Bitcoin Forum

Please see our blog post here: http://tradehillblog.com/2011/07/25/tradehill-audit-discovers-dwolla-transactions-are-reversible/ (http://tradehillblog.com/2011/07/25/tradehill-audit-discovers-dwolla-transactions-are-reversible/) for a walkthrough of the transaction.

We would like to work with Dwolla and find a way to prevent this in the future. Hopefully the same thing hasn't happened on other exchanges.
Dwolla has been scammed out of at least $37,000 by our records and we have prevented another $27,000.

The latest updates can be found on www.tradehillblog.com  (http://www.tradehillblog.com)


The individual listed is a confirmed scammer and most likely not their real name.
We have 17 other documented examples.

To sum it up: Dwolla sends out CSV files and emails stating that a payment has been credited. Several days later they remove the funds without mentioning anything to the merchant (TradeHill in this case).
We will continue to provide withdrawals through Dwolla and our users will be able to access all of their funds within TradeHill.



Jered

Any response from Dwolla yet?

None. We're looking forward to working with them and resolving this issue.
The idea of Dwolla is great but if transactions are reversible that changes things.
If they're not reversible then they shouldn't be advertised as so on their site here (bottom): http://www.dwolla.org/blog/retail-merchants-rejoice-web-kiosk-online/ (http://www.dwolla.org/blog/retail-merchants-rejoice-web-kiosk-online/)

Jered

What information has Dwolla provided you about this transaction? Specifically, what information about whoever claimed that it was fraudulent and what explanation they gave? IMO, you are entitled to a signed affidavit and a police report at the very least.

Essentially none. We were told that it wouldn't go from "credited" to not credited and to download a new CSV. They told us that the user had their account suspended and that was the end of it.
They did confirm that the funds were not actually sent (despite being credited). We were unable to get any more information.

Jered

I hope Dwolla promptly acknowledges and corrects their mistake. Otherwise, their reputation is going to go to near-zero pretty quickly. They should reimburse you for whatever the actual amount of your loss was.

"Remember, these are cash-based transactions! No credit card fees, chargeback concerns, or signing necessary!" - Dwolla

Their reputation is currently 0 with me unless and until this gets resolved.

Wow good thing I have not recommended Dwolla yet, I was raving about it with a few people but now F*ck that.

Hello - first of all, this is horrible news, and I hope it is resolved very soon. We're behind you 100%.

I am still unclear on 2 issues you mentioned.
1) Does Dwolla owe you guys any money? Have you lost any funds after reversals?
2) You said your blog post was going to walk us through how this happened, but I only see that it did happen, not how they/you were scammed. First the funds in the transaction you got were confirmed and then they were reversed. Do you know how the scammer got his transfer confirmed in the first place?

Best wishes.

So how and why did this happen to tradehill and not mtgox?

Surely the "scammer" would attempt to defraud the largest, already-proven-to-be-incompetent exchange, no?

It's possible Mt. Gox had the same thing happen and didn't notice. As I understand what they're saying, Dwolla just changed the status back to unpaid and took the money without any notification. If you weren't looking for something like that, you might not notice until some time later when you tried to balance the books.

1) $37,000  lost roughly, we caught another $27,000 and prevented it from leaving.
2) I should clarify that, when Dwolla credited the account the user bought BTC and moved it out.

Thank you for your support! Hopefully Dwolla will do the right thing and reimburse this.




It's impossible to guess why they would attack TradeHill and not Mt Gox.  I see no reason they wouldn't try. I hope they haven't. It's possible that they stopped after we caught them and this is the end of it.
We're going to have to wait and see what comes of this. It's going to be very interesting to say the least.

Jered

Has Mt. Gox reported in to this forum on this subject (as have some of the other exchanges) and I missed it?  I am quite interested in their experiences here.  One would anticipate that being a larger exchange with no obvious means of discouraging scammers beyond the rest, they would have been vexed by the same issues.

He's spoken on IRC and said publicly that they haven't experienced any loses. We've spoken some in private and I won't quote anything else. I'll allow him to speak for himself and see where we go from here.

Jered

first GOXED, now DWOLLA'D.

http://detroitiscrap.com/wp-content/uploads/2010/06/you-gonna-get-raped1.jpg

That sucks that Tradehill got hit with this. Dwolla should be very motivated to set it straight, or I won't be using their service again.

Jered - quick question.  How exactly did Dwolla take this money back from you?  Did they take it from your account balance with Dwolla?  And how long after the transfer IN was it taken back OUT?

Quite frankly Dwolla needs to hire more competent people!

The transfers simply changed from credited to pending and the funds were removed from our account. They were most likely taken out after 3 or 4 days.  There were 17 instances and they varied.


Jered

Maybe the scammers were buying on TradeHill with fraudulent Dwolla money, and selling on Mt. Gox. It would be kind of silly to try and sell BTC that you stole from an exchange on the same exchange.

I kindly requested that they fix this situation with tradehill on their facebook wall.  Surprised I was the first one. lol

It's worth talking to Mt. Gox to see if they can trace the coins to them. They may not be willing to freeze them (which would, IMO, be completely understandable), and it may already be too late, but it's worth pursuing.

Don't freeze them, watch where they go, then have Dwolla reverse the transaction ;).  Apparently it's possible, and you at least get another scammer account, if not a name and address.  However, if the coins were not transferred straight to mtgox from tradehill, it's much tougher to link.

There are more exchanges than 2, you know.   Heck, just go bitcoins -> namecoins -> bitcoins and you're laundered.

