One of my favorite fintech newsletters is Popular Fintech, and Jevgenijs Kazanins has published one of the single best primers on Coinbase's new Commerce protocol. If you haven't read it, what are you even doing?

Coinbase is building a modern payments network from scratch, using the best traditional and blockchain infrastructure. The future of fintech payments is here and we are witnessing something transformative.

I didn't connect it until Jev explained it clearly:

The missing element is chargebacks and representment, and I can't figure out why they skipped it. It's crucial to commerce and I don't see a replacement, as it ideally funds the disputes system which increases trust between merchant and user and should boost acceptance.

Kazanins and many others believed the system was intentionally skipped because Coinbase didn’t view it as necessary for a modern payments protocol. “It’s a cool feature for consumers, but it harms merchants (and is likely abused by consumers).” Based on their Shopify experience, the fraud and uncertainty from chargebacks didn’t justify the user trust benefit or offset the operational and financial expense of maintaining this dispute system.

Coinbase seemed to share the view, but I wonder if it was biased by their design partner, Shopify, dedicated to serving merchants. Matt Jones of Payments Culture pointed out that “no one wants to build chargebacks because it’s really hard” but as a user, if you can’t chargeback a large purchase like travel expenses, you won’t make the purchase. This was the sentiment of many in the commerce space, that chargebacks are essential for users to adopt the new payments network.

With all that said, there is no issue at all if you think about where the responsibility for maintaining a disputes & chargebacks system lies. Kazanins noted that the protocol doesn’t prevent Operators from building a chargeback mechanism on top of it, giving Coinbase the benefit without the responsibility to maintain it. Indeed, Jones pointed out the difference between rails (the protocols in which payments are made) and schemes/networks (the methods by which stakeholders agree to transfer payment data between each other). It is the schemes, like Visa and Mastercard, that have historically developed and maintained chargebacks & disputes systems, with each having their own procedures and infrastructure.

Coinbase is taking an explicit stance that chargebacks should happen at the schemes level versus the rails level in their omission of the chargebacks & disputes system at the protocol level. They should have mentioned or guided this concept to get buy-in from traditional ecommerce participants wary of a new protocol.

The protocol’s introduction may help us challenge our legacy assumptions around chargebacks & disputes. Should we remove the entire system since it could be an unsustainable and expensive one that doesn’t support itself as some argue? Or should we take a new approach with different chargeback options for different risk merchants with onchain transactions as a deterrent and built-in incentives to price and manage risk as Jones suggests?

Ultimately, as Jones says, “If someone can build a solution where the competence and value assigned by issuers isn’t a factor in dispute success, that would be a net benefit of any new system.” This is a future I am excited to see.