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Author Topic: Buying Bitcoins - Why is Dwolla/Paxum middleman required?  (Read 2514 times)
Newton
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July 29, 2011, 06:05:42 PM
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Right now, Americans setup a Dwolla account just to get funds from their bank to send to an exchange, to buy Bitcoins.  Why is the middle man required?

I believe that the exchanges already accept bank wires.  So wiring funds to a payment processor would be just silly.

The only advantage I see is that Dwolla and Paxum can accept ACH.  Why can't an exchange set this up directly?

Further, I would expect an exchange to specialize in large volume, higher frequency trades while another specialized service should be setup to purchase bitcoins for consumer use.

The service a typical consumer will need to make bitcoin an effective online market is quick, convenient purchase from either credit card or direct debit.  The problem is that bitcoin introduces significantly more risk than using cc or debit to purchase online goods.  Because the bitcoin is instantly "shipped", can be quickly laundered, and can't be reversed if the funds are revoked.

Peering a couple of years into the future, what will the solution be for average non technical users?  A centralized bitcoin store for credit approved, strongly non-private customers?
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July 29, 2011, 07:39:24 PM
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I believe that the exchanges already accept bank wires.  So wiring funds to a payment processor would be just silly.

The only advantage I see is that Dwolla and Paxum can accept ACH.  Why can't an exchange set this up directly?

American banks tend to make it difficult to directly send ACH from online banking.  Simply Dwolla is easier to use. ACH is both a push and pull system, so Dwolla pulls from accounts at other banks and then provides a simpler interface than the banks do for sending those funds out again.
Newton
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July 29, 2011, 07:49:53 PM
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I believe that the exchanges already accept bank wires.  So wiring funds to a payment processor would be just silly.

The only advantage I see is that Dwolla and Paxum can accept ACH.  Why can't an exchange set this up directly?

American banks tend to make it difficult to directly send ACH from online banking.  Simply Dwolla is easier to use. ACH is both a push and pull system, so Dwolla pulls from accounts at other banks and then provides a simpler interface than the banks do for sending those funds out again.

So why couldn't an exchange or Bitcoin vendor do the same as Dwolla?  Just make a convenient interface to withdraw directly.  It can't be just about the interface.
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July 29, 2011, 07:50:54 PM
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I think part of the Dwolla selling point was also the fact that the transactions were deemed irreversible... as it turns out, that wasn't the case.
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July 29, 2011, 07:51:59 PM
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The only advantage I see is that Dwolla and Paxum can accept ACH.  Why can't an exchange set this up directly?
Fraud. ACH transactions can be reversed weeks later with a claim that the owner of the account didn't authorize the transaction. The middle man confirms that the transaction is authorized by the account holder, handles the ACH disputes, and eats the cost if it turns out the transfer was fraudulent.

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Newton
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July 29, 2011, 08:01:35 PM
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The only advantage I see is that Dwolla and Paxum can accept ACH.  Why can't an exchange set this up directly?
Fraud. ACH transactions can be reversed weeks later with a claim that the owner of the account didn't authorize the transaction. The middle man confirms that the transaction is authorized by the account holder, handles the ACH disputes, and eats the cost if it turns out the transfer was fraudulent.

That does make sense.  However, if Paxum is able to handle the added verification costs + insurance in their given fee structure, then surely an exchange could as well.  It may be that for the time being nascent bitcoin business don't have the expertise and connections of a Paxum to handle all of this, so they need to 3rd party that.

But what bitcoin needs is a one stop bitcoin buy, because if average users are ever going to adopt it, the process has to be just as easy as setting up a paypal account.  I get that bitcoin has a ton of advantages to paypal, but the average user is going to prioritize convenience.

