Towards better consumer protection in bitcoin

[belcher]

Quite frankly consumer protection in bitcoin is shot. Enthusiasts actually go around talking up the "no chargebacks" property as though it's a good thing. Great for the merchant if they actually get any bitcoin sales, but customers will choose something else when they can.

Lack of consumer protection further hurts merchants; in two ways: One, it lowers their margins because of lemon-market effects; honest consumers will pay less because they're not sure if they're going to get ripped off; Two, it amplifies the power of reputational ransom.. since people squaking loudly is the only real sign of fraud you'll get, you have to pay attention.. but anyone can squak loudly, and demand money (or free products) from you to shut up.

Right now if a deal goes bad, consumers have to resort to public shaming on internet forums, or legal processes. Many in the bitcoin community are libertarians who want to stop relying on the police and courts. Moving away from using the legal infrastructure of the state doesn't have to be for political reasons, it's also much cheaper to avoid lawyers and legal processes.

Bitcoin does have a way to implement better consumer protection. It's called multisig. The idea being that a special kind of bitcoin address is created from three keys. If any two of the private key-holder, the money can be moved. So to create a robust consumer protection model you give the buyer, seller and an arbitrator each one key. The buyer pays into the multisig address, if the buyer receives the service and is happy, her and the seller can both use their private keys to send the money to the seller. If they can't agree then the arbitrator can use her private key to tie-break and distribute the money as they see fit. Also the arbitrator can't steal the money on his own as they only have one key, so they don't need to spend time and money on security.

Multisig is used today but only for security. People keep one set of keys in a backup, the other two keys are held on a hot wallet and third-party web wallet or security service. Malware and the web wallet cant steal coins from the hot wallet, and if the web wallet disappears the person can just open up their backup to move the money. Plenty of wallets can do this including Electrum 2.0. But this model has nothing to do with consumer protection.

There have been some attempts at multisig consumer protection but from what I can see most did not get adopted. Often they rely on users manipulating raw ECDSA keys. The GUIs that do this should have big buttons with names normal people understand, like Create Escrow Account, Fund Escrow, Receive Escrow Money, Sign Off Payment, Get A Refund. The accounts feature in Electrum is perfect for this, when people sign up to their new payment processor or marketplace they get a xpub BIP32 key, the merchant also gives them a xpub key. Clicking the Create Escrow Account button simply uses these to obtain public keys and the redeem script.

I'm nowhere near the first person to come up with this. Here is Mike Hearn talking about the concept in 2012(!) https://www.youtube.com/watch?v=mD4L7xDNCmA

Theres a whole website based on the idea, https://www.bitrated.com/ which is actually really good IMO. I think a reason it isn't seeing more adoption is that it doesn't slot into existing infrastructure. I think it only can work for OTC trades between people, so two people decide on a trade and agree to both sign up to bitrated.com, it has no scope with a payment process like Bitpay or an existing marketplace like https://cryptothrift.com/. Plus because it runs in a browser, bitrated might not be agreeable for people who prefer to keep their private keys on their hard disk. (Although bitrated can be used entirely with local private keys, it even gives you the relevant commands on the site, but I dunno if really any of its users bother)

Any consumer protection has to be part of bitcoin wallets. That software already handles our regular private keys, its only a small step to also handling multisig keys. Hopefully it would be compatible with bitrated.com (which already has an API ready to use). Another benefit of this approach is it can give people a *choice* of mutually agreeable arbritartors, not just a monopoly tied to the credit card or payment processor.

Now there also exists the BIP70 payment protocol. I don't see it having any ability to use multisig consumer protection but I'm sure thats just an oversight.

Bitcoin CAN have good consumer protection. Instead of talking up bitcoin's "no chargebacks" we should be talking about how bitcoin has much better security than credit cards so that the only chargebacks that happen will be because of merchant fraud, not because some hacker in vietnam stole the customer's credit card.

Quite frankly the credit card security system is awful, bitcoin doesn't have to work hard to beat it. https://np.reddit.com/r/personalfinance/comments/3lf9hr/bank_is_refusing_to_refund_fraudulent_visa/cv5umvx

I don't think writing an Electrum plugin that does this is too hard. Sadly it's been more than two years since p2sh multisig was released before the beginnings of adoption were seen.

