispute will be resolved within the payment system, according to opaque standards, without much collection of evidence or a neutral arbiter.

The recipient will get a chargeback and be forced to return the money, so it’s not like an insurance policy. If you have a job and receive your wages through direct deposit, that deposit can be reversed for 60 days after the deposit is made. Already paid your bills with that money? Too bad.

What about PayPal? Venmo? Square Cash? Debit cards? Facebook Messenger payments? All reversible for a terrifying period of time.

There are some benefits to resolving disputes within the payments system. A lot of payments in the US are “debit pull”: the merchant “pulls” the money out of your credit card, your utility company pulls it out of your bank account with ACH. You didn’t explicitly authorize each of these transactions, so there could easily be mistakes. Being able to easily reverse credit card transactions also makes people more comfortable using these cards, whose security is otherwise not that great.

However, I believe the option of final and irreversible payments is an important feature of a modern payment system. If you receive your pay in your bank account, you should be able to count on that money being there. If you received the wrong amount, maybe you should be made to pay it back (possibly in installments if you spent the money by honest mistake), and there is always the option of resorting to the courts, but your money should not just suddenly disappear without notice. If you sold your car to someone you met on Craigslist, and he or she paid you using the payments system, you should also count on that money being available—let them sue you if you sold a lemon.