The May Scale of Money Hardness and BitCoin
Published March 7th, 2012 edit replace rm!
Updated 4/21/2016: Updating this as this is also now affecting the Gift Card industry. Added crypto currencies in general. Moved hosted crypto currency wallets like Coinbase and UpHold up to a 3 since the industry has changed a lot since 2012 (No more BitInstant or Coinbase). Removed Liberty Reserve for obvious reasons and modernized it a bit.
About 15 years ago after a bunch of E-Gold exchangers lost money from fraudulent purchasers performing chargebacks Start e-gold app developer JP May published his May Scale of Money Hardness (only on wayback machine now).
The idea is that the easier it is for a payment to be reversed, the softer it is. I’m trying to update it for 2012 (now 2016) so the next generation of financial startups don’t get burnt more than they already have been and learn the lessons learnt by the e-gold community.
Original May Scale
| Hardness | Item |
| 1 | Street cash, US dollars |
| (Hard) | |
| 2 | Street cash, euro currencies, japan |
| 3 | e-gold |
| 4 | Street cash, other regions |
| 5 | Interbank transfers of various sorts (wires/ACH etc), bank checks |
| 6 | personal checks |
| 7 | Consumer-level electronic account transfers (eg bPay) |
| 8 | Business-account-level retail transfer systems |
| (Soft) | |
| 9 | Paypal and similar ‘new money’ entities, beenz |
| 10 | Credit cards |
| (Ridiculously soft) |
Updated May Scale
| Hardness | Item |
| 1 | Street cash, BitCoin and other intrinsic crypto currencies like Ethereum and DASH, Gold/Silver Coins |
| (Hard) | |
| 2 | Western Union and other money transmitters |
| 3 | Account based electronic currencies fire walled away from banking system (e.g. UpHold, CoinBase, BitGold) |
| 4 | International wires |
| 5 | bank checks |
| 6 | ACH, personal checks |
| 7 | Consumer-level electronic account transfers (eg Dwolla, AlerPay) |
| 8 | Business-account-level retail transfer systems, credit cards (brick and mortar) |
| (Soft) | |
| 9 | Credit cards (via internet or phone) |
| 10 | PayPal |
| (Ridiculously soft) |
updated 3/8/2012 Based on comments I moved things around a bit. Ordinary bank wires are more less reversible than ACH’s. The scale shouldn’t cover default risk only reversal risk so I’ve moved all street cash to 1. and added gold/silver coins to it. I’ve added electronic currencies like Liberty Reserve that are fire walled away from the banking system to 3. Any account based system that interfaces directly with the banking system will be in 7, so AlertPay belongs with Dwolla as their banking connections can also put undue pressure on them. I still consider Personal checks risky. At least until it clears so I’m leaving that at 6. Also see The BitCoin Wiki’s Payment Method page for alternative rating
Why do I place Dwolla above PayPal? Mainly because they exclusively use the ACH system and not the credit card system, which makes it harder for people to perform chargebacks.
Why is PayPal below Credit Cards then? While it is a blended system of ACH and CC, their risk management procedures makes it even more risky to merchants than using a straight credit card processor. Just by virtue of being successful or having one or two chargebacks they will freeze your accounts.
What can we learn from the May Scale?
Purchasers benefit by having softer money as it reduces risk for them and merchants benefit by having harder money.
If you are selling game credits, subscriptions to a web service without any significant cost to you the benefits and ease of accepting soft money is fine.
It is slightly trickier for merchants sending physical goods to users. The merchant does have a risk, but the shipping infrastructure does provide some insurance and documentation that partly alleviates it.
If you are selling financial instruments, real estate, cars and other high value items you should not accept anything higher than 5 on the May scale. As a matter of fact due to anti money laundering laws since the original May scale was written you probably shouldn’t accept anything less that 5 either.
If you sell BitCoin you are in a little bit of a different situation similar to e-gold exchanges of yore, due to the growing hostility to it from financial institutions and governments. Depending on how high your spread or transaction fee is you could accept the risk of accepting bank transfers, in particular if you limit the size and frequency of transactions with customers until you feel you can trust them. But I would probably stick to 3 or below.
One risk potential risk with Number 3 is that you might accept a Western Union transfer from a party who is on the terrorist watch list, in which case you could get associated with them. This is a particular risk if you are not registered with the FSA (in the US) or similar elsewhere and did not perform some level of Know Your Customer.
Why soft money?
Most of the soft money is based on book entry systems with central authorities. One of the benefits of this is that in case of fraud it is possible to contact this central authority and reverse a transaction.
BitCoin is also a book entry system, but there is no central authority so there is no way of reversing a charge.
So if you as a consumer buy some coffee with BitCoin and the merchant doesn’t send it you there is no real recourse unless you know who the merchant is and are able to take the merchant to small claims court.
Because of this there is a trend within the BitCoin community of having centralized BitCoin denominated book entry systems that temporarily keep the funds in a reversible place. 4/21/2016: Do these even exist anymore? There are also BitCoin escrow agents. These are potentially good solutions, of course you also need to trust the operators of these or they may just run away with your BitCoin. There were probably more fraudulent than trusty escrow services in the e-gold days. I would expect the same with BitCoin.