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[kalooki]

"Quite frankly the credit card security system is awful, bitcoin doesn't have to work hard to beat it."

You forgot to add "...in the US".

The rest of the developed world has chip and pin and 3D secure, that obviate the vast majority of credit card fraud for merchants.

[belcher]

"Quite frankly the credit card security system is awful, bitcoin doesn't have to work hard to beat it."

You forgot to add "...in the US".

The rest of the developed world has chip and pin and 3D secure, that obviate the vast majority of credit card fraud for merchants.

Chips are simply harder to copy. All of the same risks above still exist, they're just moving the hurdle about who can copy them. A research paper on the topic.

edit: Thinking some more, making something harder but not impossible to copy still has value. Of course I agree that chips are better than magnetic strip, but there are still issues.

It's another illusion: You are still able to make "card not present" transactions with CVV, which is required for purchases over the internet. No codes rolled and the card is static. They dip their hands into your account.

BTW I'm not from the US.

[belcher]

So let's talk about the technical side of how this should work.

There are three entities: buyer, merchant and arbitrator.
arbitrator is something a la cryptothrift or the old bitnet. It may also be a payment processor like bitpay or coinbase.

1. Buyer and merchant both create accounts, arbitrator gives him each the same xpub key used for generating a multisig pubkey and a public signature key (could be a bitcoin address or a PGP key)
2. Buyer and merchant each upload the xpub keys used for generating multisig pubkeys. In the buyer and merchant's GUI there are a list of Buyers/Merchants and a list of Arbitrators.

Now an account has been created, which only needs to be done once.

3. A buyer sees something she wants to buy, presses a button Buy and is given an option to choose a Merchant and Arbitrator from the list.
4. The marketplace will choose three integers, it creates a message containing them and signs it with its signature privkey. This information is passed to the buyer and merchant using either http or copypasted from the website into the client.
5. The buyer and merchant verify the signature and use the three integers with bip32_child_key_derivation() to get three public keys. They use them to create a 2-of-3 multisig address.
6. The buyer clicks a button called Fund Escrow which pays bitcoins into the multisig addresses, after its confirm the merchant's client displays a message Escrow Funded.

Now for what happens if merchant is honest.

7. Merchant fulfills their end of the obligation by shipping the goods or services.
8. On the arbitartor's website, the buyer (or merchant) press a button called either Release Escrow or Receive Escrow Money. The arbitrator creates a partially signed transaction spending from the multisig addresses, going to the merchant and also a cut going to the arbitrator.
9. Merchant downloads transaction from arbitrator, either using http or copypasting.
A. Merchant's GUI examines the transaction, displaying to the user how much money goes to which identity. User presses Sign Off Payment which signs and broadcasts it.

Now for what happens if merchant is dishonest

B. Merchant doesn't fulfill their obligation
C. On the arbitartor's website, the buyer presses a button called Get A Refund. The merchant and buyer now argue their case with the arbitrator making the final decision. These discussions should be signed so they could be spread around if the arbitrator is being unfair. The arbitrator creates a partially signed transaction spending from the multisig addresses, splitting the money as agreed.
D. Buyer or merchant downloads transaction from arbitrator, either using http or copypasting.
E. Buyer's or Merchant GUI examines the transaction, displaying to the user how much money goes to which identity. User presses Sign Off Payment which signs and broadcasts it.

Now for what happens if the arbitrator disappeared.

F. Merchant fulfills their end of the obligation by shipping the goods or services.
G. When the buyer and merchant obtained the other's xpub keys from the arbitrator, they also got the other's contact details. Maybe an email address or website. These details are now used to communicate.
H. They use the details to create a transaction that send the money to the merchant, or whoever they agreed on.
I. If this happens when the arbitrator has not disappeared, it will be visible on the blockchain and the arbitrator will ban the merchant and buyer from it's services because they are not paying the arbitrator his cut.

[mookid]

I agree with @Belcher, things like this are preventing people to switch or even thing to switch to bitcoin,
why should they use some geeky technology when they can simply pay with their credit card, and have the possibility of
reverting the transaction in case they get screwed.
I all in for bitcoin, and i know what it offers (total economic liberty, you are responsible for your own money) but the mass
adoption won't come until problems like these gets handled better.

