Bitcoin For Merchants

Lesson 2 – Understanding the Risks

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Welcome back to Bitcoin For Merchants: An Original Coin Academy course. We are on lesson 2: Understanding the Risks. Let’s go ahead and get started with this lesson.

The first issue that I want to talk about is clearance times. Bitcoin transactions are processed in groups, typically it takes 10 minutes to verify and add a group of transactions to the blockchain. There have been no reports of double spending problems, the system is really very robust, if you want to look at this from purely hypothetical point of view and you want to be risk-averse, the way to think about it is this way: the transactions at the end of the blockchain are most at risk, in other words, the most recent group of transactions.

Therefore if you really want to play it safe, you can wait 2 or 3 confirmation cycles before you consider a transaction final. This means waiting 20 or 30 minutes before considering a transaction to be final. If you are receiving in a very large sum, caution says wait for 6 confirmations (60 minutes). But again I reiterate, there actually been no reported incidents of transactions being reversed due to fraud, double spending issues, or due to bad verifications in the blockchain so the risk on this is extremely marginal. That said, there is a solution. If you want, use a merchant service that provides instant confirmation and side steps this entire issue.

Another issue that is very much real world issue, is Bitcoin Exchange Rate Risk. Admittedly, this is no different than dealing with any sort of foreign currency exchange. That’s really the way to think about it. But Bitcoin is more volatile than traditional currencies. If you have a narrow margin business, this may be an issue or concern for you. You certainly don’t want to be in a situation where you are holding Bitcoin, if you are absolutely essential on having national cash for your operations. Some payment processors however, including Bitpay, Coinbase, BIPS, and a number of others offer immediate conversion to national currency if you are using their system.

There is another issue here, and it is that it can create pricing headaches. You have a price of X for your product, you know that right now in Bitcoin that equals Y while 20 minutes from now, much less 3 days from now, it’ll make to Z. Solution for this? Use a merchant service that offers real-time rate conversion for your prices of your goods and offers instant settlement in national currency. In other words, you are pushing the risk back on the merchant payment processor and you’re using their technology to avoid pricing headaches.

Bitcoin Fraud – this is really an imaginative area. The fraudsters are always looking for a new way to make money and of course they see Bitcoin starting to emerge as a payment paradigm, and they’re headed that way too. At this point in time there have been few reported incidents but 2 schemes have emerged that you should be aware of.

The first is QR Code fraud and this is actually a physical fraud exercise. Basically, the fraudster will create a sticker that looks like your sticker but it has their QR code on it. Then they will find a way that they can paste their sticker on top of your QR code. So when the buyer takes a snap of the QR code to process the transaction, the buyer sees the transaction clear and they see the Bitcoin leave their account but you as the seller, you never received the Bitcoin, the transaction never clears for you. That is because the Bitcoin has gone off to the fraudster’s account not to yours. This is really easy to protect against. You basically need to do two things. 1 – you need to protect your QR codes. Don’t put them on the back of your menus for example. That’s ripe for fraud, you’d constantly have to check your menus to make sure nobody had stickered them. And 2 – always wait for the transactions clear before you release the buyer or you release the goods.

The second fraud scheme that we’ve seen is an Invoice by Mail fraud scheme. The way this works is the fraudster will send out invoices to your customers. This is typically done by a spammer, they blast it to everybody. And it announces your firm now accepts Bitcoin and they include a Bitcoin address in the invoice telling people “you can pay right now, use this QR code”. But of course that Bitcoin address is not yours. The solution to this is never embed your address in invoices. If you are going to implement Bitcoin payment, do it quickly. Notify your people, notify your customers but don’t put the address – the QR code – in the invoice. Rather, give them a link they can click that takes them to your website and put the code on a SSL-enabled page. This is your best solution for protecting against this sort of fraud. So this is really a manageable risk. Both of these fraud schemes are. I’m sure other fraud schemes will emerge in the future but right now these are the two that we’re aware of.

What are the indirect costs of accepting Bitcoin for your business or implementing Bitcoin for sales? First, staff training of course. Second, there is a potential for longer transaction times depending on the methodology that you use. Third, customer education. Your staff is going to spend a little bit of time with the customers. Certainly some of the customers helping them process the transaction or understand what it can do or answering questions about the system. Next you will have accounting process adjustments you have to make so you do need to speak to your accounting team and have that system in place so that you can start handling these transactions when they begin. And there is additional account management overhead because now you have a new account – Bitcoin Wallet. You need to get funds in and out of that account.

That’s it for this lesson. Join us in Lesson 3 where we look at how to accept Bitcoin both in terms of manual transaction process and we’re going to look at an example of implementing a Bitcoin point of sales system. Thank you very much.