Identity theft and ecommerce fraud are costing billions of dollars each year, and have been increasing in recent years. Fortunately, due to the technical design of Bitcoin – along with one of its most powerful features, multisig – both buyers and sellers online have alternatives that can reduce the likelihood of being involved in identity theft or fraud.
In the United States, an estimated 17.6 million people were victims of identity theft in 2014 (the most recent year numbers are available). The most common types of misused information were bank accounts (38% of cases) and credit cards (42% of cases).
It isn’t surprising that millions of cases of identity theft occur each year based on bank accounts and credit cards. The numbers that allow access to those accounts are unchanging, they are tied directly to your identity, and they are being stored in databases by any number of retailers who you’ve done business with. Those databases are a treasure trove for cybercriminals, and they are constantly under attack. The list of high-profile breaches in recent years is impressive: 56 million credit cards in 2014 by Home Depot, 70 million in 2013 by Target, 76 million households in the summer of 2014 by JP Morgan Chase, and the list goes on and on.
Bitcoin works differently. The numbers that give you access to your bitcoins aren’t shared publicly, and they don’t make their way into any databases. You don’t need to trust a business to store your Bitcoin information properly like you would a credit card – the business doesn’t have any information to store. There are no treasure troves of data for cybercriminals to steal.
Your bitcoin also aren’t tied directly to your identity. You can choose to give the merchant as much or as little information about yourself as you want. This gives buyers some assurances that their purchases won’t increase the likelihood of identity theft, and it gives merchants one less piece of data they need to protect. Identity theft based on bitcoin transactions is practically impossible.
People are starting to notice Bitcoin’s potential for reducing identity theft. In April, Business Wire reported that a recent survey showed victims of identity theft were taking action to prevent it from happening again, and 10% of them were using alternative currencies like Bitcoin.
There is another aspect to Bitcoin that helps prevent online fraud. A feature called multisignature – often shortened to multisig – allows for bitcoins within a certain address to be controlled by more than one person.
The majority of bitcoins are owned by individuals, just like cash and other forms of money. With multisig you can now have multiple people, or even organizations, control the same coins. The multiple parties must then come to agreement before the bitcoins can be moved out of the account. There are many applications for multisig including increased security of funds, more equitable control of funds in non-profits and other organizations, and the ability to create complex contracting systems.
Perhaps the most useful application of multisig is escrow. A common use is the two-of-three multisig. This means there are three parties involved, and any two of them must agree before the bitcoins can be moved from escrow. The buyer and seller both choose a third party they trust, and then the buyer sends the funds into multisig. If the seller delivers as promised, then the buyer and seller both agree to release the funds, and since only two out of three parties are needed, the funds are then released from escrow. If there’s a dispute and buyer and seller can’t come to an agreement, then the third party is brought in to determine the winning party and join with them to release funds.
Consider how this is different from the existing system. In the current system with a stolen credit card, a buyer can order something and the seller will ship it as normal. When the real owner of the credit card realizes this and the credit card company reverses the transaction, the vendor typically is forced to eat the cost of their product.
Stolen credit cards aren’t the only way fraud is accomplished. Buyers can claim no delivery even when they’ve received a product. Ecommerce platforms and credit card companies are notorious for siding with buyers over vendors, and often don’t do their due diligence to determine who is really at fault. Vendors can also defraud buyers too, taking money but not delivering or delivering inferior products.
Bitcoin, along with multisig, prevents much of this fraud from occurring. There is no credit card company controlling Bitcoin that can reverse transactions, giving vendors the assurance that they control their own money. There’s also the ability for buyers and sellers to come to agreement about who will provide their dispute resolution via multisig, instead of being forced to use the ecommerce platform itself. As long as both parties choose a reputable third party, there’s little chance that fraud will be successful.
Bitcoin and multisig are useful tools to prevent fraud, but they’re not perfect. Bitcoins can be stolen, and once taken they’re unlikely to ever be returned. Protecting them takes some technical knowledge and the learning curve can be steeper than other payment systems. Although Bitcoin isn’t perfect and won’t eliminate all fraud online, it’s a powerful alternative for those willing to use them.
Giving buyers and sellers the ability to prevent fraud is one of many reasons OpenBazaar relies completely on Bitcoin. OpenBazaar also has two-of-three multisig built in, with an open marketplace of moderators who offer dispute resolution. If you want more privacy in online trade, with no fees, no censorship, and better protection from fraud, try OpenBazaar now.