I believe this was possible because in the US EFTs can be reversed in case of error for up to 60 days even though funds clear in 2-5.  This is how it would go down, with no risk to scammer:

Joe Smith: "Mr bank, please initiate EFT to account XYZ."
Bank: K.
Dwolla: Funds received to Mr. Bogus T. Fradulent's account.
Joe Smith aka Bogus T Fradulent: "Mr Dwolla, please send em to Trade Hill, account ABC "
Dwolla: K.
Trade Hill: "Funds received to Bogus T Fradulent's account."
Joe Smith aka Bogus T Fradulent: "BUY BUY BUY SEND SEND SEND"
Joe Smith: "Mr bank, I made an error.  I sent to account XYZ, I meant PDQ."
Bank: K.  EFT reversed, reason of Joe Smith's funds deposited to wrong account.  Dwolla, never mind that deposit to account XYZ.
Dwolla: K.  Um.  Wait, what?  This sucks, let's just pretend we never transfered those funds to Trade Hill.
Trade Hill: WHAT IN THE BUTT?!?!

Kids, don't try this at home.  Not being an expert in wire fraud and money laundering I'm sure I left some important details out.  You're more likely to win 15 years of prison rape for wire fraud as opposed to a few bitcoins following the above script yourself.

Sounds pretty accurate, I think you nailed it.

Which brings up the question -- What is Dwolla's business model? How can they do no chargebacks at only 25 cents per transaction? One fraudulent payment reversal in every 5,000 transactions would bankrupt them.

They've clarified it today. They do chargebacks. Unfortunately they had told us that they don't.
It's 4:15, I'm going to get some sleep, I'll be available tomorrow.


Jered

Well there goes Dwolla and Paypal. Too bad traditional banking institutions are the ones causing the currency fraud.

They told everyone, and continue to tell everyone, that they don't. I presume they're going to reimburse you, change their terms of service, and notify their customers. If not, they cannot be trusted to honor their commitments.

"Remember, these are cash-based transactions! No credit card fees, chargeback concerns, or signing necessary!" -- Dwolla

I bet they were thinking something like, "this is so easy, why isn't everyone doing it?" Now they know. It's never easy.

If this goes to arbitration, you should win. Dwolla can't excuse their reneging on their agreement with you because a third party reneged on them. Otherwise, you could excuse any non-performance simply by laundering a contract through a third-party who you would rely on to perform your part of the contract.

For the time being Dwolla is still here, thankfully.  IMO, they helped boost the bitcoin economy as much as bitcoin did theirs.  They are still the cheapest and most convenient way for US customers to fund exchanges.

However, since it is clear that Dwolla transactions are in fact reversible (contrary to their claims), exchanges like TradeHill might need to change how they process Dwolla deposits.  To protect themselves, they may have to start withholding bitcoins purchased with dwolla deposits for a couple of weeks, until it is clear the deposit won't be reversed.

Reversing transactions is really the only way to protect themselves against (ACH) fraud, so this shouldn't be much of a surprise despite their claims about "no chargebacks".

Dwolla is still friendly to bitcoin, just not to fraud.  We are lucky that bitcoin makes up the bulk of their business.  Otherwise, they would probably choose to freeze MtGox and TradeHill's entire accounts (like PayPal would) rather than just reversing a few of their transactions.

How does it protect them against fraud? They've still been defrauded out of exactly the same amount of money. They've just additionally defrauded one of their customers. If Jack steals $10 from me, and I respond by stealing $10 from Joe, I haven't "protected myself" against Jack. I've just victimized Joe.

Since the Dwolla Service is only for US Citizens Many of us really dont care I think...

Sounds like that won't be very practical:


Having to wait for two months before you are actually allowed to use your deposited funds to buy Bitcoins is surely not an option.
Dwolla probably didn't have that many scamming issues they couldn't resolve or just eat the loss up until now. I'm not sure about the US, but EFT reversal is not a very common scamming-vector here in Europe.

I suspect that the only real way to handle this is for somebody to charge higher fees and use that money to pay for lawyers handling the dispute resolution / scamming cases.

Whether Dwolla, TradeHill or the bank does that is irrelevant but somebody will eventually have to price in that risk.

Jered,

What Tradehill customers were impacted by this?  IOW, the scammer bought BTC and cashed out.  Did the BTC sellers get their cash? 

It's also possible Mt Gox has had the same thing happen and hasn't talked about it publicly. Based on the reasons they gave for their French bank cancelling their account, we know someone's tried this with Mt Gox SEPA transfers using stolen online banking information, and since SEPA transfers are definitely reversable it's very likely they lost some money from this happening, yet they haven't said anything.

It's not like Mt Gox are exactly the most honest and straightforward organisation; in the past they haven't admitted to anything that wasn't already obvious.

It protects them by fraud by transferring the risk to the party that actually has control of it. Remember that it was TradeHill that chose to offer the high fraud risk service of selling untraceable cryptocurrency rather than something lower risk. Also, your analogy is bad. Dwolla are effectively a middleman - the reversed transactions to TradeHill were carried out at the (fraudulent) request of the person who originally transferred in money that was reversed, using that money. It's more like if Jack gave you $10 of stolen money to give to Joe, and then the victim came and demanded it back.

Did they actually claim this? I've seen them advertise "no chargebacks" as a benefit, but that's still technically true - chargebacks are considerably nastier than merely reversing the transaction. In fact, I'd always got the impression that Dwolla transactions were reversible based on their promotional material.

