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A Good Read: EBA Warning on Virtual Currencies

The European Banking Authority released a document on December 12, 2013, issuing a warning about virtual currencies. The document, “Warning To Consumers On Virtual Currencies”, drew many sensationalistic media headlines.

To me, this EBA release is a very important document, stating the importance of personal responsibility when endeavoring in virtual currencies like Bitcoin. This was sensible, friendly advice from the EBA and it is a good, short read for everyone involved in or considering to be involved in virtual currencies.

Bitcoin Confirmation Wait Time

3rd party payment networks, such as VISA and Paypal, are pretty speedy when it comes to transaction validation. The customer is approved or declined in a matter of seconds. With Bitcoin, this is not entirely the case.

Because Bitcoin does not rely on 3rd party trusts, validation is performed by the Bitcoin network. When someone sends a Bitcoin payment, it must first be confirmed by several computers on the Bitcoin network as a valid transaction. Unfortunately this process can take hours. Naturally, a merchant cannot have a customer waiting around for hours for a payment to be validated.

Typically, a merchant will see they have a payment almost immediately, but it will be flagged as pending and it will show “0 Confirmations” at first. So, the merchant knows they have a payment, but it has not yet passed validation and they do not have access to the funds. Slowly, once 6 confirmations have occurred, the payment process will be complete. The merchant can watch this transaction and see the confirmations increment during this time.

There are many theories on how to perceive this. For one, trust in Bitcoin. Even with 0 Confirmations, the transaction has occurred and cannot be reversed or cancelled by the sender. One of the only ways for the payment to fail is if the sender initiated a Race Attack. With a Race Attack, the sender would have to double-spend their bitcoin, with a higher mining fee, and hope it propagates through the network before the first payment. Then, the confirmation system would validate the 2nd payment, and fail the first payment. This seems like a very highly unlikely scenario, incredible expensive for the attacker. Even BitPay CEO Tony Gallippi is on record about this unlikeliness of this event.  With 1 approved confirmation, the likelihood of this being a fraudulent transaction is reduced almost to nothing. So, do you have to wait for all confirmations to trust that this will be a valid transaction? Is 0 enough? Is 1 enough? This is a risk factor, and would be up for you to decide in relation to the type of business you are conducting.

What Is Bitcoin?

Bitcoin is a digital currency, built on the concept of Cryptocurrency, which was developed as a tool for Internet-Age commerce. The best resources describing Bitcoin in detail are the Bitcoin.org FAQ and We Use Coins. These are recommended resources for everyone interested in learning more about Bitcoin, and especially those seriously considering using Bitcoin for commercial purposes.

Do Not Reuse Bitcoin Deposit Addresses

Remember, Bitcoin transactions are publicly viewable. If Customer A sends Bitcoins to Merchant A, anyone who has the public deposit address for the transactions, can view the amount of money in the deposit account by performing a simple search at https://blockchain.info/.

What if you have all of your customers using the same deposit address? Well, then anyone with a copy of this address, including Customer B or competing Merchant B, can see how much revenue you have generated. This is a problem, and to mitigate this you should never use the same address twice. Luckily, Bitcoin allows everyone to create an unlimited number of deposit addresses.

In this scenario, there are a few ways to practically implement this.

1. A merchant can create a new deposit address for each customer – like a customer number. So, a customer or merchant can look up this address, and easily look up their transaction history with this particular entity.

2. A merchant can create new deposit addresses for each transaction. Returning customers would have unique deposit addresses for each transaction and could look those up individually. This is the most secure for both the merchant and the customer.

Thankfully, merchant tools such as Coinbase and Bitpay include much of this functionality automatically. If you decide to accept a manual payment, however, you must make sure to create and distribute a new deposit address for this instance. This is also simple to do, and this functionality is included in all Bitcoin wallets.

If I Accept Bitcoin, How Will Customers Pay Me?

You will need an Internet connected iPad, iPhone, Android, or computer available for you and your staff if you plan on conducting Bitcoin transactions. Here is a hypothetical scenario:

1. Customer brings $25.27 worth of merchandise to counter and wants to pay with Bitcoins.

2. Sales associate rings up merchandise on the standard POS system, and chooses “Bitcoin” for the payment method. Most POS systems have customizable payment option buttons, one of which could be labeled “Bitcoin”.

3. Sales associate launches the Bitcoin software on one of the devices:

– Chose “Receive Payment”

– Enter $25.27 as the amount to be collected.

4. A QR code will be generated by the Bitcoin software. This will include:

– The deposit address for the collection.

– The amount to be collected.

5. The Sales Associate shows this QR code on screen to the customer.

6. The customer uses their mobile device to scan the QR code with their Bitcoin wallet app, and sends the payment.

7. The sales associate closes the register as a complete sale, and issues receipts as usual.

Bitpay has a few videos showing the transaction process.

As you will notice in the steps I provided above, Bitcoin merchants do not have to worry about exchange rate obfuscations. You simply enter the USD amount of the sale, and the Bitcoin network calculates the current Bitcoin value in real time as the transaction occurs. This is one of Bitcoin’s many strengths as a global commerce platform, as travelers worldwide can worry less about local exchange rate calculations.

Why Would I Consider Bitcoin For My Business?

