Handling Cryptocurrency Chargebacks
With cryptocurrency’s increased popularity, consumers are more willing to transact in Bitcoin, ether and other digital currencies. According to Bitpay, 46 million of their users were willing to make payments with crypto tokens in 2021, and over one-third of millennials are happy to receive half their salaries in cryptocurrencies. Even large players in the payment industry like Mastercard, and Visa have crypto integrations.
More merchants are accepting crypto payments to keep up with payment trends. Unfortunately, chargebacks are a problem for cryptocurrency transactions, too. Although chargebacks on P2P crypto transactions or crypto purchases of goods or services aren’t possible, credit and debit card payments to cryptocurrency exchanges to buy crypto can be charged back.
Let’s take a deep dive into crypto chargebacks, how they are different and how to prevent them.
The core principles of cryptocurrencies, including decentralization, peer-to-peer transactions, and anonymity, should make crypto chargebacks impossible. However, this is not the case where fiat is exchanged for crypto.
Why crypto exchanges are vulnerable to chargebacks
Crypto exchanges accept fiat money from users in exchange for digital tokens. Users can store these currencies within the exchange, or send them to a cold or hot wallet.
Overall, crypto exchanges make buying and selling cryptocurrencies easier by accepting purchases from credit or debit cards. They also act as market makers, enabling the fluid buying and selling of cryptocurrencies by bringing together millions of willing crypto buyers and sellers and acting as an intermediary.
The ease of transacting in cryptocurrency and the lack of chargeback support structures have led to an influx of fraudsters seizing the loopholes in the system.
Unfortunately, exchanges often incur chargeback-related costs whether they lose or win chargebacks. Even worse, crypto exchanges have thin profit margins, so chargebacks heavily affect their bottom line. Chargeback costs can easily represent 10-15 percent of an exchange’s net profits.
How cryptocurrency chargebacks are different
The volatility of cryptocurrencies makes crypto chargebacks different from regular chargebacks.
Say you have $10 today, tomorrow, it’ll still be worth $10 since inflation usually doesn’t have a huge impact on fiat currency in such short periods.
On the other hand, the price of Bitcoin can rise and fall significantly within hours. A 10% price fluctuation translates into a huge loss or profit if the amount of Bitcoin held is large.
If a crypto user purchases cryptocurrency and its value drops immediately, they might file a dispute citing unauthorized charges to recoup their money.
Another difference is when transactions fail on the merchant’s end. Since many merchants accept crypto payments, there’s an influx of spoofing sites responsible for users losing their crypto coins. With no legal framework to bring these sites to book, defrauded crypto users often file disputes against their exchanges.
Protecting crypto exchanges from chargeback fraud
Protecting a crypto exchange from fraud chargebacks hinges on verifying that the user is the owner of the card used in a payment, using data to improve your systems, and getting the best payment processing framework.
Methodologies of proof of identity
A strategy crypto exchanges can employ to limit chargebacks is by being thorough when onboarding new users. Letting in the wrong user inadvertently opens up the exchange to chargebacks.
But the problem is cryptocurrencies operate in a decentralized network that fosters anonymity. This makes acquiring a user’s data a huge challenge. If you have numerous onboarding hurdles, they’ll prefer your competition.
However, major exchanges like Binance bypass this challenge by making the sign-up process easy but having layers of security, including I.D verification and other authentication methods before buying or withdrawing crypto coins.
Automate chargeback mitigation
All evidence shows crypto payments are here to stay and will continue to grow. As such, crypto exchanges will continue facilitating a large portion of the action making chargeback mitigation key for these platforms. With the ever increasing transaction amounts, exchanges need a fully scalable chargeback mitigation solution able to adapt to meet their needs.
Implementing identity verification is a right step in reducing crypto chargebacks. Another step in handling chargebacks is leveraging verification data so that when you receive a chargeback you’ll have the evidence to build a winning case against the dispute.
Justt offers an end-to-end chargeback mitigation solution with detailed reports, accountability, and custom solutions. It leverages artificial intelligence, millions of data points and expert experience to form a strong line of defense against fraudulent chargebacks. Contact us for more information on handling crypto chargebacks.
Cryptocurrency Chargebacks FAQs
Crypto-only transactions cannot be charged back. However, debit and credit card payments to crypto exchanges to purchase crypto coins and tokens can be charged back.
Since crypto transactions are irreversible, Coinbase advises customers to contact merchants directly concerning refunds. Coinbase doesn’t publicly share information on whether it contests chargebacks filed by platform users.
Merchants don’t have the luxury of refusing chargebacks right away. However, they can dispute the chargebacks through representment, where they prove transaction legitimacy.
Although crypto transactions cannot be reversed, they can be refunded by the merchant. Customers should be careful to transact with reputable and trustworthy merchants.
The price fluctuations in cryptocurrency are influenced by forces of demand and supply, user and investor sentiments, media hype, and government regulations.
Crypto exchanges can help prevent chargeback fraud by verifying card owner details and identity through I.D verification to prove that true fraud has not occurred and that a chargeback is unwarranted.
Crypto’s irreversibility makes chargebacks impossible and helps merchants manage their cash flow better. Merchants also open their doors to international customers who couldn’t purchase their products in their native fiat currencies. On the flip side, merchants have to deal with cryptocurrency volatility making it difficult to keep up with the true value of their products.
Usually, you cannot cancel a transaction on Coinbase. To get a refund, you should contact the merchant. However, Coinbase issues refunds in specific situations when an error on their end results in:
- An unauthorized transaction
- An incorrect amount leaving your account