Dwolla has added the following to their user agreement:


I think Dwolla will soon discover that this doesn't do what they think it does. If Dwolla can't establish any fraud on the part of the receiving party, Dwolla will lose in arbitration. Dwolla cannot use the fact that they were defrauded to justify breaching their agreement with an innocent party. This clause just says that Dwolla can take the money back until an arbitrator decides who gets it. The receiving party will llikely prevail in their arbitration with Dwolla and Dwolla will have to reverse the chargeback, again assuming they can't show any fraud on the part of the receiving party.

The unusual rules for credit card chargebacks come from specific Federal laws. There are no analogous laws for ACH that Dwolla can take advantage of. Since Dwolla drafted these terms as a contract of adhesion, any ambiguities in it will be construed in the favor of the other party.

For the ones that hate all legal terminology, can you explain the difference between a chargeback and reversing a transaction.

I would think somebody would have to have proper credentials in order to goto their bank and claim a transaction is fraudulent.

In which case they would be using their real name and information.  Isn't this traceable back to their bank?  Hard to use TOR and proxies at a physical bank location.

I hope the cyber police do a full back trace and put somebody in jail.

I think holding ACH/dwolla deposits for 60 days before allowed to use it MIGHT be the final solution here, there's no other way to prevent ACH fraud.

Hes probably not using his own account. That would be stupid.

Not sure there is a legal definition of "chargeback" at all, but in common use it generally refers to the rather expensive process by which credit and debit card payments reversals are carried out by the major providers. If memory serves me correctly at least one industry with high chargeback rates (the porn industry) is more worried about the nasty penalties associated with chargebacks than the transactions being reversed - they can eat the loss of income because their marginal costs are fairly small, but the fees really bite.

You're assuming the transaction was actually carried out by the account holder. There's a large chance the transactions in question genuinely were carried out fraudulently for exactly this reason: false claims of fraud would be risky and easy to trace.

Dwolla just has to do a better job ensuring ACH tx's to them are legit before releasing funds to merchants.  i know my acct with them had to go thru all sorts of hoops to get credentialed before i could ACH to them which is why i fail to relate to what happened here.

edit:  all the pressure we've been putting on them to make the clearance of funds faster probably contributed to errors.

Now suppose someone swipes your Dwolla password. There are STILL people out there who haven't changed their passwords since the MtGox incident and are STILL getting their accounts broken into and their money stolen.

you can tell Dwolla is still a rookie organization based on my conversations with their telephone contact person Ben.

You guys aren't considering the fiduciary duties. When you hold someone else's property in trust there are strict liabilities. Dwolla gave out material false information publicly and privately (in the case of Tradehill) that was acted upon. There is no excuse for that.

I have seen this work real world with a Bank and fake postal money orders. The bank released the funds and they had no recourse against the person that deposited them.

Good!  Expensive lessons are not soon forgotten.

I too spoke to Ben when I contacted dwolla for my issue. He was nice over the phone not so much on email. More than likely if you have a customer issue he is the only guy you will be able to talk to. I suspect they are short staffed and in over their heads!

i don't give a damn as long as mtgox and dwolla is fine. LOL

This is still unclear. MtGox hasn't reported having any Dwolla issues, but is could become a problem now that it is known that transactions can be reversed.

It's been confirmed at exchangebitcoins.com and Mt Gox in IRC  but "not at the same level as TradeHill"

Jered

My guess is that Dwolla is gone. This is their non-response they sent this afternoon:

Dwolla Support support@dwolla.org to me
   
show details 1:27 PM (3 hours ago)
   
__________________________________
Please type your reply at the top of the email...
Charise
JUL 26, 2011  |  12:27PM CDT
David,

We'd be happy to walk you through our processess.

Dwolla has a return and dispute process which is pretty straight forward but in the past has been fairly manual.

Is there any specific question I could possibly answer? I'd be happy to do so.

+++++++++++++++++++++

David
JUL 26, 2011  |  08:46PM CDT
Original message
Please make me feel you are "doing the right thing" in reference to the following line of discussion in the bitcoin community.

http://forum.bitcoin.org/index.php?topic=31712.0

I am a relatively new client of yours and I used your services to interact with TradeHill, among others. I am at this moment extremely nervous about using your services unless and until this matter is cleared up.

Thank you

+++++++++++++++++++++

This screams of avoiding the subject. I am not sure what my response to their non-response will be.

I think the ever astute JoelKatz has nailed it on the head, they have no reserve on hand nor any plan in place to solve this type of problem.

I don't see how what Dwolla did by editing statements retroactively to HIDE their reversed transactions is different than fraud.

By forcing you guys to go public to get a response (if you do) they've already destroyed any trust I could have given them.

The question now is only how can we quickly and cheaply transfer money to TH? 10$ per transfer is out of the question for me personally.

I heard you guys mention ING p2p transfers on Bruce's show. I already have an ING account, and ING is fantastic! If TH takes a step to verify account holders in some way so we can avoid 60-day or 180-day transfer holds, I'm totally fine with that.

This might be a naive question - but since when are SEPA transfers reversable? (In case that you gave a correct and matching account name + account number.) I never heard nor have seen reversed SEPA transactions so far. Can you maybe elaborate on this?

I really hope that Dwolla refunds TH the frauded money. However, I would guess that Smalleyster has a point - potentially they might have trouble refunding TH as the 0.25$ probably dont include a credit fee :(
On a seperate note: I think TradeHill really did a great job on playing with open cards and letting the community know about this problem (after Dwolla didn't resolve it). Personally, I highly prefer such open communication over non-informative messages "we stopped x or y" without giving reasons. So, a big thumbs up for the TradeHill communication style!

