

Dwolla Being Sued by Bitcoiners for $2 Million - hornokplease
http://www.betabeat.com/2012/03/06/dwolla-was-just-sued-by-bitcoiners-for-2-m/

======
Lazare
Go here, and read this blog post by Dwolla CEO Ben Milne:
[http://blog.dwolla.com/retail-merchants-rejoice-web-kiosk-
on...](http://blog.dwolla.com/retail-merchants-rejoice-web-kiosk-online/)

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

Now go here, and read this official statement from Dwolla:
[http://www.betabeat.com/2012/03/06/dwolla-releases-
statement...](http://www.betabeat.com/2012/03/06/dwolla-releases-statement-on-
that-bitcoin-lawsuit/)

    
    
        Unfortunately, as is a reality with all financial services
        (e.g. banks, credit cards, etc.), predators can use stolen
        identities to create fraudulent accounts without a victim’s
        knowledge. That’s why Dwolla requires numerous identification
        and verification steps. A necessary byproduct of this kind of
        fraud is bank-level reversals, “chargebacks” issued by the
        institutions on behalf of the victim, not Dwolla.
    

There's really no way to square those two statements. Now Dwolla does go on to
say that:

    
    
        Most all merchants are well aware of the problem, which is why
        we’ve always had something in our terms of service about
        chargebacks since Day One.
    

Ignoring the tortured logic in there (merchant awareness can't really be _why_
they have chargebacks), is this true? If so, then I guess all Dwolla is guilty
of is contradicting their marketing hype in the fine print of their terms.
Sleazy, but not that uncommon. Does anyone have a copy of their early terms of
service?

Moving beyond that, I'm also quite shocked at their reversing charges and then
retroactively changing records. That seems like a fairly huge breach of trust,
and yet Mt Gox confirms it ("the transactions just disappeared from the
history at first, without any notice"). I think Dwolla needs to come clean
about how the hell that happened, and what steps they've taken to ensure it
can't happen again. I'm uncomfortable with a payments processor that thinks
retroactive changes to statements could ever even _possibly_ be okay,
especially in a post-SOX world. I want to see some acknowledgement on their
part that they've screwed the pooch, and that it won't happen again the next
time their tinkering with their systems. That's not the sort of think a
trustworthy company would try and sweep under the rug, in my book.

~~~
wmf
Originally (i.e. before that blog post on Mar 30, 2011), Dwolla said
transactions were irreversible, both in their marketing and TOS. They knew ACH
chargebacks are possible, but they must have either been planning to eat fraud
losses (keep in mind they're charging less than 1% fees) or perhaps they
thought their anti-fraud system could prevent fraud from happening in the
first place.

Then Dwolla started getting hit with chargebacks from banks. Reminiscent of
Madoff, Dwolla was faced with a choice between going out of business or
breaking their own rules. People become very ethically flexible when survival
is on the line. It's possible that their code and schema didn't even have the
_concept_ of reversing transactions. It's possible that they hand-edited their
database to reverse transactions, which didn't leave proper audit trails.

Soon after that, they officially changed their TOS and stated that
transactions would be reversible from then on. This shifted all risk from
Dwolla to their customers, causing some Bitcoiners to immediately drop Dwolla.
Others kept using Dwolla and got screwed later.

~~~
Lazare
Interesting. If that's true, then Dwolla comes off very _very_ badly here.

Look, I understand their position: They're a young and hungry startup, they
have an awesome plan, and it doesn't _quite_ work; they end up needing to pass
the chargebacks on. I'm okay with that. But it needs to be communicated to
their clients, with a date (and _not_ in the past) when the change will take
place.