[ajtowns]

So let's talk about the technical side of how this should work.

There are three entities: buyer, merchant and arbitrator.
...
Now for what happens if merchant is honest.

7. Merchant fulfills their end of the obligation by shipping the goods or services.
8. On the arbitartor's website, the buyer (or merchant) press a button called either Release Escrow or Receive Escrow Money. The arbitrator creates a partially signed transaction spending from the multisig addresses, going to the merchant and also a cut going to the arbitrator.
9. Merchant downloads transaction from arbitrator, either using http or copypasting.
A. Merchant's GUI examines the transaction, displaying to the user how much money goes to which identity. User presses Sign Off Payment which signs and broadcasts it.

Might be better to not involve the arbitrator if the merchant is honest, ie:

 - Original payment is locked with 2 of 3 multisig to buyer, merchant, arbitrator
 - Buyer clicks "purchase received", sends a partially signed tx paying to merchant to merchant
 - Merchant fully signs tx, collects payment

or

 - Original payment is locked to *either* CLTV 7 days to merchant *or* 2-of-3 multisig to buyer, merchant, arbitrator
 - Merchant waits 7 days for payment to clear and spends it

In the latter case, in the event of a dispute being raised within 7 days, the arbitrator and buyer probably would spend the payment to a 2-of-3 multisig with buyer, merchant and arbitrator, without a locktime escape so any evidence can be reviewed without a deadline. Or it could have a CLTV 60 day branch sending back to the buyer to provide a two-month deadline for the merchant to provide evidence that they actually delivered the goods. The more automated payment processing and dispute handling can be, the cheaper it can be...

[belcher]

That's a good idea ajtowns, so by default after a timeout the money goes to the merchant. Like in credit cards. Before that timeout the buyer can raise a dispute.

In fact then it doesn't have to be 2of3 it can be 2of2 with buyer and arbitrator. Something like this script https://github.com/bitcoin/bips/blob/master/bip-0065.mediawiki#Escrow

[belcher]

bumping this to draw attention to OP_CHECKSEQUENCEVERIFY which can be used for a better way of escrow

https://github.com/bitcoin/bips/blob/master/bip-0112.mediawiki#escrow-with-timeout

It would allow the escrow money to become the sole property of the merchant without any new transaction actually happening. The 2-of-3 multisigs required two transactions per sale, with OP_CSV it's only one. So it's like the customer paid with a plastic coin that after 30 days become solid gold, but only if the merchant delivers.

[Patatas]

Quite frankly consumer protection in bitcoin is shot. Enthusiasts actually go around talking up the "no chargebacks" property as though it's a good thing. Great for the merchant if they actually get any bitcoin sales, but customers will choose something else if they can.

There always can be refund policies right ? If the customer is not happy with the services from the merchant,they can request the coins back.Adding reversible payments will open another room for scams.

Right now if a deal goes bad, consumers have to resort to public shaming on internet forums, or legal processes. Many in the bitcoin community are libertarians who want to stop relying on the police and courts. Moving away from using the legal infrastructure of the state doesn't have to be for political reasons, it's also much cheaper to avoid lawyers and legal processes.

That's a good thing in a way ,I reckon.We should be happy there is no central authority to report to.Sharing on forums and blogs turns out to more effective.

Bitcoin does have a way to implement better consumer protection. It's called multisig. The idea being that a special kind of bitcoin address is created from three keys. If any two of the private key-holder, the money can be moved. So to create a robust consumer protection model you give the buyer, seller and an arbitrator each one key. The buyer pays into the multisig address, if the buyer receives the service and is happy, her and the seller can both use their private keys to send the money to the seller. If they can't agree then the arbitrator can use her private key to tie-break and distribute the money as they see fit. Also the arbitrator can't steal the money on his own as they only have one key, so they don't need to spend time and money on security.

Multi-Sig addresses are already in use.However I don't think there is a need to complicate process .A simple escrow is the best solution.Buyer sends money to escrow,seller ships the product.On delivery buyer checks the product and releases the escrow.Unsatisfied with the product,buyer sends the shipment back to the seller. Seller approves and releases the escrow.