1. Marketing:

Do You Accept Bitcoin? Bitcoin is a hot global trend in current media. It is an emerging technology, and while foreign to many people, it is attractive to a growing global audience who understand and participate in its capabilities for electronic commerce. In recent news, simply advertising “Now Accepting Bitcoin” has given small business owners, such as a Subway franchise owner in Pennsylvania,  global news coverage. There are very few businesses in global merchant directories, and there are a growing number of customers simply looking to spend their bitcoins in brick-and-mortar establishment.

2. Low Merchant Fees:

EFT trusts such as VISA, MasterCard, and PayPal charge merchant fees for their services and the utility it offers your business. There are several Bitcoin merchant services software companies who’s services offer very low merchant fees. For instance, Bitcoin merchant software BitPay offers a free software platform and 1% transaction fees. If your revenues are high enough, a $30/month subscription to the BitPay service offers 0% merchant fees. In this case, the higher your revenue, the less you pay in merchant fees. Of course, since this is a global system, there are no additional fees or wait times for global transactions. This service also offers free deposits of your Bitcoin revenue into US checking accounts at the current BTC/USD exchange rate.

Another merchant services software platform is part of the Coinbase brokerage service. With Coinbase, there are 0% merchant fees up to your first $1,000,000 in revenue, and 1% thereafter.

Bitcoin merchant software runs on standard PC, Mac, and mobile platforms, limiting the likelihood of new computer hardware investment.

3. Cryptocurrency may be inevitable:

Whether it is Bitcoin, Litecoin, or some other alt-coin solution, cryptocurrencies have a very high likelihood of being a common part of the global Internet experience. The recent senate hearing on Bitcoin confirmed this, legitimized Bitcoin as a viable and legal form of global commerce, and illustrated the US Government’s ability to successfully mitigate criminal activity associated with Bitcoin. Even if you decide it is not right for you, understanding it may be valuable even if only as a tool to recognize and thwart scam artists walking through your doors.

How Do I Process Merchandise Returns?

UPDATE: 1/9/2014: Bitpay responded to my request about this topic. They do not offer a return function yet, but are working on it. In other news, Overstock.com began accepting Bitcoin today. Their return policy, while not stated on their website, is to issue store credit in USD for all Bitcoin purchases. This differs from their return policy, which offers full refunds in certain cases.

Original Post 12/12/2013:

As far as I can tell, Coinbase makes accepting payment of merchandise from customers very easy, but returns? For businesses, processing payments to the customer for return merchandise is complicated.

Coinbase does not yet have easily customizable merchant tools for processing customer returns like they do for processing customer purchases. So, to refund a customer, merchants will have to log into their main Coinbase account and initiate a Send to the customer.  This poses several risks:

1. If staff are all given the company Coinbase login info, they will be able to see all financial data related to bitcoin transactions for said business.

2. If the computer at the checkout counter is in view of customers, customers may potentially be able to see company bitcoin financial data on screen once the staff is logged in.

There is no easy way to just refund an order. You have to look up and cross reference the order with the customer’s receipt, then initiate a send, and make sure you enter the correct email address or wallet address. This is greatly subject to human error.

I thought I had found a short-term solution…Coinbase has an option to require a customer email address to be collected for all purchases. The problem? This email does not show up in the Orders page of Coinbase. So, you cannot cross reference the email address with the order. Where did the email address record go? It went in the receipt of the order which arrived in the email inbox for the account associated with Coinbase. So, now you can try to find a record of this by digging through the inbox of the linked Coinbase email address, and then you still have to log in to Coinbase and initiate a Send. As part of this process, you would have to manually enter the email address and the amount from the email. One time when I tried this, the email field arrived blank in the receipt. Not only is all of this a logistical nightmare for a busy staff, but so much human error can occur.

CoinNEO’s recommendation today: A trusted staff member will look up the data and carefully initiate a manual Send to the customer’s email address or deposit address. Also:

1. If the store is not too busy, assist the customer right away and take as much time as is needed to ensure the return is processed correctly.

2. If the store is too busy, request a receipt and the email address associated with the purchase. Process the returns later when the store is   closed or not too busy. Yes, the customer may have to wait a day – but that is still far less of a wait than a debit/credit card refund, and safer for all parties.

In the future, it would be great if Coinbase could:

1. Include the email in the Orders page, and a search function for the Orders page.

2. Include a “refund” button on each order, and have the options to:

– Refund to the email address on file at purchase.

– Scan a customer’s deposit address QR of choice.

3. Develop ability to issue content-restricted staff login accounts.

Perhaps this functionality could be created using the Coinbase API’s transactions tools already, but not everyone has resources for sophisticated web development. It would be nice if it could be as easy as the customizable payment tools they already provide under Coinbase’s Merchant Tools section.

Human error is so important to mitigate as best as possible. Remember, bitcoins cannot be double-spent, cancelled, or reversed – just like cash. There are no 3rd party trusts to dispute a claim with, or third party insurance security. If it goes to the wrong email address or wallet address, there is a high likelihood that money is gone forever.

I am confident these issues will be resolved sooner or later. These merchant tools are still so new, and innovation is happening at great speed. These are the growing pains we all must endure and explore if we want to help make this a truly viable global payment option for business.

For now, returns are a meticulous, manual process, at least with Coinbase.