Why is Bitcoin so susceptible to credit card fraud?

Question

I understand that you can't buy Bitcoins with a credit card due to massive fraud problems involving chargebacks. Why is Bitcoin more susceptible to this then the thousands of other businesses that take credit card payments for non-physical products (say, RPGNow, Bandcamp, iTunes and so on).

Answer 1

Bitcoin strongly enforces two concepts - high anonymity and no chargebacks.

Because of high anonymity, it is nearly impossible to be 100% certain who you are sending Bitcoins to. In the end, the Bitcoin address is just an arbitrary string of characters.

Because of no chargebacks, once you send someone Bitcoins, they are irreversibly theirs (assuming no double-spends and no 51% attack). You can't later recall the money you sent this way.

When someone would buy Bitcoins with a credit card, they could wait until the coins appear in their wallet, and then claim that their credit card was stolen used by someone else to purchase Bitcoins without their intent. They could get away with their chargeback claims, as it would be impossible for the seller to prove that they sold the coins legitimately to the person. Moreover, the seller wouldn't be able to get their Bitcons back due to "no chargebacks" rules.

What makes it different from services like iTunes and the like, is that the value of the Bitcoins is close to how much it costs the seller to aquire and sell them, whereas iTunes' costs are marginal. For example, buying a 1$ song from iTunes would mean that they have to probably spend less than a penny processing everything and providing you content (logging transaction, letting you download the song, etc), whereas if you send 1$ in Bitcoins, you are sending about 1$ worth of goods. When iTunes gets charged back, they lose a penny and can still sell the song any amount of times. When a Bitcoin seller gets charged back, they lose a dollar and can't sell the same coins again.

Bitcoins can't be copied and distributed to multiple people at marginal cost, that's what makes chargebacks so costly for any potential sellers.

Answer 2

It's because bitcoin transactions are final, and exchange margins are low.

Businesses selling something for download can afford to be hit by fraud without incurring any real loss (other than potentially an opportunity cost, but even that is likely to be minimal as fraudsters would be unlikely to pay even if they couldn't defraud). ie margins are high.

However, when bitcoins are purchased with a credit card, it's more similar to a physical cash withdrawal from a credit card. Once physical cash or bitcoins are handed over the transaction is final. The party that hands over the cash or bitcoins has a lot to lose if the credit card transaction is reversed. They can't get their cash or bitcoins back. Fees charged for performing an exchange are low, so can't cover the cost of fraud.

Other types of businesses that sell physical goods online and ship them are probably careful to ensure they have validated identification or a physical address so that they have something to pursue in case of fraud. In some cases, the cost of the physical goods may be low enough that some risk of fraud is acceptable.

Answer 3

1. Bitcoins are liquid. Everybody wants bitcoins, and as many as they can get - if not for some immediate use, then to sell them for other currencies which are of immediate use. Even someone who doesn't need or believe in Bitcoin can still steal them. Thus a Bitcoin CC trader will attract all the fraudsters in the world. A site like RPGNow will attract only those fraudsters interested in RPGs, who are a minority among people interested in RPGs - and even they won't bother to steal a few $10's worth of games.

2. Bitcoin is traded on thin margins (which is also a result of being liquid). This has two implications. One, that every fraud incident is much more painful. Two, that legitimate customers will be looking for ways to buy bitcoins without paying the high CC fees - meaning that fraudsters are an even higher percentage of the traffic. Any attempt to increase fees to compensate for losses from fraud will just drive out the good customers, and keep the thieves who don't care how much fees they "pay".

3. Bitcoin payments are irreversible. With at least some of the other vendors, the vendor has some control over the platform with which his product is used. If he receives a chargeback he may have the power to revoke the usage of what he sold.