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Thursday, June 09, 2011

Bitcoin’s Four Hurdles: Part Three – Escrow - Falkvinge on Infopolicy

Bitcoin is revolutionary in that its transactions are untraceable and irreversible. But in a system as large as The Economy, large changes must come gradually. We are used to dealing with receipts, reversing transactions we’re not happy with, and similar things — so Bitcoin requires all those mechanisms for adoption. We need anonymous, trustable escrow.
You don’t want to build a house for someone based on nothing but trust. You want to see the funds there, ready to be paid out to you on completion and acceptance of your work. Similarly, the homeowner wants a receipt that she paid the funds, that the house is hers. The builder and future homeowner both need to trust a mutually trusted intermediary. This is lacking in the bitcoin ecosystem today.
This is an article in a series on what Falkvinge identifies as Bitcoin’s four hurdles, which will be followed by a series on Bitcoin’s four drivers. This is the third article, on escrow. The others are usability, transactions, and exchanges (coming June 10).

There are a few nascent escrows, like ClearCoin, but we need more, much more — and on more scales. Besides, none of the escrow services that exist have had any time whatsoever for building trust in the community. The escrows need to provide discretion and anonymity just like the bitcoin economy as a whole, and need to make safeguards that their clients are not exposed towards authorities and other entities capable of lawful violence.
The business case for escrow is obvious — it takes a small fraction of the transaction. Today’s credit card companies take about 5%. ClearCoin takes one-tenth of that. There’s the business case for merchants and escrows alike.
The escrow services are needed on three specific scales, and neither is met today.
The first escrow is the personal scale. You’re buying something from another person. I predict NFC will be the most user-friendly technology here: the use case would be that seller and buyer stand facing each other, and both raise their phones, placing them back to back, so that both see each other and their own screen. The seller enters a number on her phone. The buyer presses a button confirming the transaction. Immediately, the seller knows that the agreed amount of funds now belongs to her. Neither buyer nor seller risk loss of money from loss of phone. Neither buyer nor seller are personally identified. Over the next half-hour or so, the bitcoin network catches up, so it is possible that she can’t spend the funds immediately. That’s not relevant for the scenario. From what I know, nobody is yet working on this scenario for Android and/or iPhone.
The second escrow is the point-of-sale scale. This is quite similar to the personal scale from the buyer’s point of view, except he places his phone on a black surface at a point-of-sale. From a seller’s perspective, the seller asks the buyer to pay by authorizing the sale through the buyer’s phone, just like on the personal scale, but the sales clerk is likely to operate a touchscreen with an attached NFC communications surface. This escrow scenario is actively being worked on from several angles.
The third escrow is the international trade scale, where Letters of Credit are used today. Million-dollar deals, shipping several containers at a time. It takes much more than a website to become successful with this — understanding requirements for buyers and sellers on this scale goes beyond the scope of my experience, but trustable receipts, discretion, and protection from lawful searches is certain to be three of the requirements. ClearCoin goes a little bit towards this, but I believe much more is needed.
In two days, I will end this series with the last of Bitcoin’s hurdles, exchanges. After that, I will start being enthusiastic about Bitcoin’s four drivers. There are at least four drivers for Bitcoin, each of which is going to convert billions of euros and US dollars into Bitcoin if the hurdles are cleared.


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