There is also a risk to the merchant in BitCoin. See the recent Linode Bitcoin fiasco. If they were using softer money they could have called the central authority (PayPal etc), freeze their account and have dodgy transactions reversed.
Anyway none of this is easy. If you are trying to do something with BitCoin or other kinds of alternative financial services you need to think about it for your business.
Anonymous March 7th, 2012
The Bitcoin wiki has an article ranking different payment methods as well. (note though the values are inverted, with 10 being hardest):
- http://en.bitcoin.it/wiki/Payment_methodsJim March 7th, 2012
Supposed there was a civil war and the U.S. created a new denomination. Then street dollars would be reversed.
Bitcoin is immune to war, politics, and government. That is why it should be ranked higher than street cash/US dollars and should have a hardness of ‘0’.
Pelle March 7th, 2012
@anonymous Thanks thats a good link of up to date options.
@Jim Even as a staunch libertarian I’d say thats a big If. But I do believe that in such a case US paper currency would still remain valuable similar to what happened to the Iraqi Swiss Dinar after the first gulf war.
The USD note (not the electronic book entries that make up most of the USD) is still such a trusted item world wide that it would continue to retain value for a long time. The US government can of course do a lot to destroy this and might just do so.
Technically BitCoin is immune to war, politics, government etc. But the perceived and market value of it can certainly change both up and down by such things.
Jon Matonis March 8th, 2012
@Jim, The risk that you point out is a legitimate risk, but it is a default risk, not a reversal risk.
Admittedly on a longer time horizon, other default risks on the ‘May scale’ would be (a) the SHA256 algorithm that bitcoin uses becoming outdated and not modified; and (b) the mining of the asteroid belt for gold which would make it just another commodity.
Bitcoin is closest to gold because it has zero counter-party risk. Gold is analog bitcoin.
n March 8th, 2012
I think a few corrections to the scale are in order. First, bank wires and bank ACH have completely different hardness. They do not belong in the same bin. Bank wires are very hard – once a wire clears, the issuing bank /cannot/ unilaterally claw back the funds. The worst they can do is ask nicely to get money back. ACH on the other hand is easily reversible, all it takes is a claim of ‘unauthorized transfer’ and the bank will claw back the funds.
Personal checks, /once they clear/, are also quite hard and it is very difficult (impossible?) for issuing bank to claw back the funds.
Further – what is the point of separating USD street cash from EUR cash from “other country” cash. It is physical cash notes – they all have the same exact reversal risk – namely, in order to claw back the funds, the guy has to physically find you and ‘convince’ you to give the cash back. Upon what grounds are they separated?
Finally, you are missing some payment methods, most notably Liberty Reserve which is extremely hard.
Hope this helps. :)
Bitcoin Documentary March 8th, 2012
Great article! I’d be interested to see where all the various e-currencies would get placed, eg. Liberty Reserve, Alertpay, Solid Trust Pay, etc. (LR most certainly being the hardest of those 3).
Jim March 8th, 2012
May scale is looking better after the update.
Jim March 8th, 2012
Let’s say you have cash or gold and store it in a vault in a house or a bank. The courts give warrants to the police to raid your house and take back your cash or gold. Your cash or gold is only as good as how well you protect it or hide it.
If you have bitcoin locked in a TrueCrypt file with a really long and hard password, and place it inside another TrueCrypt file then there is no way the police or court can access your bitcoins. If they force you to give up your password you can safely do so because there is another TrueCrypt container inside that one. (You can infinitely chain TrueCrypt files.) So the court has no way to force you to give up your password to your “x” encrypted files.
With the proper techniques bitcoin is less reversible (if you can call “police raids” reversible) than gold, silver, or cash.
Now, my scenario is way out there…but I bet there will be a court case that will have to deal this scenario sooner or later.
Jim March 8th, 2012
Here is the TrueCrypt link with something called “Plausible Deniability”:
http://www.truecrypt.org/docs/?s=plausible-deniability
(Sorry for posting so much. I’m just exciting about bitcoins.)
indio007 March 9th, 2012
A dollar bill is hard money?
BWAHAHAHAHAHAHAH!!!!
Papyal ... March 12th, 2012
Paypal doesn’t even fit on this scale … It should be somewhere around 10^2 in this scale as it often puts penalties on retailers too.
Chargeback/Dispute is a button away, taking money away immediately from the retailer, and sometimes extra charges are put on the retailer, the retailer’s account maybe suspended and/or cancelled due to this as well…
Sometimes retailer even looses multiple times the payment in dispute with paypal!
and this coming from someone who puts through several hundred thousand euros a year through PP.
david nicol April 6th, 2012
bitcoin script is designed to do things, as I understand it, like escrow right there in the block chain. You’re supposed to be able to mock up an account to hold the funds for the ordered coffee and publicly transfer into it, then after verifying that the coffee has arrived, release it, all with bitcoin script. Of course coffee vending expert FORTH programmers are few and far between, so escrow agents using the simpler BTC transfers are what we have instead.