Even though Bitcoin exchanges may not have the best reputation in the world of finance and “mainstream media” these days, it looks like some of these exchanges are being dragged down because they rely on third party service providers. When the first exchanges started integrating other payment processors for depositing and withdrawing funds, it was only a matter of time until the first problems arose.
EgoPay Freezing Funds With No Communication
Coindesk reported yesterday how EgoPay, a Bitcoin exchange processor, has been freezing the funds of several of their clients. While there might be a valid reason behind the freezing of some funds due to illegal activities, two exchanges were caught in the crossfire as well. Both BTC-E and Bitmarket.pl are locked out of their funds for the time being, and the lack of communication from EgoPay’s side is frustrating all parties involved.
To make matters even worse, EgoPay’s API has been shut off completely, according to customer reports. These issues started popping up as early as December 28th, when the API returned several faulty transaction notifications to Bitmarket.pl. Said transactions came from EgoPay’s IP address and were verified correctly by the SCI callback, yet the transactions had similar ID codes, which is very unusual.
No one has any idea what is going with EgoPay these days, as their communication has been lackadaisical since the end of December. However, it is not the first time EgoPay freezes BTC-E’s funds, as the same events transpired in August of 2014. We will be keeping an eye on the situation and keep our readers informed.
Should Exchanges Stop Integrating Third Party (Payment) Processors?
Other than EgoPay, there are plenty of other third party (payment) processors being used by various exchanges all over the world. PerfectMoney is just one of these examples, albeit this company has been around for quite some time now. PerfectMoney is seeing an increase in the amount of transfers being made through the platform, which is a healthy sign. Furthermore, PerfectMoney, together with OKPay and Bitcoinpay, are non-reversible payment methods. That does not mean they cannot freeze funds if needed though.
There are a plethora of other (payment) platforms through which users can deposit and withdraw funds to exchange against Bitcoin. Most of these platform have reversible transactions, and if someone tried to buy Bitcoins with stolen credit cards through one of these platforms, the merchant’s funds would be frozen and even reversed. Not a good plan of action to be honest.
Platforms with reversible payments include Paypal, Moneypak, Dwolla,Serve, Alertpay,Skrill and Money Order. These are all possible payment methods in order to purchase bitcoin from various places. (Source)
Keeping Bitcoin Exchanges Accessible For The Masses
Let’s say that all Bitcoin exchanges would stop using third party (payment) processors all together. While this would be a way to remove or drastically reduce the chances of funds being frozen/charged back, it would also massively reduce the influx of newcomers to the Bitcoin space. Most people wouldn’t mind buying a Bitcoin, assuming they can use one of the existing payment options.
Credit card payments are made possible through a variety of third party (payment) processors, and that is what most people will use. Unfortunately, credit cards have a huge charge back rate, making it one of the least safe methods of purchasing Bitcoin for the consumer. A chargeback will also affect the third party processor, which will in turn deduct/freeze the Bitcoin exchange’s funds. You can see where I’m going with this.
But what about bank transfers? Most of you will be aware that phishing attempts in order to obtain customer’s bank details are on the rise over the past few days. Hacking someone’s bank account and sending over a wire transfer to purchase Bitcoin is a lot “easier” than most people would assume it to be. And banks will reverse these transactions if it can be proven the transactions were executed by a malicious party. Once again, the Bitcoin exchange sees funds frozen and probably reversed.
The number of fraud cases related to purchasing Bitcoin with a stolen bank account or credit card are relatively low, but it only takes one case to freeze an exchange’s entire account with that processor. Most of these issues get resolved quickly however, but it is still an annoying situation. Furthermore, what if the third party processor decides to freeze your funds for weeks while the investigation is pending?
Perhaps the time has come for us to move away from the current system of exchanges as we know it, and make trading peer-to-peer like it should be. No centralized exchange platform, no centralized payment methods. In fact, I wouldn’t be surprised if platforms such as LocalBitcoins start seeing an increase in transactions over the next few months.
What would be even better though, is a trustless exchange. While I am not a coder by any stretch of the imagination, a trustless exchange allows for peer-to-peer transfers of funds/assets. Add multisignature wallets for storing the escrow funds, make use of smart contracts which can be verified by independent oracles, and we are on on the right track to create a world of trustless Bitcoin exchanging.
Unfortunately, there are a few issues with the plan as I envision it. First of all, the Bitcoin blockchain is not designed to accept external inputs, so oracles are completely out of the question for now. This is a matter developers could work around though, but it will take time to develop and come up with a proper solution. The usage of (n)LockTime could prove to be a valuable addition to Bitcoin’s blockchain technology.
Secondly, by using an escrow system, you are actually adding a third party to the peer-to-peer exchange. However, no one said this escrow system has to be relying on human input, as it can easily be formed by oracles or other computer-based validators. The only human input we actually need is coming from both peers who want to conduct a transaction.
But what if your computer-based escrow service cannot come to a one-sided conclusion in order to release the escrow funds? Granted, this would be a very unique situation, but we have to be prepared for every possible scenario. Arbitrage on top of smart contracts is one possible solution, but I’ll leave that up to the “technical gurus” to work out further.
What are your thoughts on Bitcoin exchanges using third party (payment) processors? Leave a comment below!