Chargebacks: A big problem for crypto exchanges. Here is the fix.
Chargebacks: Digital currency marketplaces need to defend themselves against litigation related to fraudulent transactions, according to Roenen Ben Amico-founder and Chief Risk Officer of Justt.ai.
Crypto has gone mainstream: Currencies such as Bitcoin are now owned by hundreds of millions of people around the worldand accepted by a growing number of online sellers. For online merchants, ignoring crypto is a risky proposition. Crypto will play a key role in tomorrow’s payment infrastructure, and it’s vital for forward-thinking retailers to plan for the future.
However, as the sector current oscillations show, joining the crypto revolution brings serious challenges. I recently had the opportunity to discuss the role of crypto in digital commerce at the Merchant Risk Council (MRC) in Berlin. I took the opportunity to point out that volatility is far from the only issue traders face when exploring the use of Bitcoin and other cryptocurrencies.
In fact, there is one big challenge that many crypto proponents overlook. Chargeback fraud is increasingly becoming a major headache for crypto exchanges. It has the potential to cause training issues for many other types of digital merchants.
Chargebacks: A Burden for Exchanges
This may seem counter-intuitive. Payment fraud protection should, in theory, be a major selling point for digital currencies. Crypto transactions take place on decentralized electronic ledgers and are secure by design. A transaction cannot be canceled once it has been accepted by both parties. Conventional chargebacks are simply not possible: when a transaction is concluded, there is no turning back.
But rather than eradicating “friendly fraud,” Crypto Payments takes the box away from the merchant and places it on the crypto exchange where the digital currency was originally purchased. Granted, a purchase made using crypto cannot be disputed directly, but if a customer originally purchased crypto using their credit card, then that root transaction box still be disputed.
Confused? Here is an analogy. A customer goes to an ATM and withdraws $100. With this money, they go to a store and buy a pair of jeans. A week later, they decide they don’t want the jeans anymore, but they can’t get a refund from the retailer. Instead, they file a claim against the ATM that originally gave them the money they spent.
In this scenario, the store selling the jeans is a business offering crypto payments at checkout. The ATM is the exchange from which the customer originally purchased their crypto. There is no legal framework to hold merchants liable if a buyer wishes to cancel a purchase made using crypto. Thus, the disgruntled customer’s only recourse is to file a chargeback claim against the crypto exchange, alleging that their payment card was used illegally.
Chargebacks: open to abuse
Worse still, it’s not just disgruntled customers who are using (and abusing) chargebacks against crypto exchanges. As we all know, the crypto space can be a bit of a Wild West, and consumers who are affected by scams designed to separate them from their digital parts could end up seeking compensation by any means possible. This is even if it means abusing the chargeback system by challenging their original, legitimate fiat-to-crypto purchases.
Then there is the question of volatility. With currency values swinging in the double digits in a single day, chargebacks can cause serious problems for exchanges. Customers could use transaction disputes as a hedge against loss of value. If a currency crashes in the weeks following a trade, the client may be tempted to use a chargeback to recover their initial fiat investment, for example. Taken to extremes, such strategies could allow unscrupulous investors to offload the risk of crypto speculation on exchanges. This is when they are free to pocket their returns if the value of a currency rises.
Such cases are much more common than you might think. Today anyone with a smartphone can buy crypto. It is just as easy to file a chargeback request against an exchange. As I told my fellow panelists in Berlin, many crypto markets are now losing between 10% and 20% of their bottom line to chargeback claims. Given the extremely thin margins in the industry, this poses an existential threat to all but the most profitable crypto platforms.
Chargebacks cost exchanges money, but fighting fraudulent disputes can also be costly. Either way, exchanges have fewer resources to invest in customer service, product development, and innovation. This makes it harder for them to capitalize on the rapid expansion of crypto.
What is the solution ?
The long-term solution will be to develop new protocols that provide crypto transactions with the same consumer protections as credit card payments. This ensures that chargebacks are primarily handled by merchants, not exchanges.
According to Motie Bring, Nuvei’s chief commercial officer, “You have to have the right mechanisms in place if you want consumer confidence.”
But with crypto regulation advancing at a glacial pace, the burden of chargebacks on exchanges is not going to ease anytime soon. So what is the immediate solution?
First and foremost, crypto markets need to ensure that they have a comprehensive customer verification system in place. Anonymity and fraud go hand in hand, so it’s important to gather as much customer information as possible during the onboarding process. Of course, asking for large amounts of information won’t always sit well with potential crypto clients. Binance addressed this challenge by offering a frictionless registration process, but then requiring certain additional verifications (such as identity verification) before coins could be purchased or withdrawn.
The right integration can support chargeback disputes, but with modern AI and machine learning, it’s also possible to leverage new technologies to scale, automate, and optimize chargeback mitigation efforts. Done well, such approaches can help exchanges win more disputes while significantly reducing the extent to which chargeback disputes drain their resources.
The Dynamic Future of Crypto
Crypto payments are here to stay, and exchanges will play a vital role in helping both crypto newbies and seasoned traders gain access to cryptocurrencies of all kinds. But in a Web3 world, it is essential to recognize the new risks that the integration of crypto brings to both merchants and exchanges.
Until regulation catches up, these risks will continue to grow. That’s why it’s critical that exchanges act now to implement appropriate, technology-enabled chargeback mitigation strategies. Disputes over dishonest transactions are becoming a major problem for crypto exchanges today – and if the crypto space is to truly go mainstream, exchanges will need to find an effective and scalable solution to handle fraudulent chargebacks.
About the Author
Roenen Ben Amico-founder and Chief Risk Officer of Justt.ai, is an expert in the field of payments and chargeback mitigation. Previously, Roenen led the Chargeback and Merchant Risk teams at payment service provider Simplex, which successfully recouped millions of dollars a year. He also served for nine years in an elite military intelligence unit of the Israel Defense Forces, rising to the rank of captain and leading the creation of an innovative operations department focused on change leadership, human resource development and risk management.
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