If they changed it without clear communication (or, worse, announces the
change retroactively) then they've screwed over their customers, and may well
be legally liable. And that brings us to the press release, dated today, where
Dwolla is claiming that "we’ve always had something in our terms of service
about chargebacks since Day One." In other words, they're saying there was
never a change - and if your information is correct, then this is a boldfaced
brazen lie that destroys all credibility they might ever have had[1]. I kind
of hope you're wrong. :(

[1]: Alternatively, they could be playing word games - maybe they had
"something" in their TOS since day one. After all "no chargebacks" is
"something", right? In which case they still have destroyed all credibility
they might ever have had. And I don't think I'm exaggerating here; so far
Dwolla is doubling down and claiming that they've done nothing wrong. Either
they're completely right and everyone else is wrong, or their reputation is
toast.

~~~
wmf
More on Dwolla's evolution: <https://bitcointalk.org/index.php?topic=67680.0>

~~~
Lazare
Oh, man. Come on everyone, pull up a chair and warm your hands at the bonfire
of Dwolla's credability. :(

This is getting painful to watch.

------
pja
Sounds like Dwolla is having to deal with some of the same problems Paypal did
in the early days.

Reversing transactions without telling the payee when the payee has previously
been given the all-clear is pretty shady though.

~~~
scott_s
And I think that all systems that try to do better than Paypal will run into
this: <https://news.ycombinator.com/item?id=3539767>

~~~
ExpiredLink
Payment processing isn't easy - contrary to popular belief.

~~~
mrb
Actually this whole mess of chargebacks is precisely one thing that Bitcoin
solves. As a merchant, once you receive a Bitcoin transfer, _no one_ can
reverse it or initiate a charge back.

~~~
noahc
It solves a problem very well, many would say a little too well. What happens
is that once this problem is solved a little too well in that it does the
following:

1\. Provides no way of reversing transactions.

2\. Has a large enough mass that the currency is trusted.

3\. Has a large enough mass that non-nerds can easily use the system.

The feds come in and want to shut it down because it provides a great avenue
for the criminal element and con-artists. eGold is the prime example of this.

~~~
dublinclontarf
eGold was a centralised service. Once bitcoin becomes a major success, that's
it, genies out of the bottle.

Also what you have just said applies to cash. In reality merchants who are not
thieves will follow consumer regulations that all stores do.

------
benatkin
I found this comment from July 26, 2011:

> I always assumed it was only a matter of time before Dwolla realized they
> would not be able to offer irreversible transactions. The scams would
> eventually get big enough that they would HAVE to start chargebacks, and the
> money train into bitcoin would end.

> Bye Dwolla!

[http://tradehillblog.com/2011/07/25/tradehill-audit-
discover...](http://tradehillblog.com/2011/07/25/tradehill-audit-discovers-
dwolla-transactions-are-reversible/)

------
mhp
From reading that article, it looks like TradeHill claims they are missing
about $100k in revenue, and maybe up to $200k. Why are they suing for $2MM?
Even treble damages (x3) plus lawyer costs wouldn't add up to 2MM in the most
optimistic case. Can anyone explain the discrepancy?

~~~
vsviridov
It does mention that the cost of acquiring the bitcoin.com domain cost them
"about $1M in equity"...

~~~
noduerme
This is one of the real mysteries of the article. AFAIK, and anyone in the
bitcoin forums knows, and unless something changed in the last 12 hours, the
bitcoin.com domain is still owned by Tradehill's CEO who's promising and
planning to develop it into a prime piece of real estate. Which betabeat
doesn't mention. So the only thing I can take from this is that he traded his
equity in the dying company for the domain, and valued the equity at $1M, then
wrote it off as a loss for the company and blamed Dwolla for it...? Go figure
that one out...

------
hristov
What is really interesting is that while both Tradehill and Mt Gox heavily
used Dwolla, Tradehill seems to have had more problems with it. Tradehill
reports $100 000 charged back. Mt Gox reports 5000. Tradehill reports that
Dwolla would try to charge stuff back in a hidden manner by changing the
status of transactions after the fact without notifying them of the
chargebacks. Tradehill further reports that Dwolla would completely ignore
them and stone wall them when they tried to discuss the matter. Mt Gox on the
other hand reports that Dwolla were very good about reporting the chargebacks
and there were no communication problems.

Now for those of you that do not know: Mt Gox is the leading bitcoin exchange
that does most of the business. Tradehill was an upstart that tried to compete
with Mt Gox and even when active only did a small portion of the business Mt
Gox did. Furthermore, Mt Gox does so much business that they were reporterdly
Dwolla's top client for a while and that may still be the case.

Please feel free to provide your own speculations as to what all of this
means.