[belcher]

Quite frankly consumer protection in bitcoin is shot. Enthusiasts actually go around talking up the "no chargebacks" property as though it's a good thing. Great for the merchant if they actually get any bitcoin sales, but customers will choose something else if they can.

There always can be refund policies right ? If the customer is not happy with the services from the merchant,they can request the coins back.Adding reversible payments will open another room for scams.

Payments with no chargebacks already open the door to scams, except on the part of the merchant scamming the customer. The customer can request a refund all they want, but if the merchant doesn't send them the customer is stuck.

Customers know this, they will simply refuse to use bitcoin as a payment method online.

We know bitpay's sales numbers are not great, yet services that implement strong escrow like OTC trading platforms (localbitcoins and bitbargain) and the dark net markets are seeing sustained and growing volumes.

Right now if a deal goes bad, consumers have to resort to public shaming on internet forums, or legal processes. Many in the bitcoin community are libertarians who want to stop relying on the police and courts. Moving away from using the legal infrastructure of the state doesn't have to be for political reasons, it's also much cheaper to avoid lawyers and legal processes.

That's a good thing in a way ,I reckon.We should be happy there is no central authority to report to.Sharing on forums and blogs turns out to more effective.

Nobody is talking about a central authority. Arbitrators can be decentralized like they are on openbazaar or bitrated.

As I wrote in my OP, complaining on blogs and forums has problems of amplifying reputational ransom, and reduced margins for merchants because of lemon market effects. The method still has it's place but we should be moving towards better consumer protection.

Bitcoin does have a way to implement better consumer protection. It's called multisig. The idea being that a special kind of bitcoin address is created from three keys. If any two of the private key-holder, the money can be moved. So to create a robust consumer protection model you give the buyer, seller and an arbitrator each one key. The buyer pays into the multisig address, if the buyer receives the service and is happy, her and the seller can both use their private keys to send the money to the seller. If they can't agree then the arbitrator can use her private key to tie-break and distribute the money as they see fit. Also the arbitrator can't steal the money on his own as they only have one key, so they don't need to spend time and money on security.

Multi-Sig addresses are already in use.However I don't think there is a need to complicate process .A simple escrow is the best solution.Buyer sends money to escrow,seller ships the product.On delivery buyer checks the product and releases the escrow.Unsatisfied with the product,buyer sends the shipment back to the seller. Seller approves and releases the escrow.

I'm not aware of any wallet that implements multisig escrow. If people want to use multisig they have to manipulate raw ECDSA keys. Not to mention payment processors like bitpay are not compatible with multisig at all.

Far from complicating the process, I'm advocating making it simpler by creating good UIs for multisig escrow.

[achow101]

I'm not aware of any wallet that implements multisig escrow. If people want to use multisig they have to manipulate raw ECDSA keys. Not to mention payment processors like bitpay are not compatible with multisig at all.

Far from complicating the process, I'm advocating making it simpler by creating good UIs for multisig escrow.

Armory has a GUI for multisig, but you still have to enter the raw public keys. Unfortunately, this is really the only way to do that since addresses map to the hash of the key, and not the key itself. Perhaps there can be a way to lookup the public key of a previously used address, but it wouldn't work if the address is new.

[Syke]

Payments with no chargebacks already open the door to scams, except on the part of the merchant scamming the customer. The customer can request a refund all they want, but if the merchant doesn't send them the customer is stuck.

Merchants have to deal with unknown customers all the time, therefore, they need protection against dishonest customers. Bitcoin solves this problem perfectly.

On the other hand, customers can choose to deal only with known merchants. I have no worries about sending bitcoin to a merchant because I only deal with reputable vendors. Bitcoin works perfectly here too.

[achow101]

On the other hand, customers can choose to deal only with known merchants. I have no worries about sending bitcoin to a merchant because I only deal with reputable vendors. Bitcoin works perfectly here too.

But then how does a new merchant become reputable? The problem is the new vendors who want to be able to sell goods for Bitcoin but if no one trusts them because they are new, then they can't become reputable merchants. This mentality prevents newcomers to the market.

[belcher]

@knightdk is right, relying so much on reputation has a centralizing effect.

