Cryptocurrency escrow, like localbitcoins.com, use bitcoins as guaranty funds. Seller transfer bitcoins to merchant as guaranty, later when buyer has paid with fiat money to seller, merchant make the transfer of bitcoins to buyer wallet. why bitcoin escrow use bitcoins guarantee and don't use fiat currency?

  • I think it's because bitcoin transactions are more transparent and it's always possible for third parties to verify the escrow is behaving correctly.
    – Pedro
    Sep 17 '18 at 20:14

Because it is much harder to do escrow with fiat.

Fiat currencies are subject to various regulations which make this difficult. The escrow service would have to be registered as a money transferring business and be required to follow AML/KYC regulations. This means that all users would have to submit personally identifying documentation to the service in order to do any trades.

Additionally, there are multiple ways that fiat can be transferred. If you look on LocalBitcoins' website, you will see that you can do a variety of things for transferring the fiat; you can send cash by mail, cash in person, you can do bank account transfers, you can purchase goods for the seller, etc. There are a lot of different ways to send the fiat to the other person. If they put the fiat in escrow, then they would be limiting the number of ways that the fiat could be transferred. Conversely, there is only one way to transfer Bitcoin.

Furthermore, doing a fiat escrow would mean that the service is subject to whoever they are using as their bank. The service itself cannot actually hold the fiat money when it comes to things like bank and wire transfers (or it's really difficult). Rather they have to have an account with a bank and the money would go into that bank account and leave from that bank account. This introduces another third party who is not necessarily trusted. That bank could shut down the service's bank account thus causing all users whose funds are in escrow to lose all of their funds. It would, in general, introduce more risk to trading.

Lastly, the idea of services like LocalBitcoins is centered around the idea of trading Bitcoin for physical cash, typically in person. This means that it is extremely difficult to provide escrow services because someone from LocalBitcoins would have to be physically present for each trade to hold the fiat while the Bitcoin transfers. That would simply be unfeasible and impractical to do. However, because Bitcoin is a digital asset, the Bitcoin can easily be held in escrow on their servers and the trade can go along as long as both parties have internet access. This is much easier and cheaper to do.

Thus Bitcoin is easier to do escrow with than fiat, so such services escrow the Bitcoin rather than the fiat.

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