Opinion

Felix Salmon

Why payments won’t ever be anonymous

By Felix Salmon
December 16, 2011

I spent Wednesday night in Silicon Valley, at a very geeky discussion of Bitcoin, the unregulated digital currency which managed to get a lot of anarcho-utopians very excited. But Bitcoin fever seems to be on the wane right now, and the number of real-world places where Bitcoins can be spent is still, to a first approximation, zero.

One of the subjects we spent a fair amount of time discussing was the question of chargebacks and reversibility of transactions. Bitcoin was designed to be as cashlike as possible: once it’s spent, it’s gone. As one user discovered in spectacular fashion.

There are good reasons for setting payments systems up in a non-reversible way: it makes things much simpler and easier, for starters, and there is real demand out there for a digital equivalent of cash. On top of that, many Americans are unaware of the rights they have when money is spent on their credit or debit card, by themselves or others.

But consumer-advocacy organizations like Consumers Union are very aware of those rights. And as we move, very slowly, into a world of mobile payments, Consumers Union is trying its hardest to ensure that such payments are as reversible as possible.

Most cell phone and tablet users can purchase digital goods and charge them to their monthly bill or prepaid phone account. But they may not get the protections they need to limit their financial liability if something goes wrong with the transaction…

“Consumers using mobile payments should get the same strong protections they currently enjoy when they make purchases with a credit card or debit card,” said Michelle Jun, senior attorney for Consumers Union, the nonprofit advocacy arm of Consumer Reports. “But we found that consumer rights can vary widely between wireless carriers and the protections carriers claim to provide are often nowhere to be found in customer contracts.”

Jeremy Quittner wrote up the Consumers Union findings under the headline “Banks More Consumer Friendly than Carriers for Mobile Payment”:

Banks have been much maligned for nickel-and-diming their customers, but in another area — cardholder fraud protections — they are being praised as consumer champions.

A Consumers Union report released Wednesday shows that protections for purchases that consumers make using their mobile phone numbers are much weaker than those consumers get from standard cardholder agreements regulating their credit or debit card purchases.

I suspect that as the world moves increasingly towards digital and mobile forms of payment, these issues are going to be key in determining how popular those forms of payment become. People are naturally resistant to change, and they still worry much more about spending money online than they do about spending money in much less secure real-world transactions. So long as headlines about digital and mobile payments continue to frame the issue as one of “consumer protection,” the payments industry is going to have to take such things very seriously, even if they run counter to the anarcho-utopian leanings of the geeks developing the underlying technologies.

The tension, of course, comes with regard to anonymity: while cash is perfectly anonymous, other forms of payment are not. And it’s pretty much impossible to create a reversible payments system if the users are completely anonymous.

But that’s OK: if I’m making a payment by swiping my phone, I don’t really feel the need to be anonymous at all. In fact, if the payments system knows not only my identity but also my location when the payment is made, there are lots of ways that it can use that information in ways I could find extremely valuable. We’re seeing this already: various payments companies are putting together systems whereby every time I walk into my local coffee shop, say, I can just pick up my regular order and walk out, and the payment will happen automatically. As will the free coffee I get after paying for ten at a regular price. All I need to do is have my phone in my pocket.

The future of payments, then, is likely to be highly personalized and reversible — exactly the opposite of the anonymous and irreversible protocols built into Bitcoin. And that’s one big reason Bitcoin is not going to be a long-term success.

Comments
29 comments so far | RSS Comments RSS

“And it’s pretty much impossible to create a reversible payments system if the users are completely anonymous.”

There are more things in heaven and earth, Felix, than are dreamt of in your philosophy.

Ask any expert in cryptography what he or she thinks of your statement.

It is actually quite easy to augment a “digital cash” system such that you are anonymous unless and until you choose to reveal your identity.

In other words, I can create a digital message, deliver it to you anonymously, and later prove that I was the originator… By revealing a piece of information that only the originator could have. Verifying that information’s validity is easy; forging it is impossible. (Or rather, “computationally infeasible”. Same thing in practice.)

It is called a “digital signature”, and you already use this technology every time you connect to a https: URL. Although not for the same purpose, of course.

Posted by NemoP | Report as abusive
 

The developers of bitcoin are now designing a system to send bitcoins by email address or by url. This would reduce anonymity, but would make it easier to use.

There are a lot of bold statements in this article which I think is a little premature to state so early in the game.

Posted by jimbobway | Report as abusive
 

“And it’s pretty much impossible to create a reversible payments system if the users are completely anonymous.”

Clearly, Felix does not understand basic cryptography with this statement.

Posted by jimbobway | Report as abusive
 

@jimboway
I think what he meant was it would be hard to make a system to enforce reversibility because the veracity of statements regarding the exchange of goods cannot be easily tied to the base58 numbers representing Bitcoin accounts. Of course a new transaction can be made that reverses the previous transaction, that is trivial. A system that determines when that second transaction should be applied is difficult in practice. You can, of course, prove that you own a bitcoin account via digital signature. It is hard to prove that someone owns an account if they do not volunteer that information.