As I mentioned in my OP, relying only on reputation hurts merchants too; in two ways: One, it lowers their margins because of lemon-market effects; honest consumers will pay less because they're not sure if they're going to get ripped off; Two, it amplifies the power of reputational ransom.. since people squaking loudly is the only real sign of fraud you'll get, you have to pay attention.. but anyone can squak loudly, and demand money (or free products) from you to shut up.

The way to protect both merchants and customers is to outsource trust to arbitrators who can stop scamming by both parties.

[Itoo]

So, I think what you're saying is that you, or some fine young entrepreneur should offer an arbitration service and try to create a market for it within the bitcoin space? Bitcoin isn't broken and doesn't need fixing. It was capable of arbitration before ethereum was thought of. All it needs is a service provider, and willing, paying customers. So if you believe in it, go out and do it with bitcoin as it is, and make consumer protection better (if you can find the customers).


If you're not talking about service providers being aribiters, then who would be this arbiter? Please answer this question if I've made a mistake in assessing the situation.


EDIT: changed 'private entity' to 'service providers'. There doesn't ever need to be one arbiter, and the arbiters should be market participants subject to competition, not some form of government, as seems to be implied. If that's what you're after, go somewhere else. Go do something with Ethereum, as you're keen to mention.


EDIT Again: After reading your comments above about the arbiter being a merchant, that's fine. Is your main point that wallets should provide for this service? That's fine too. Is this post geared toward merchants? It sounds like it's calling out a problem with bitcoin, when it's actually just calling out a potential service within the market. That service has it's place, but it will likely not get much business soon.

[Chris!]

I was trying to think of the solution to the whole 'no chargeback' Protocol when I started using Bitcoins. I find that I never really spend any significant amount of Bitcoins and one of the reasons is if I get a bad deal I can't do anything (if I'm dealing with someone sketchy). If I'm looking for cheap electronics on eBay and I'm assuming a few cords won't work when I get them, I don't have to worry about their 97% feedback, I'll just say "2/10 of the cords don't work, send 2 more" and 2 more are sent. I find that if I were to deal with someone on bitcointalk and they have 97% reputation I would just avoid them entirely and not waste time/effort. I know people use a lot of escrow services on here, but what do you do in real life? "Go to bitcointalk.org, set up an account and send this guy $350 in BTC then I'll ship it out to you". It seems just as sketchy if not more sketchy to a random person and the deal is over before it starts.

[belcher]

So, I think what you're saying is that you, or some fine young entrepreneur should offer an arbitration service and try to create a market for it within the bitcoin space? Bitcoin isn't broken and doesn't need fixing. It was capable of arbitration before ethereum was thought of. All it needs is a service provider, and willing, paying customers. So if you believe in it, go out and do it with bitcoin as it is, and make consumer protection better (if you can find the customers).


If you're not talking about service providers being aribiters, then who would be this arbiter? Please answer this question if I've made a mistake in assessing the situation.


EDIT: changed 'private entity' to 'service providers'. There doesn't ever need to be one arbiter, and the arbiters should be market participants subject to competition, not some form of government, as seems to be implied. If that's what you're after, go somewhere else. Go do something with Ethereum, as you're keen to mention.

There are many ways of doing it. OTC Exchanges (Localbitcoins, BitBargain) and marketplaces have the model where the service provider is also the arbitrator. Bitrated and Openbazaar has the model where the arbitrators are separate.

In OP I write about moving away from governments

> Many in the bitcoin community are libertarians who want to stop relying on the police and courts. Moving away from using the legal infrastructure of the state doesn't have to be for political reasons, it's also much cheaper to avoid lawyers and legal processes.

Bitcoin's script is perfectly capable of implementing consumer protection with multisig and time-locked opcodes, there's no need for altcoins.

EDIT Again: After reading your comments above about the arbiter being a merchant, that's fine. Is your main point that wallets should provide for this service? That's fine too. Is this post geared toward merchants? It sounds like it's calling out a problem with bitcoin, when it's actually just calling out a potential service within the market. That service has it's place, but it will likely not get much business soon.

I'm calling out the entire ecosystem. Consumer protection would have to be implemented in wallets, payment processors, marketplaces and most other services. I'm guessing it would look like something along the lines of the bip70 payment protocol.