~~~
mrb
I can tell you why Mt Gox has fewer problems with Dwolla than TradeHill. MtGox
goes to _incredible_ lengths to keep the bad guys away from their exchange:
they forbid web sessions coming from TOR, they ask for proof of ID for users
handling the most money (over $1k/day or $10k/month), they track stolen
bitcoins and freeze Bitcoin deposits made to them containing known-tainted
coins, etc.

As a consequence, the bad guys tend to operate on the less protected
exchanges, such as TradeHill, and they get hit by Dwolla's chargebacks, coming
mostly from hijacked/fraudulent Dwolla accounts...

MtGox's report of $5000 of Dwolla chargebacks is so small it could very much
have been only 1 or 2 incidents. Of course Dwolla is going to have much more
time communicating with their largest customer about 1 or 2 incidents, than
investigating possibly hundreds of fraud cases involving a customer like
TradeHill representing a small fraction of their business...

------
adrianwaj
The interface between bitcoin and fiat always worried me. Piss poor behaviour
by Dwolla if true. Dwolla and Tradehill were on the same team if you ask me:
pity they couldn't see it.

~~~
vessenes
It is definitely true that Dwolla reversed the transaction. I'm not sure if
it's true that said reversal lost them bitcoin.com, though.

~~~
vragnaroda
If TradeHill's reporting is to be believed, I find it highly implausible it
was all one transaction that was reversed. Also, there's nothing to indicate
that Dwolla was the one that reversed it. They were reversed. That much is
probable (although TradeHill gives different figures in every report about
it). We haven't heard what Dwolla has to say about this yet or seen any
evidence about it. “It's definitely true” that we don't know the details, yet.

------
bryanh
And we begin the rumblings of fraud within another payment center, this one on
the back of ACH instead of credit. I am curious how it plays out, but Dwolla
will certainly have their work cut out for them in the coming years. If
regulations don't kill them, fraud very well might...

Best of luck to them.

------
kiba
Despite all those frauds, hacking, and mistakes, bitcoin continue to keep on
ticking.

~~~
elliottcarlson
As do banks and credit cards.

~~~
burgerbrain
And that is a good thing. I want both systems.

~~~
jerguismi
More competition = better for the consumer

------
lysol
Does TradeHill have to prove that bitcoin has value at all, first? Do they
even have a leg to stand on?

~~~
joezydeco
Does bitcoin really have a part in this whole problem?

If you substitute "TradeHill" for "E*Trade" and "bitcoins" for "stocks" the
problem would still be the same, right?

~~~
DarkShikari
There is a slight relevance of Bitcoin: Bitcoin transactions _are_
irreversible. There is no real technical means to reverse a transaction; it is
simply not possible. Even if there was a court order to reverse a transaction,
unless the physical recipient could be identified, located, and arrested, the
court order would be meaningless.

This is in contrast to almost any other exchange system (besides hard cash),
which could, at least technically, force reversal of a transaction. See for
example Paypal, Facebook credits, money in an MMORPG, shares of stock, and so
forth.

~~~
ars
It's not the exchange system that matters, it's who holds the account.

With bitcoin if I hold my coins in a currency exchange (which is basically a
bank) they can obey the court order and reverse transactions.

And I can become my own bank, and then hide, in which case it would be hard to
serve a court order on me. (Although banks often have accounts at the fed, so
they don't hold the money themself.)

What's unique about bitcoin is most people hold their own accounts. So you
have to find the account holder, which is hard. But, as I said, it's not the
exchange the matters, it's the account holder.

~~~
DarkShikari
_With bitcoin if I hold my coins in a currency exchange (which is basically a
bank) they can obey the court order and reverse transactions._

It would be trivial if it was that simple, but the stolen funds were of course
withdrawn from Tradehill, and so are no longer in control of an exchange.

It's no different from a criminal running off with a bag of cash; how are you
going to "reverse" the transaction of the money being physically picked up,
put in a bag, and carted off?

~~~
ars
That's basically what I said. You are not arguing with me.

I was just pointing out the distinction is not in the type of currency or
exchange, it's in who holds the account.

