8 ms·

Dwolla Being Sued by Bitcoiners for $2 Million

128 points by hornokplease 15y ago

adrianwaj 15y ago
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 15y ago
  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 15y ago
    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.
pja 15y ago
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 15y ago
  And I think that all systems that try to do better than Paypal will run into this: https://news.ycombinator.com/item?id=3539767 https://news.ycombinator.com/item?id=3539767
  - ExpiredLink 15y ago
    Payment processing isn't easy - contrary to popular belief.
    - mrb 15y ago
      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.
      - samstave 15y ago
        Disclaimer: I dont know much about how bitcoin works It would seem though that one would need a third party transaction 'escrow' (for lack of a better word) which could invalidate bitcoins should they be stolen. Basically saying "this bitcoin transaction is valid, therefore these bitcoins of value x are valid" If things are stolen, then you could disable those bicoins.
        replax 15y ago
        Invalidating bitcoins would not work though. additionally, it is against the philosophy of bitcoin, basically to be a currency without supervising powers. You literally have to think of bitcoins like real cash. I know that it feels unnatural at first, as usually everything you do software side on a computer is reversible, but that is not the case with the way bitcoins work. Everyone who runs the bitcoin client validates transactions and when a certain threshold is reached, the transaction is successful. Therefore, to prevent the validation of transactions, you would have to run an astonishing number of clients which refuse validation. The only way you could intercept stolen bitcoins at this point is, that the services which you can use to exchange bitcoins to dollars keep a db of stolen coins and prevent those from being cashed out.
      - noahc 15y ago
        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.
bryanh 15y ago
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.
benatkin 15y ago
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-discovers-dwolla-transactions-are-reversible/ http://tradehillblog.com/2011/07/25/tradehill-audit-discover...
mhp 15y ago
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?
- angersock 15y ago
  They're bitcoin loonies and need to find a way to make real money?
  - tjoozeylabs 15y ago
    Good get these pimps out of Des Moines for good!
- vsviridov 15y ago
  It does mention that the cost of acquiring the bitcoin.com domain cost them "about $1M in equity"...
  - noduerme 15y ago
    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...
- noodle 15y ago
  looks like a large chunk of the claim is wrapped up in the losses involved in the business closing down.
- mark_up 15y ago
  Go back and finish reading the article.
lysol 15y ago
Does TradeHill have to prove that bitcoin has value at all, first? Do they even have a leg to stand on?
- joezydeco 15y ago
  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 15y ago
    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 15y ago
      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 15y ago
        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?
kiba 15y ago
Despite all those frauds, hacking, and mistakes, bitcoin continue to keep on ticking.
- elliottcarlson 15y ago
  As do banks and credit cards.
  - ktizo 15y ago
    Good point. I hadn't actually thought of it that way round, although it is obvious in retrospect. However I do still currently view bitcoin as mostly just an interesting beta experiment.
  - deleted 15y ago
    [deleted]
  - burgerbrain 15y ago
    And that is a good thing. I want both systems.
    - jerguismi 15y ago
      More competition = better for the consumer
hristov 15y ago
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 15y ago
  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...
Lazare 15y ago
Go here, and read this blog post by Dwolla CEO Ben Milne: http://blog.dwolla.com/retail-merchants-rejoice-web-kiosk-online/ http://blog.dwolla.com/retail-merchants-rejoice-web-kiosk-on... 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-on-that-bitcoin-lawsuit/ http://www.betabeat.com/2012/03/06/dwolla-releases-statement... 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 15y ago
  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.

128 points by hornokplease 15y ago

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 15y ago
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 15y ago
  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.

pja 15y ago

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 15y ago
And I think that all systems that try to do better than Paypal will run into this: https://news.ycombinator.com/item?id=3539767 https://news.ycombinator.com/item?id=3539767
- ExpiredLink 15y ago
  Payment processing isn't easy - contrary to popular belief.
  - mrb 15y ago
    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.
    - samstave 15y ago
      Disclaimer: I dont know much about how bitcoin works It would seem though that one would need a third party transaction 'escrow' (for lack of a better word) which could invalidate bitcoins should they be stolen. Basically saying "this bitcoin transaction is valid, therefore these bitcoins of value x are valid" If things are stolen, then you could disable those bicoins.
      - replax 15y ago
        Invalidating bitcoins would not work though. additionally, it is against the philosophy of bitcoin, basically to be a currency without supervising powers. You literally have to think of bitcoins like real cash. I know that it feels unnatural at first, as usually everything you do software side on a computer is reversible, but that is not the case with the way bitcoins work. Everyone who runs the bitcoin client validates transactions and when a certain threshold is reached, the transaction is successful. Therefore, to prevent the validation of transactions, you would have to run an astonishing number of clients which refuse validation. The only way you could intercept stolen bitcoins at this point is, that the services which you can use to exchange bitcoins to dollars keep a db of stolen coins and prevent those from being cashed out.
    - noahc 15y ago
      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.

bryanh 15y ago

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.

benatkin 15y ago

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

mhp 15y ago

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?

angersock 15y ago
They're bitcoin loonies and need to find a way to make real money?
- tjoozeylabs 15y ago
  Good get these pimps out of Des Moines for good!
vsviridov 15y ago
It does mention that the cost of acquiring the bitcoin.com domain cost them "about $1M in equity"...
- noduerme 15y ago
  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...
noodle 15y ago
looks like a large chunk of the claim is wrapped up in the losses involved in the business closing down.
mark_up 15y ago
Go back and finish reading the article.

lysol 15y ago

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

joezydeco 15y ago
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 15y ago
  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 15y ago
    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 15y ago
      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?

kiba 15y ago

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

elliottcarlson 15y ago
As do banks and credit cards.
- ktizo 15y ago
  Good point. I hadn't actually thought of it that way round, although it is obvious in retrospect. However I do still currently view bitcoin as mostly just an interesting beta experiment.
- deleted 15y ago
  [deleted]
- burgerbrain 15y ago
  And that is a good thing. I want both systems.
  - jerguismi 15y ago
    More competition = better for the consumer

hristov 15y ago

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 15y ago
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...

Lazare 15y ago

Go here, and read this blog post by Dwolla CEO Ben Milne: http://blog.dwolla.com/retail-merchants-rejoice-web-kiosk-online/ http://blog.dwolla.com/retail-merchants-rejoice-web-kiosk-on... 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-on-that-bitcoin-lawsuit/ http://www.betabeat.com/2012/03/06/dwolla-releases-statement... 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 15y ago
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.