Cryptocurrency and Chargebacks: a Confusing, Evolving Situation

Can a merchant receive a chargeback on a transaction in which the consumer paid with cryptocurrency? The short answer is no, there is no possibility of the merchant receiving a chargeback on a crypto payment. But a full accounting for what the rising cryptocurrency phenomenon means for merchants reveals a more complex and fraught situation.

What Is Cryptocurrency?

Cryptocurrency is decentralized, digital currency. It is designed to be used for peer-to-peer transactions conducted via a cryptographic ledger known as a blockchain. Forbes describes a blockchain as an “open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in ‘blocks’ that are then linked together on a ‘chain’ of previous cryptocurrency transactions.”

Cryptocurrency transactions are anonymous, since they occur over blockchains. They are also usually irreversible. The first modern cryptocurrency is Bitcoin, which was first introduced in 2008 by an anonymous person or collective known by the pseudonym Satoshi Nakamoto. It remains the most popular and important cryptocurrency but there are numerous others that follow its model to one extent or another. In addition to serving as currency, crypto currencies are also especially volatile investment assets. As a result, the value of cryptocurrencies relative to stable currencies such as the U.S. dollar varies wildly, with the price of one Bitcoin reaching as high as $68,000 in 2021 before falling below $30,000 in the first half of 2022.

In recent years it has moved from being a fringe form of currency for hobbyists, hardcore libertarians, and criminals looking to launder money to a more mainstream hybrid between decentralized currency and lightly regulated investment asset. It is also gaining more acceptance in traditional financial institutions. This places it in an unusually precarious position in which merchants may be unable to ignore it but may be unwilling to engage with it.

Are There Crypto Chargebacks?

For most merchants, the answer is no. There is one key exception that will be discussed below. Because cryptocurrency transactions occur without the use of payment cards, they are not subject to the rules and regulations of payment cards, including chargebacks. If a consumer wants to have their payment returned, they do not have the recourse to file a chargeback with their issuing bank because there is no issuing bank. Similarly, there is no possibility of a card brand ruling in favor of the cardholder in a payment dispute because there is no card brand or cardholder. Crypto transactions are between the customer and the merchant and any dispute must be resolved solely between those two parties. Indeed, this may be one of the benefits of accepting cryptocurrency as a form of payment.

The Exception to the Rule

The one notable exception in which cryptocurrency transactions may be subject to chargebacks does not involve merchants at all but, rather, involves cryptocurrency exchanges. There are multiple ways for a consumer to acquire cryptocurrency, such as mining it by solving mathematical puzzles with computing technology to create new Bitcoin. But, as crypto becomes more mainstream, a popular way to acquire it is to purchase it from a crypto exchange such as Coinbase. Mainstream digital payment services such as PayPal and Venmo also offer the option to purchase cryptocurrency. If those purchases involve a credit or debit card, those transactions may be subject to chargebacks. And, due to cryptocurrency’s untraceable, unregulated, and functionally irreversible nature, it is a fertile breeding ground for all sorts of fraud. That fraud may result in chargebacks against cryptocurrency exchanges.

There is no guarantee that the current chargebackless status of cryptocurrency will remain into the future. Indeed, it seems unlikely as more and more major institutions begin to incorporate crypto into their operations. Visa and Mastercard are becoming involved in cryptocurrencies and J.P. Morgan has created its own cryptocurrency. The world’s current wealthiest man is deeply involved with cryptocurrency. Nonfungible tokens (NFTs) are both a source of (non-chargebackable) fraud and a surprisingly mainstream, crypto-related asset bubble. Facebook’s transformation into Meta and the broader tech investment into metaverses is inextricable from cryptocurrency and blockchain based technologies. As these institutions absorb the world of cryptocurrency into their existing systems, it seems likely that the rules and regulations that dominate the mainstream world of finance will eventually be applied to crypto as well.

Should Merchants Accept Crypto?

As such a volatile, poorly understood phenomenon that is both rife with fraud and rapidly growing in mainstream adoption, it is hard to provide reasonable guidance for how merchants should handle cryptocurrency as a form of payment. It may be instructive to examine the pros and cons.

Pros

• No chargebacks (except for crypto exchanges)
• Reduced or nonexistent transaction fees for merchants
• Appeals to particularly crypto-enthusiastic demographics, especially younger consumers
• No liability for merchants to prevent identity fraud since transactions are necessarily anonymous

Cons

• Without a method for quick exchanges into fiat currency, merchants could lose money on crypto transactions due to market volatility
• High rates of fraud and crime
• Mostly unregulated
• Requires some upfront investment from the merchant in order to accept crypto
  Impossible to predict how the continued expansion and adoption of cryptocurrency will go

Each merchant must decide for themselves on whether or not to accept cryptocurrency as payment for goods and services.