[e-gold-list] Escrow Services

[Daniel Burton]

I was wondering if anyone on the list could share their experiences 
using universal-escrow.com.  If you have used the service, did the 
transaction go smoothly?  Was the payment released in a timely manner?

I was also wondering if anyone had any other escrow services to 
recommend.  I am thinking of starting to accept e-gold escrow payments 
for my online sales so that my customers can have a little bit more 
assurance that they will receive the product they ordered -- I think a 
reliable escrow service especially would help me increase sales to 
Western Europe, since there is little legal recourse for individuals 
when transactions go awry across international lines (I sell out of 
California.)

I also have some concerns with the protocol Universal Escrow uses that I 
would like to share.  I think the protocol is sound at solving problems 
with the vast majority of contingencies, and probably a better way of 
dealing with things than the way Tradenable and others do things....  
The fact that both paries need the other one to agree for either of them 
to withdraw money from the escrow account is a great incentive for them 
to come to some sort of equitable agreement with each other.  (A seller 
will give up nearly the full value of the gold in escrow to get it out, 
so he has a strong incentive to give the buyer either the goods or a 
repund.  Conversely the buyer will give up nearly the full value of the 
gold in escrow to get it refunded, and thus he has a strong incentive to 
accept either the product or an equitable refund.)

This works well most of the time, but I think the fact that both parties 
have to agree before either can withdraw the gold is actually a problem 
in certain situations and can be used in a certain form of attack either 
by a buyer or seller.

Suppose you have a competitor who wants to put you out of business, or a 
disgrunted ex-employee or ex-customer, just basically anyone who has 
some sort of spite against you or some reason to want to see you go out 
of business, without necessarily wanting to rip you off for any other 
reason.

For the sake of argument, let's say you are the main competitor with a 
business in a small market with room for only a couple firms of your 
size and that sales in that market are international.  You reside in a 
different legal juristiction from your competitor, and it is difficult 
to to any legal action across international borders.  And let's also say 
that demand for the goods you are selling is relatively inelastic.  Your 
competitor accepts payments by Universal Escrow, but you don't -- you 
rely mostly on reputation instead.  You want to put your competitor out 
of business so that you can monopolize the market, restrain supply, and 
reap the montary benefits.  Here's how you can do it:

First you discretely hire buyers to serve you in a confidential 
capacity.  You have the buyers buy from the competitor using Universal 
Escrow.  You pay the buyers -- except you instruct them not to release 
the money from escrow when the transaction completes.  You then take the 
goods and add them to your own inventory, having acquired them at a 
reasonable rate.  You repackage them as necessary and sell them to 
customers yourself.  You lose little money in overhead costs doing this, 
but your competitor has just sold goods at the full production cost, 
which will never be reimbursed.  The money will sit in the escrow for 
however many years it takes for the storage fees to spend it down to 
zero, but you don't care.  You have just created a cost for your 
competitor far larger than what you paid to create it.

At a certain point, they may get wise and stop accepting escrow 
payments, but not before the damage is done.

You can do this on the opposite end too.  Instead of hiring people to 
secretly act as buyers, you have them secretly act as suppliers.  You 
post advertisements for whatever supplies your competitor needs to do 
business at reasonable, but attractively low rates.  You ignore any 
inquiries or orders by anyone other than your target.  As soon as the 
business you want to damage places an order, you accept payment for it 
by escrow -- except you never ship the goods.  In fact the goods never 
even existed.  You let the money sit in escrow forever and never agree 
to release it.  You don't care how long it sits there, as long is it 
helps put your competitor out of business.  You have done this at very 
little cost to youself, but made your competitor lose a large amount of 
money, probably before he even realizes what is happening.

That was a very specific example, but a disgrunted ex-employee, or 
anyone else who has a grudge against you can pull the same tactics.  
They may have a monetary incentive to release the money from escrow, but 
the money may not be all they care about -- the side-effects of leaving 
your money stuck in escrow are themselves enough incentive for them to 
leave it there.

It seems that these types of problems would be most prevalent in the 
kind of fraud-prone online markets where the sellers are fairly 
anonymous, where an escrow service is most needed to complete 
transactions.  Though the kind of service offerred by Universal Escrow 
is good and cheap, it seems to me that some type of arbitration-based 
system for dealing with disputes is really necessary in order to prevent 
things like these types of abuses.

Absent that, it would seem that the only other way of keeping this from 
happening would be to have both parties put down an additional deposit 
before the transaction can be completely.  The deposit would then be 
refunded after the money was released from escrow.  A seller would want 
that kind of protection against abusive buyers, and a buyer would want 
the seller to put down a deposit in order to raise the cost of attacks 
where the money is trapped in escrow to prohibitive levels. 

(I just thought of that protocol while writing this....  It seems you 
could actually implement it with Universal Escrow right now, though it 
wouldn't be a standard transaction flow.  You would have two escrow 
accounts, one normal, and the second a deposit that would be refunded as 
soon as the first one was released, never actually inteded to be paid 
out to the recipient.  A buyer might actually want you to put down a 
deposit in a third account before they put down anything, one to be 
released back to you after the transaction is completed, and then you 
have the problem of who releases the deposit first -- you have just 
iterated the problem, because whoever is last can simply refuse to 
release the deposit.  It seems that you need an entirely different kind 
of protocol to solve that problem, one where both deposits are kept 
together by the escrow service and both deposits are released 
simultaneously only when both parties agree.  You need a third party to 
do that, and any third party who can credibly offer that service might 
as well start their own escrow service rather than riding on top of 
another one.)

I hope this message hasn't inspired anyone to do anything bad -- but 
perhaps pointing out this possible problem will cause people to take 
measures against it before it happens.



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