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Thursday, January 13, 2011

The 45 Day Rule

To protect ourselves from fraud using stolen credit cards and/or abusing chargeback policies from payment services providers, we will be implementing a logic which we call the 45 day rule.

For YouTipIt members this will essentially mean, that Bitcoins that have been bought from us using PayPal etc. , will have to remain in our system for at least 45 days. These Bitcoins can be tipped immediately after purchase, but they just cannot be withdrawn before they have passed that 45 day stay.

We do realize that many users might see this as an inconvenience, but this our strongest method of deterring internet payment fraud and not making our members pays ridiculously high transaction fees. I’ll elaborate in more detail how these frauds work below, but before that I’d like to highlight the core facts of the 45 day rule.

  • Bitcoins bought from YouTipIt through a payment service provider such as PayPal will remain for 45 days in our system.
  • Bitcoins that have been deposited using the Bitcoin network do not have this restriction. They can be withdrawn at any time!
  • Bitcoins which still are on hold can be tipped and re-tipped. The hold remains, only the owner will have changed. (We add a timestamp and some metadata on each coin when it is credited to the member)
  • If a credit card transaction bounces and we have to pay the money back to the credit card company, then the Bitcoins of that particular transaction are “deleted” from the system. All tips using that money will then consequently be invalidated.
  • If a member is unhappy with our service and wants his money back, he/she can contact us and we will gladly arrange a reversal at a minimal fee. (Please do not use PayPal’s dispute functionality)

Now, as promised, more details on the background: The way most credit card fraud works on the internet is actually quite simple, provided you have sufficient criminal motivation that is...

  1. Illicit person acquires credit card data (theft, purchase..)
  2. Illicit person buys goods or services in a shop on the internet
  3. By the time the Non-Illicit person realizes that something is wrong and acts (blocks credit card, reverses credit card transaction), the shop on the internet will often have already delivered the goods or services, leaving the shop, the credit card owner, the credit card company and often also a payment service provider to fight it out who pays for the damage done.

Lawyers, I’m sure, really enjoy figuring these things out, but usually the weakest links in the chain break first, meaning it’s either the shop or the credit card owner who will be left crying in the end.

If we replace “shop” with YouTipIt in the above scenario, it quickly becomes clear that we are at a big risk of people using YouTipIt to launder their stolen credit card money and leaving us with the tally.

Credit Card Companies and Payment Service Providers all have their own strategies to minimize this kind of fraud. Most of them essentially make good people pay for the actions of the bad. This means: If they make enough revenue from “good” people, the relatively small percentage of fraud is something they can live with. So by adding sufficient transaction costs on the transactions of the “good”, they actually succeed in making a decent amount of money.

So if we’d add sufficient transaction costs on every YouTipIt transaction and manage to build up an equally sufficiently big revenue stream, then shouldn’t YouTipIt turn into a successful endeavor? Yes, but only if we had enough capital to burn for a couple of years until we reach that break even.

Now I’m sure we could convince the odd investor or two with a glossy business plan to cough up some dough. We don’t want to be driven by investors. We want to keep our freedom and make YouTipIt something worth its while and be driven its members and not by the investors.

Hopefully, the 45 day rule will deter fraudsters from using YouTipIt and will help us keep running our service at the lowest possible costs.

Thief Pictures, Images and Photos

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