Reversing a transaction means that the institution that performed a transaction debits the recipient and credits the sender for the amount of the transaction. A 'chargeback' is a specific case where funds are returned to a consumer by an issuing bank, reversing a credit card or bank account transfer. Generally the specific term 'chargeback' is used to indicate that it's in accord with specific Federal laws that give the consumers additional rights beyond what they'd normally have and prohibiting the financial institution from acting as a mere intermediary by making them responsible to the consumer for merchant fraud.

In this case, Dwolla charged back TradeHill. They had better be prepared to defend that action in arbitration. If they cannot show some fraud on TradeHill's part (or unjust enrichment, or something like that), or some law that exempts them from that requirement, they are fully liable. You can't reverse a transaction to Jack because you were defrauded by Jill.

If you promise to buy a video card from me for $200 and I buy the video card from NewEgg for $195, then give it to you and you don't pay me the $200, I have no right to charge back NewEgg. If I want to charge back my transaction with NewEgg, I have to show some fraud between NewEgg and me. Reserving the right to charge back, as Dwolla's ToU now says, still doesn't permit them to charge back without a sufficient legal justification.

As far as TradeHill is concerned, Dwolla sent them some money and then reversed that transaction. Dwolla initiated that reversal and they have to defend it. "A third party reneged on us" is not a reason to reverse a payment.

I get the whole Dwolla reversing charges after crediting TradeHill's account. But how does the scammer pull this off and how could Dwolla not be aware of it? The scammer transfers funds to Dwolla, transfers to TH, buys bitcoins, and reverses the original transaction from bank to Dwolla. Do I have that right? Is it assumed that the scammer stole access to the bank account?

Dwolla is aware of it. But if they can just reverse their payment, they have no incentive to do anything about it.

Yes.

Assumed by whom? Most likely, the reversal is the fraudulent part, but TradeHill has no way to know. That's between Dwolla and the person who reversed the ACH payment.

Here is the reply I received from Dwolla today about this "scandal".
It appears there have always been chargebacks available for ACH transfers, but there are no chargebacks if a Merchant uses their POS service to receive credit card payments.

Well if all this is true, its only a matter of time before Mt Gox is screwed too and they will no longer accept Dwollas also.

I wonder how financial institutions who have to deal with these types of transactions do it. How do you trade in the stock exchange for example?

This is still a big risk Error - we caught couple of stolen-password accounts this morning!  Dwolla is reviewing their activity now.

Back in the day when I had active brokerage accounts they all required I write a check and they did not let me trade until that check had cleared.

The problem is that payments, including checks, can be reversed long after they clear. For example:
http://www.snopes.com/crime/fraud/cashier.asp

Then why not let me walk to their bank and make a deposit directly into their bank account?
I have the proof with the deposit receipt and even if it takes 3 days for them to confirm thats better than paying 10$ to 20$ in wire fees.

That article refers to *cashier's* checks, which is a totally different beast than a personal check. Apples to oranges. Never take a cashier's check, they are almost always a scam.

There only difference is that a cashier's check purports to be guaranteed by a bank. Otherwise, there's no difference. They can both be counterfeited, dishonored or reversed, even a month after they supposedly cleared.

This thread's title states that "Dwolla was scammed", which implies Dwolla's ignorance. I might have worded it more accusingly, but perhaps Jered is only being diplomatic/open to the possibility that Dwolla just has some presentation errors. I would assume that the bank to Dwolla reversal could only occur if the bank or Dwolla account was stolen, otherwise the scammer must have presented a claim which I assume didn't happen.

So CubedRoot has posted in the Trading Discussion forum that Dwolla has sent him an email stating that there are no chargebacks for just credit and debit card transactions.

They further stated that "bank returns and disputes have always been part of the Dwolla system.", "Sorry for any miscommunication.", "...putting together more information for the web site ... ", "...likely involve updating documentation", etc; see the posted email.

My guess is that Dwolla is worried that they "miscommunicated" the policy so badly that to immediately reject Tradehill would be untenable, so they are easing in the response in various ways while avoiding a direct conflict until the waters are muddied enough.

While they have not communicated with Tradehill, it seems like their position has been disclosed sufficiently to understand how they are likely to handle the disputed transactions and how they are going to operate going forward. Furthermore, Tradehill has the information necessary to make whatever decision they need to make beyond ceasing to do business with them.

Hard to see how Mt. Gox remains unaffected by this.

Jared: If Dwolla doesn't rectify the situation, for how long will you continue to allow Dwolla withdrawals? Will you give your customers advanced notice before dropping Dwolla completely?

Just guessing out loud, but my *guess* at this point is that similar has probably happened at Mtgox but they have not noticed it yet.

That's my guess as well. And the possible implications are ugly.

I am pro Bitcoin. I want it to succeed. So it saddens me to raise the possibility that Mt. Gox has been Dwolla'd so badly that they are no longer solvent. If so, they can hide that for a long time as long as there is no "run on the bank", so to speak. So they would have incentive to not disclose loses, hoping they can make up the missing bitcoins with earnings.  But in that case, it seems like they would need to stem the bleeding by stopping Dwolla deposits ASAP. But they have not done that. Strange. Maybe they are hoping that Dwolla will return the money to Tradehill in which case there would be no need to disclose insolvency until that is resolved. I really hope this is all just wild speculation.

Anyway, the speculation will probably continue if they cannot explain why this is not an issue for them. It seems like it must be.