I was trying to think of the solution to the whole 'no chargeback' Protocol when I started using Bitcoins. I find that I never really spend any significant amount of Bitcoins and one of the reasons is if I get a bad deal I can't do anything (if I'm dealing with someone sketchy). If I'm looking for cheap electronics on eBay and I'm assuming a few cords won't work when I get them, I don't have to worry about their 97% feedback, I'll just say "2/10 of the cords don't work, send 2 more" and 2 more are sent. I find that if I were to deal with someone on bitcointalk and they have 97% reputation I would just avoid them entirely and not waste time/effort. I know people use a lot of escrow services on here, but what do you do in real life? "Go to bitcointalk.org, set up an account and send this guy $350 in BTC then I'll ship it out to you". It seems just as sketchy if not more sketchy to a random person and the deal is over before it starts.

Yes that's right. Your actions are a natural consequence of no consumer protection.

It should be built into wallets, payment processors and marketplaces so it's effortless.

But note with bitcoin you'd be able to choose your arbitrator, unlike with credit cards where the payment network and arbitrator are locked together.

If by "real life" you mean meeting up in person, then you don't need consumer protection there because the delivery and settlement generally happen at the same time, plus you can examine what you're buying beforehand.

[Itoo]

I'm calling out the entire ecosystem. Consumer protection would have to be implemented in wallets, payment processors, marketplaces and most other services. I'm guessing it would look like something along the lines of the bip70 payment protocol.

Why does arbitration have to be built into a BIP? If people want it, as you and I have both said, any service provider can offer it with current functionality. So I think the discussion is at an end there because I don’t think you’ll disagree with that statement.

I'll just say thought that everything else you say sounds like you want to implement control over bitcoin. Leave bitcoin as it is and let consumers choose what gets implemented through natural processes. BIP70 sounds like it’s intended simply to further identity tracking and it sounds like a horrible idea for bitcoin. I’m sure some of your altcoins have that functionality built in. Bitcoin doesn’t need it built in in any form.


People who talk about getting rid of governments don't generally sit and think up ways to govern things. You're talking about governing. If you really believed there was a market for it, then you would write some code and try to sell your service. That's my challenge to you. Go do it with bitcoin as it is today. Go make some money and support bitcoin in the way that you're so passionate about, which seems to be arbitration and identity tracking. Only, let consumers choose.

[Itoo]

I'm calling out the entire ecosystem. Consumer protection would have to be implemented in wallets, payment processors, marketplaces and most other services. I'm guessing it would look like something along the lines of the bip70 payment protocol.

Why does arbitration have to be built into a BIP? If people want it, as you and I have both said, any service provider can offer it with current functionality. So I think the discussion is at an end there because I don’t think you’ll disagree with that statement.

I'll just say thought that everything else you say sounds like you want to implement control over bitcoin. Leave bitcoin as it is and let consumers choose what gets implemented through natural processes. BIP70 sounds like it’s intended simply to further identity tracking and it sounds like a horrible idea for bitcoin. I’m sure some of your altcoins have that functionality built in. Bitcoin doesn’t need it built in in any form.


People who talk about getting rid of governments don't generally sit and think up ways to govern things. You're talking about governing. If you really believed there was a market for it, then you would write some code and try to sell your service. That's my challenge to you. Go do it with bitcoin as it is today. Go make some money and support bitcoin in the way that you're so passionate about, which seems to be arbitration and identity tracking. Only, let consumers choose.

I'll also point out that BIP70 was written or proposed by Gavin Andresen, who recently had his commit priveleges to core revoked for what seem to be attempts to sabotage bitcoin (or at the very least a stupid, and very out of character endorsement).

BIP70, to me, is just more evidence that Gavin is acting in opposition to bitcoin and the core stated values.

[alani123]

"Quite frankly the credit card security system is awful, bitcoin doesn't have to work hard to beat it."

You forgot to add "...in the US".

The rest of the developed world has chip and pin and 3D secure, that obviate the vast majority of credit card fraud for merchants.

What makes you say that security for cards is awful? The only time I had issues with one was with a debit card loaded with bitcoin.