Posted by k9quaint | Report as abusive
 

http://bitjack21.com

Posted by bitjack21 | Report as abusive
 

@Nemo and Jimbob, I think you guys are missing the problem. I believe that reversibility in the sense that Felix is talking about is the capability of an objective third party to roll back a transaction between two other parties.

Posted by spectre855 | Report as abusive
 

The author’s statement about not being able to see any real world places where Bitcoins can be spent is a little presumptuous. Is the author discounting or ignoring the fact that the value of one Bitcoin is beginning to stabilize at around 3 times the value of the US Dollar? It doesn’t achieve that valuation amongst market participants if Bitcoins weren’t usable for anything. Let’s not forget that due to the relative anonymity that Bitcoin users enjoy, the specific markets for their use may not be publicly visible just as markets where cash is spent are not publicly visible. Yet we know from the public data that Bitcoins continue to to be bought, sold, and transferred on a 24-hour basis.

Concerning reversibility, Bitcoins do not require reversibility to continue to find a valuable use as a currency just as cash does not require this feature.

I’m looking forward to the day when people who write about Bitcoin will do better research about what it really is, the markets that do currently exist for their use, and will have a better understanding of free market economics before they write about the subject.

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” – Murray Rothbard, Making Economic Sense (1995)

Posted by AveryH | Report as abusive
 

@AveryH, I love the idea of bitcoin and I’ve wanted to see it flourish, however, I’m with Felix. I haven’t seen just about anywhere useful that accepts bitcoins as a suitable payment, regardless of what they’re speculatively “valued” at. Maybe you can enlighten us on the vibrant markets out there that we seem to be missing.

Posted by spectre855 | Report as abusive
 

There was quite a lag before the same fraud protections that credit cards had were applied to debit cards, IIRC. On the order of a decade, I think. I’d expect the same for mobile or other new payment schemes.

Of course, this is a perfect place for a national consumer finance protection agency to act. Anyone think they’ll be ahead of the curve on this one?

Posted by AngryInCali | Report as abusive
 

Bitcoin will absolutely succeed in the niche wherein

a) The seller can’t trust the buyer (because he’s anonymous);
b) The transaction needs to cross borders without inspection (maybe because the transaction is illegal); and,
c) Both parties don’t want to, or can’t meet to exchange cash in person.

There’s a huge market for things like this. Just to give a few examples: enabling a digital black market in untaxed consulting work, donating to organizations that are banned, and selling drugs online.

Imagine a future when instead of meeting your pot dealer in the back alley, you just order it online from his proxy-protected beautiful web site. It’s coming to an Internet near you, and Bitcoin will enable it, like it or not.

Posted by NoDrugWar | Report as abusive
 

“the payments industry is going to have to take such things very seriously, even if they run counter to the anarcho-utopian leanings of the geeks developing the underlying technologies.”

If you mean that people will not prefer Bitcoin because the payment industry doesn’t like it then I’d say you are speculating and you are also probably wrong. Even if someone doesn’t like non-reversability, Bitcoins has much more to offer (like non-existent fees etc).

If you mean that they are going to ban bitcoin as a technology then I’d say that they can’t do that that that easily and they will merelly create a bigger black market. Also it will probably violate many rights and I really hope people will not tolerate that although I might be wrong.

All in all I don’t see the use of reversability when you can escrow transactions. If someone is worried he can use an escrow company for his Bitcoin transactions (there are already a few) and the merchant will not receive payment until you receive the merchandise. And you can’t lie if the escrow company knows the full transaction information beoforehand (and this can be made so that it breaks your anonymity only in case of a fraud). Bitcoin is like cash, be as careful as you are with cash and you should be fine.

Posted by Tritonio | Report as abusive
 

Also if the demand for reversibility is SO high then it can easily be provided in the same way our banks provide it. Just don’t make direct transactions. Put your bitcoins in a centralized system like Mt Gox that provides reversibility under the same conditions as our banks. That centralized system would of course apply fees and destroy your anonymity but if people need reversibility that much…

Posted by Tritonio | Report as abusive
 

“The future of payments, then, is likely to be highly personalized and reversible — exactly the opposite of the anonymous and irreversible protocols built into Bitcoin. And that’s one big reason Bitcoin is not going to be a long-term success.”

The problem with this statement is that Bitcoin doesn’t preclude “non-anonymous, reversible” systems from building on top of it. For example, users with a specific ewallet may enjoy reversals when paying from that ewallet. It all depends on contracts between various organizations that build up around the Bitcoin protocol.

Many things that Bitcoin “is not” can be added by 3rd parties – and thus many of the criticisms levied against Bitcoin are invalid or simply uninformed.

Posted by FeedZeBirds | Report as abusive
 

Lol @Tritonio and FeedZeBirds, escrows and third parties. You guys are talking about the same thing. Central clearing houses. Banks. Exactly what bitcoin was designed to eliminate.