Suppose you had dollars in Dwolla today. Would you transfer it to Mt. Gox or return it to the bank?

I never keep USD in Dwolla for more than a few minutes.

i was nervous enough to cancel a bank transfer to dwolla at a cost of $60 to me today.

I would transfer enough to Mt. Gox to buy and immediately withdraw your limit of bitcoins (assuming that is why the money is there to begin with). If its a lot of money, send the rest back to the bank if you are worried about it.

That said, I actually think Dwolla is a little better bet than Mt Gox right now.  It looks to me like Dwolla is going to avoid (their) losses for now, right or wrong. (If it goes to arbitration, that's a different story.) I am not sure about Mt. Gox.

Dwolla's F.B statement ?

http://supportsean.com/screenshot.jpg

What kind of god damn answer was that? That was a question you dolt!

Dwolla has completely and utterly avoided addressing the issue. That's what scares me.

this is very, very scary ...I'm assuming they are treating their F.B as a way to answer people's questions ?

Well that' the second time today I've seen a correspondence ask them a question and the response was "If you have any questions just ask."

That's simply taking everyone as stupid.

deleting the comment = hiding something  which is even worst then not answering it!

That's basically the same non-answer they emailed back to me. So I just emailed the back the link to TH's blog statement. I don't expect to hear anything more from them other than declaring bankruptcy soon.

I don't think Dwolla has an answer yet. I suspect that they're rethinking their whole business model right now.

There's a market for $0.25 transactions. But Dwolla is going to have to figure out how they're going to handle fraud in a way that doesn't drop their profits to zero (which is going to mean making everyone else eat the fraud costs) and they're going to have to communicate that clearly to all parties.

You could ask them more directly. :
What is Dwolla's Phone Number?
Last Updated: Jun 29, 2011 08:24AM CDT
From 9AM to 6PM Monday - Friday Dwolla's customer service is available at 515.280.1000.

(from their website)

Hypothesis alert!  (These kinds of ideas hit me when I am in the shower somehow and I just got out.)

Two things seem particularly mysterious about this issue:

1) Dwolla's silence and unwillingness to communicate with Tradehill for no understandable reason.

2) The seemingly disproportionate effect on TH vs. all other exchanges.

The idea which hit me is that for the last decade or so 'national security letters' have been being used like confetti (in the US.)  An interesting feature of these is that complete silence on the part of the involved parties is demanded and usually obtained.  So, for example, the NSA can not only walk into a library and demand their checkout list, but also compel the Librarians to not utter a word about it.  (A few years ago Librarians 'struck' and destroyed all of their records in disgust as I recall.)

So, I wonder if Tradehill is the target of a national security investigation?  It was not to long ago that certain congressmen were making noise along these lines about Bitcoin generally, and Tradehill seems to me like it could be a high-value target.

Part II of my hypothesis is that TH may have been being specifically set up and hence the disproportionate malfeasance that they seem to have encountered.

[emphasis mine]

yup.

but... they're basically competing against the cheapest wire available:  10 bucks/3 days.  right?

that sure leaves them plenty of room to compete.  would anybody mind - especially now, with reality as it is - a $1 USD charge?  probably not.  still pretty damn cheap, comparatively.

but maybe from somebody else.  i must say that i'm not terribly impressed with dwolla at the moment.  it'd take one helluva campaign on their part to convince me otherwise.

This is sad.

I've always been a little skeptic about escrowed exchanges. I realize their importance to most people, particularly large business who just can't afford to evaluate the trustworthiness of every individual they exchange currency with. But the thing is that they need to have a public link to the current banking system, and that makes them vulnerable to all sorts of issues, including what we're seeing here.

I think the best way out for them now, besides using irreversible means of payment like Liberty Reserve (actually, does it remain irreversible?), is to try to hire insurances. That would make everything more expensive, but that's the cost of the banking system, if you want to use an escrowed exchange you'll have to pay for it.
I wonder though if it they would manage to find any company offering insurances to something as peculiar as bitcoin exchanges at an affordable price.

Where's that CoinPal guy now? He had a robust fraud prevention system. Couldn't the same techniques be applied to credit card or bank transfers?

Today on IRC and via email, two other exchanges confirmed they had transactions that 'vanished' and that were 'reversed'. We are waiting for them to make this public.

Any exchange using Dwolla CSVs over the past two months almost certainly has loses to the order of 3 to 9% of their volume.

Adam

That's big. It could possibly mean that Dwolla simply doesn't have the resources to take these frauds on their balance sheet. That's probably why they are silent: they know they should refund you, but they just can't.

Maybe you'll have no other option but suing them.

If dwolla can reverse across the board why would anyone continue to use them? They've been pushing the 'as good as cash' for quite awhile, they even still have FAQs about how easy it is without the worry of chargebacks. They want brick and mortar merchants to use this, but why would I want to sell even a cup of coffee via dwolla if it may end up being a fraud transaction later on.

I was about to start accepting dwolla for a non-Bitcoin online service to hopefully avoid some of the 3% fees paypal and CC processors take, along with the hassle of those payment system chargebacks. But why try to get people to use another service if Dwolla will be just as bad as what's out there already.

http://agoristradio.com/?p=438

listen to this very interesting Agorist Radio podcast History of the Cypherpunks.

its been a coupla months since i listened to it but a central point from the panel discussion was that banks LIKE chargebacks b/c it gives them an excuse to charge higher fees.

in Dwolla's case, in order for them to survive IMO the only choice is for them to charge more.  i've never understood how they could make money at $0.25 per tx.