Bitcoin was a significant part of Dwolla's business, and apart from the fraud Dwolla was turning a nice profit.  So this should be good incentive for someone else to roll the whole thing into one?
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July 29, 2011, 08:06:13 PM
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That does make sense.  However, if Paxum is able to handle the added verification costs + insurance in their given fee structure, then surely an exchange could as well.  It may be that for the time being nascent bitcoin business don't have the expertise and connections of a Paxum to handle all of this, so they need to 3rd party that.
In theory, yes, but this is very difficult in practice. Unlike most other businesses, you can complete your transaction with an exchange in minutes -- get in cash, buy Bitcoins, and irreversibly ship them out. If the incoming funds weren't good, there is no recovery for the exchange. And the stolen money can be across the planet in minutes. So it's a choice target for fraudsters.

A bitcoin exchange that tried to do this themselves would have to have the very most advanced fraud controls in the financial industry, because they'd be the perfect target. And balancing out all those costs, they'd have only the volume of their share of the bitcoin market.

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CydeWeys
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July 29, 2011, 08:08:24 PM
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This makes a pretty good argument for having a large number of Bitcoin processors ready to accept physical cash in exchange for Bitcoins.  I could see a large-sized city supporting a Bitcoin processor.  Heck, it doesn't have to be a full-time job; just have specific posted hours when you're exchanging Bitcoins for cash.  It'd still be a lot faster to drive somewhere and exchange cash than wait for something like Dwolla to work out.
Newton
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July 29, 2011, 09:29:40 PM
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This makes a pretty good argument for having a large number of Bitcoin processors ready to accept physical cash in exchange for Bitcoins.  I could see a large-sized city supporting a Bitcoin processor.  Heck, it doesn't have to be a full-time job; just have specific posted hours when you're exchanging Bitcoins for cash.  It'd still be a lot faster to drive somewhere and exchange cash than wait for something like Dwolla to work out.

No doubt cash is the perfect bitcoin complement.

But a couple of the short term compelling markets for bitcoin don't fit so well

-  online payment
    Still easier to sign up for paypal than to withdraw cash from your bank, then go out and buy bitcoins with cash

- International money wire.
    Bitcoin is brilliant for this, but nobody wants to buy a large quantity of it with cash.
   
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July 30, 2011, 01:11:55 AM
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- International money wire.
    Bitcoin is brilliant for this, but nobody wants to buy a large quantity of it with cash.
   

For personal use, people would easily be willing to send thousands. For business use it may be harder.  Would certified checks or bank drafts work?

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Xiong Zhuang
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July 30, 2011, 06:51:43 AM
 #11

Dwollla make it easier for people transfer money between bitcoin markets who don't live in American.
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July 30, 2011, 07:07:32 AM
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The middle man confirms that the transaction is authorized by the account holder, handles the ACH disputes, and eats the cost if it turns out the transfer was fraudulent.

Unless that middle man is Dwolla..

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FreeJAC
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July 30, 2011, 07:29:36 PM
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The Canadian exchange does not have this issue. Works directly with customers getting cash to coins and coins to cash.

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JoelKatz
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August 01, 2011, 11:08:18 AM
 #14

So dwolla is basically an escrow, then ?
That was what they claim, but that is not what they do.

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BCEmporium
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August 01, 2011, 11:18:21 AM
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So dwolla is basically an escrow, then ?
That was what they claim, but that is not what they do.

Luckily we live in a World where what you claim to do worth more than what you actually do, so they just fit in.
It's the World of Hypocrisy on all its splendor.
1bitc0inplz
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August 01, 2011, 11:49:39 AM
 #16

The only advantage I see is that Dwolla and Paxum can accept ACH.  Why can't an exchange set this up directly?
Fraud. ACH transactions can be reversed weeks later with a claim that the owner of the account didn't authorize the transaction. The middle man confirms that the transaction is authorized by the account holder, handles the ACH disputes, and eats the cost if it turns out the transfer was fraudulent.

You are correct.

If I am not mistaken, ACH transactions can be reversed 30 days after the fact. And, in certain circumstance, I believe their is even a larger window for which the ACH can be (at least in part) reversed.

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Xephan
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August 01, 2011, 12:35:03 PM
 #17

Dwollla make it easier for people transfer money between bitcoin markets who don't live in American.

I thought Dwolla only works for Americans.


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