Posted by spectre855 | Report as abusive
 

Bitcoin was not designed to eliminate banks.

It was designed to give users more options.

Anonymous or not anonymous.
Through a third party or directly.

Posted by WYZ | Report as abusive
 

@spectre855 – You can have a trusted third party that can roll back transactions, even if they do not know who you are until you choose to reveal yourself (to initiate a complaint about the goods or services you purchased, for instance).

Cryptographic protocols make many things possible that are not possible with physical tokens like cash. Bitcoin is just the beginning, not the end. And to anyone who knows anything about cryptography, Felix’s entire premise is nonsense.

Posted by NemoP | Report as abusive
 

@WYZ, no the elimination of banks is quite specifically why bitcoin was designed. Just read the first few lines of Satoshi’s original whitepaper right here:

http://bitcoin.org/bitcoin.pdf

Posted by spectre855 | Report as abusive
 

@Nemo, I won’t claim to be a crypto expert so you may be right. Do you have any links to information on how such a system might work? I’m a software developer and I like to nerd out on stuff like this.

Posted by spectre855 | Report as abusive
 

This issue is orthogonal to the success of Bitcoin. In theory, credit card transactions could be denominated in Bitcoin. Anonymity is a feature, not a requirement. And with Bitcoin, you no longer need a checking account to pay your monthly bill–transacting “cash” directly is secure!

Posted by clr76 | Report as abusive
 

Many people, like the author, have trouble understanding that i’ts easy to use an anonymous system in nominative mode and not the other way around.

The same people usually do not undestand either that we can have trusted third parties in a decentralized system (escrow, hosted wallets etc) but that we cannot turn a centralized banking system in a decentralized network like bitcoin.

Posted by Boussac | Report as abusive
 

@spectre855 Here is a good starting point: “The New Cryptography Behind Anonymous Digital Cash” http://themonetaryfuture.blogspot.com/20 09/10/new-cryptography-behind-anonymous. html

Posted by matonis | Report as abusive
 

@spectre855
Bitcoin was designed to eliminate the OBLIGATION to go through a bank to transfer money from point A to point B.
Just like email was invented to eliminate the need to go to the post office when you simply want to drop a line or two to someone. The US Postal Service is still around because SOMETIMES we want to use it instead of email. Likewise, bitcoin will not eliminate banks but simply their exclusive position.

Posted by Boussac | Report as abusive
 

Felix, if you’re saying that bitcoin won’t ever be a leading ‘establishment’ payment system, then you are probably correct. However, it doesn’t need to be ‘establishment’ in order to be a success which is why I wrote: “Air Guitars and Bitcoin Regulation”

http://themonetaryfuture.blogspot.com/20 11/11/air-guitars-and-bitcoin-regulation .html

Posted by matonis | Report as abusive
 

Minor correction: Bitcoin has reversible transactions support using the lock_time parameter. In other words, there is nothing preventing people from doing reversible non-anonymous transactions using Bitcoin. It’s just a matter of whether the demand is there or not.

Posted by justmoon | Report as abusive
 

It is simply not true that there are not a lot of real-world uses for bitoin.

Just look at the most recent launch: BitcoinDeals.com

An amazon-like shopping portal for bitcoin payments.

Posted by BitcoinAnalyst | Report as abusive
 

Go see the list!

over 800 sites now accepted bitcoin

http://www.thebitcoinreview.com/

Posted by AdamStg | Report as abusive
 

Felix Salmon hasn’t done his homework!

On markets: It seems you have not even checked http://www.weusecoins.com page and see the listed markets.

On anonymity: Also it seems you don’t understand that this is determined by the user. The beauty of bitcoin is it enables the user to choose to be almost fully anonymous to pubic.

On reversibility: The solution lies with escrows and other payment services built on top of bitcoin.

Posted by bilot | Report as abusive
 

The arguments in the article against bitcoin are a little short-sighted. Bitcoin isn’t absolute; it’s being built upon and features are being added.

The dismissal of bitcoin: “The future of payments, then, is likely to be highly personalized and reversible — exactly the opposite of the anonymous and irreversible protocols built into Bitcoin. And that’s one big reason Bitcoin is not going to be a long-term success.” is akin to saying in 1992 that the internet will not succeed because people are used to TV and want to see video. It will come.

The upcoming bitcoin v0.6 is scheduled to have built-in escrow, as well as mulch-signature transactions. These are examples of consumer protections that surpass even the current model of transactions, and that’s just the start.

Bitcoin does some things now, but it can do a lot as it is built upon. What’s important, is the core underlying technology, a unique, secure, distributed, worldwide p2p currency that is and has never been realized until now.

Posted by MarkOates | Report as abusive
 

Pseudo-anonymity is a good thing and will helpout with bitcoin in the long run. Overall it’s good that huge amounts of money can be tracked into the block chain. There are a few bitcoin reviews of some sites that anonymize payments at Bitcoin Branches.

http://www.bitcoinbranches.com

Posted by bitcoinbranches | Report as abusive
 

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