And it took two weeks for them to just man up and admit this?!

Yeah, that's BS. Appreciate you guys forcing them to reveal this. Too bad it had to get to that point.

This could mean that some exchanges no longer have the funds to cover all their liabilities, and are now operating on a "fractional reserve" model where they just hope everybody won't withdraw their money all at once. Kinda scary.

This is why I try not to leave any more money than I have to on the exchanges. There is nobody looking over their shoulder to make sure they aren't making big loans to themselves, writing off big losses, etc, all while naively intending to pay the money back "someday, with our future profits"

Yes, you have "counter-party" risk. That is the reason for holding bitcoin in your personal wallet. Local, in-person exchanges are best. Develop local, trusted, trading networks. Only leave in the exchanges and online wallets what you can afford to lose.

Just hold all dwolla deposit for 60 days before the fund is allowed to be used for trading from now on

If thats the best option, simply dont allow dwolla. No business can operate by forcing clients to wait 60days, no clients would tolerate this either.

I think best approach if you want to use dwolla from now on then clients must verify themself with the normal legal bullshit ie. photo id, proof of residence, bank account statement etc etc. so would be scammers wouldnt even think twice wasting their time to try and defraud a company.

All this of course only in case someone wants to make use of dwolla, other methods can still be as anonymous as it is atm and unchanged.

but it's my money, and i want it NOW.

this is an overstatement by a long shot.  remember this is an exchange, not a bank.  ppl move money in and move money out rather quickly for the exchange only.  no one is paid any interest like a bank therefore no one has an incentive to leave money there on a long term basis.  this is why exchanges don't make loans and are thus not "fractionally reserved" in the traditional sense.

i suppose if mtgox got defrauded lets say $35K (they did say less than TH), then yes, on an absolute basis they might be a bit short but considering they have hundreds of thousands in USD and BTC it won't be a problem.

What other option is there for funding with a $0.25 fee? I'd take the 60 days rather than no funding options at all.

You really think its practical if you want to trade to wait 60days ? Id rather pay $5 or $10 to be able to trade in less time than that but maybe its fine with you to wait 2 months to get in a good trade o_0

There is other funding options, tradehill just have to add it. Dwolla isnt the only alternative, just wait for tradehill to add other methods if this doesnt get resolved.

For emergency trade, sure I can wire the money and pay the fee. But like my stock brokerage account, I usually keep money in there for years and don't deposit and withdrawal constantly, 60 days isn't a big deal to me, it's just an option to fund cheaply.

[POLL] Will you reverse your Dwolla transactions?
http://forum.bitcoin.org/index.php?topic=32354.0

If the results of this poll are accurate, there are more reversals coming. If I were running an exchange, I would disconnect my bank account from Dwolla ASAP, changing banks if necessary. Let Dwolla sleep in the bed they made.

They're not reversable if you, as the owner of the account being transferred from, gave a correct account number and name. They are reversable with certain restrictions if the original transfer request itself was made fraudulently, even after the funds have supposedly cleared. Mt Gox's problem was that phishers were carrying out fraudulent transfers from other people's accounts to Mt Gox.


They can't do anything about it. Normally there'd either be a delivery of a product that's traceable or no way for someone to make large amounts of money from this and thus no incentive to do it, but due to the nature of Tradehill's business neither is true.

How would it matter if there's a delivery of a product that's traceable? The claims in this case aren't that TradeHill didn't do what they said they were going to do, the claim is that the original transfer is unauthorized. The situation would be precisely the same if TradeHill had shipped them a physical product.

Suppose instead of buying bitcoins, TradeHill had shipped a physical product and TradeHill could prove that. How would that change things? TradeHill would still be out the product they had shipped and Dwolla would still have taken back the money.

Even if the physical product could be recovered, someone would still be out the costs of preparing, shipping, and restocking the product. There would still be the issue of whether Dwolla or TradeHill eats that loss. Dwolla can't afford to eat that loss on $0.25 per transaction. And TradeHill can't on .5% commissions. And there's always the chance the physical product couldn't be recovered.

I agree with Mr JoelKatz: Why should tradehill have to have "tracable proof" of products and services? Why isn't a list of account transactions good enough? That is good enough for Dwolla obviously because all they provide is a list of transactions (one that apparently they can change over time whenever they want)

Watching Bruce's show from yesterday covering Dwolla's emails.

Their "answers" to his direct questions are downright despicable, and even the irrelevant garbage they are saying is dishonest.

And their CEO thinks it's funny to mock Bitcoin investors? Who are making up almost his entire customer base.

They deserve the failure that's coming to them.

I couldn't figure out what was and wasn't written between Bruce's numerous interjections declaring what was obvious, pathetic, or dishonest. Just the facts sir!

Compare Bruce's argument that all they'd have to do would be to publish an e-mail they'd sent to Tradehill informing them about the transaction reversals with (a) their initial statement that they can't release details about specific customers or transactions and (b) Bruce's second e-mail to them. (It's revealing that they haven't quoted any concrete policy of informing customers about reversed transactions but unsurprising that they won't publish private e-mails.)

Finally managed to find the actual article Bruce was referring to (http://www.siliconprairienews.com/2011/06/guest-post-the-virtual-currency-debate-exchange-and-hysteria) - that was a bit of a pain.

Edit:
It matters because Tradehill were offering a service that had the equivalent of a big neon sign on it reading "ideal for laundering stolen money". Of course, they should've reacted by refusing to do business with Bitcoin marketplaces from the start.

The riskier fraud is and the harder it is to make money on it, the less likely it is to happen.

Excellent point. I don't think Dwolla could have refused to do business with Bitcoin marketplaces from the start. Part of their business model and sales pitch is that they don't care what you do so long as it's legal.

I've been a bit hesitant (to put it mildly) to use TradeHill because I was slammed with a bunch of spam with TradeHill URLs right after the Mt. Gox breakin.  It looked at first as if Tradehill was trying to take advantage of Mt. Gox's problems.  I wasn't impressed with the plausible deniability because of their affiliate program.  Affiliate programs are how many companies spam while avoiding responsibility for spamming, and is how most actual spammers get paid for sending spam.  I'm one of the people that tries to clean up the virtual piles of manure that spammers spread around the Internet. Because of this, affiliate programs leave a *really* bad taste in my mouth.  Rightly or wrongly I attribute the attitudes of spammers to those who run affiliate programs.  :/  So my trust in Tradehill hasn't been great.

However, I'm impressed by how they are handling their current issues with Dwolla.  They are making clear, detailed allegations of fraud against Dwolla backed by names, numbers, charts, etc.  They're talking and acting like a company who has the facts on their side and is confident of prevailing in court should it come to that point, but that prefers not to go to court.  In other words, they're acting like people who are telling the truth.  I believe them.

Dwolla needs to answer these allegations, publicly and in the same forums where they have been made.

It does seem impressive, but it doesn't add up IMO.

TradeHill claims that there is a *huge* percentage loss of invalid transactions occurring which the likes of MtGox hasn't even bothered to check. Considering that MtGox has recently suffered a major setback I find that claim dubious, considering the tender freshness of bitcoin trading.. Tradehill claims losses are in the thousands of dollars range... why would *any* financial keep on business as usual while such quantities of money are being thrown around as potential losses?

I also find it suspect that in the other thread, TradeHill starts promoting Paxum.

I don't find Tradehill's promotion of Paxum in the least suspicious under the circumstances.  Without Dwolla, they *must* have some means of processing payments/letting customers transfer money in and out of Tradehill accounts.  This appears to be the means that they currently have chosen.

That doesn't mean you or anybody should put huge amounts of money at risk through this channel.  But IMHO Bitcoin itself is too new/untried to risk any money that you can't afford to loose anyway.  So I'm going to give this a try and see what happens.

Do you?  I would not have been surprised if Mt Gox was pretty busy with other things, and their books got pretty scrambled in the fallout of their other recent issues anyway.

That Dwolla would be editing their books was kind of a shock to everybody and I don't think anybody would have expected it (and parenthetically, I have not heard *anybody* come up with a defense for this except for CampBX who seemed to be of the opinion that they may have a possible, if distasteful, 'out' from a legal perspective.)

Indeed it seems like Mt Gox and has gone through a 'no-problem -> maybe small problem ->stop using Dwolla' range of responses after being tipped off.  That tells me that they had probably something less than a full situational awareness.


You do?  Tradehill mentioned that they are hard at work finding a replacement for Dwolla which, as others seem to be finding, is not currently usable (and many others postulate never will be.)

The main thing which surprised me was how quickly they found a company in this business, and one who claims to have found a solution for the charge-back issue.  I'm dubious of that claim but would be delighted to see them prove me wrong.(*)  Also the outfit claims to have been setting up for three years before they went into action.  That's plausible I suppose, and I can understand it in some scenarios, but it also is something I would investigate.

* Actually, I personally don't care all that much.  Wire transfers are working well for me in my situation.  OTOH, I might someday want to use the service for things other than funding my BTC trading.

Great, that's just great.  Just what we need another scandal caused by incompetence. 

Wow.  That article is amazing.  He seems to think that the problem is fraudulent bitcoin transactions being converted to dollars, when the real issue, as far as I can tell, is fraudulent bank transactions being converted to bitcoins.

A quick quote to illustrate what I'm talking about.


Let me rewrite that in a way that reflects reality:

How is Paxum different from Dwolla? I read the terms and FAQ (also thought Dwolla looked fine last week) but aren't they suseptable to teh same attack? TradeHill can hope Paxum doesn't push their losses upon the merchant, but otherwise, what's the difference?

For the record, I pushed Dwolla funds to Mt. Gox this morning with no trouble.

A rep from Paxum is here on the forums.  He says they have rigorous verification processes that make fraud very unlikely.  So, they don't have losses that they need to pawn off on their customers.

Dwolla was pretty much just on the honor system, apparently.  Which is odd.  I got a phone call from Dwolla when I set up my account, just to verify my info.  I still haven't added any banking info to my dwolla account.

I didn't see under what conditions Paxum can reverse charges. They should mention that. Mr. Paxum are you listening?

Certainly if someone compromises the bank or Paxum account, I suspect Paxum will block, maybe reverse transactions. While perhaps unlike, what are the circumstances and procedures?

Yes, that would be good to know.

I sure hope not. The next time MtGox publishes their password database, and some hacker finds my Paxum password is the same, Paxum has no need to reverse any transactions. I screwed up and it's my fault, not theirs. And yes, I'm speaking from experience. I did lose quite a bit of money due to the previous MtGox database.

Hopefully their process goes through more verification than the rep's posts have. A professional banking establishment representative whose grammar and spelling is that off the mark should be sending red flags to most.

When will people stop being surprised when people get Goxed?  Nice guy, but what is needed is a business professional and some programming professionals.  Professional doesn't just mean the most technical debugging skill - it means doing it correctly and not on live databases, or taking out peoples money for weeks on end, or .. or .. or ..

If you guys want BTC to become a successful currency, you have to start acting like it's really money, whether you are the giver or receiver of funds, as an individual or a business.

I see too many entitled people whining about what they've lost, gotten stolen, can't access their basket full of eggs in one basket, etc.

Use your brains.  Diversify.  Spread out the risk.

Tradehill, you're blaming the wrong person, it's not Dwolla's fault that users are initiating chargebacks with their banks. Dwolla's only choice is to reverse the transaction on their end.

I agree they have no choice. It's part of the terms of service for using ACH. It is Dwolla's fault for claiming no charge backs , avoiding full and timely disclosure, changing the TOS without notice. misrepresenting the TOS ex post facto, showing the credit to a third parties account ,making them eat the loss , etc...

qft

Here I found a pic of teh Dwolla Kids!
http://i52.tinypic.com/s29xeb.jpg

Trust US with your money, please!  Our parents wear suits so we don't have to.  In College, where we're from, we just wear T-shirts to work every day, even on company picture day!

Sounds like that new outfit simply eats the losses themselves if they do not do what they are paid to do which is to reliably acquire funds from their users.  Simple enough, and more than fair given how Dwolla promoted their services.  Why cannot Dwolla do that?

I'd probably do about half of them.

And don't give me no flak about that only 4 of them are girls.

top to bottom, left to right

N HELL-N Y Y
N HELL-Y N HELl-N
n N N HELL-Y

This explains everything!
OMFG those pics are too much!



 Joel Katz was probably correct about the bankrupt thing. Heaven forbid anyone ruins their plans to be the newest trendy internet millionaires.

I wonder which  of these tools was the one answering a question with "If you have any questions just ask".
Even "Bob" from New York City of India has more respect than that.

We agree that some innocent party must bear the cost, right? So the only question is whether it's TradeHill or Dwolla.

Well let's look at the agreement between the two of them. Dwolla said their transactions would be like cash. TradeHill asked if there could be chargebacks and was specifically told no.

I agree that it's not Dwolla's fault that users are initiating chargebacks with their banks. But I disagree that Dwolla's only choice is to reverse the transaction to TradeHill. Dwolla could eat the loss. If you don't think they can do that for some reason, please explain how that reason doesn't apply equally to TradeHill.

In fact, I don't believe Dwolla can reverse the transaction with TradeHill. That transaction was authorized by Dwolla. And Dwolla is not alleging any fraud on TradeHill's part. So I see no grounds for them to reverse it.

If I cash a check from Jack and use the money to buy a steak dinner, I can't ask the restaurant for my money back if the check bounces. I have to go after Jack for the bad check.

(As I explained in the other thread, Dwolla still doesn't claim the right to pass on chargebacks to innocent third parties. They only retain the right to chargeback the initial account and to claw back funds prior to arbitration.)

User: Hey I'm going to scam Tradehill by transferring my money to Dwolla, transferring it to TH, buying my coins then doing an ACH chargeback with my bank.
Dwolla: We've received $50 from User. SEnding $50 to Tradehill.
Tradehill: We've received $50 from User via Dwolla.
Tradehill: Bitcoins bought and withdrew.
User: *initiates chargeback*
Dwolla: Oh no, the user did a chargeback because 1) he claims he never received the product he paid for or 2) he claims he meant to send it to someone else

1)
Dwolla: We aren't the ones selling the product, Tradehill is. Remove the funds from where they were sent (TH) and give it back to user. Not our fault.
Tradehill: What? We're not taking the loss. Blame Dwolla and make them eat it, even though it's not their fault.

2)
Dwolla: Looks like he meant to sent the money to someone else, but that same money has already been sent to TH. Chargeback.
Tradehill: Oh no, we don't want to take the $37k loss. Blame Dwolla and make them eat it.

See what I mean.

I think you're missing the point that Dwolla promised no chargebacks or reversals ever. 

That's not what happens. Someone other than the user does a chargeback because they claim that they, the owner of the funds, never authorized the transfer. TradeHill never had any contact with the person who does the chargeback.

I think you're missing the point that Dwolla is the product. The original ACH transfer was a deposit of funds into a person's Dwolla account. It has nothing whatsoever to do with with the subsequent transfer of those funds to TradeHilll. The user claiming they should reverse the transaction to Dwolla because TradeHill fell through is equivalent to them reversing the funds to Dwolla because they felt like it. And, again, it's between Dwolla and that user. If Dwolla wants to take money back from TradeHill, they need to make a similar claim, which they cannot do.

The problem is that Dwolla is charging back the transaction to TradeHill in this case for no reason. Dwolla did intend to transfer that money to TradeHill. And they have no evidence or even allegation of fraud on TradeHill's part. So again, it's a problem between Dwolla and their user.

In this case, because Dwolla's customer made a mistake, Dwolla sent money to the wrong person. Dwolla can't pass on the blame -- they're responsible for their actions regardless of who tells them to take them. So Dwolla would be responsible for any losses the mistake causes.

No, I don't at all.

Dwolla is using the non-performance of a third party as an excuse to modify its agreement with TradeHill. That's simply absurd and if it were possible in general, no contracts could work.

In these cases, Dwolla would not necessarily be liable for the full amount of the transfer, but they are responsible for any unrecoverable losses. These third-party failures explain Dwolla's failure but they don't excuse it. Dwolla still has to make TradeHill whole.

In my email today. lol

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August 2, 2011 | Published by DWOLLA.

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