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Fraud Protection: Payment-First + Legal Recourse

Last Updated: 2026-06-18

The Core Protection: Payment-First Covenant Model

Traditional escrow (how others do it):

1. Seller locks BCH first (shows good faith)
2. Buyer pays fiat
3. Escrow releases BCH to buyer
Problem: Seller has capital locked, limits throughput

Asgaya’s payment-first approach:

1. María creates covenant (no BCH locked yet)
2. María pays Isabel €100.50 via Bizum
3. Isabel's bank confirms payment
4. Isabel's bot funds covenant with BCH
5. Elena receives BCH
Result: Seller never has capital at risk

This seems backwards - why would the buyer trust the seller to fund AFTER receiving payment?

Answer: Because fraud is traceable and criminal.

Why Seller Fraud is Deterred

1. Bank Transfer Traceability

Bizum (Spain) includes:

María has all this information the moment she pays.

If Isabel doesn’t fund the covenant:

Isabel can’t ghost anonymously. Her identity is known.

Real case (IR006):

Penalty:

For €20!

For Asgaya (€100 remittance):

Risk/reward for Isabel:

Irrational to attempt.

3. Economic Deterrence

Isabel’s calculation:

If honest:

If dishonest (fraud ONE transaction):

Expected value of fraud:

Gain: €100
Loss: €2,000 + €3,600/year × years_active
EV = -€1,900 (first year) - €3,600 (each additional year)

Massively negative expected value.

4. No Capital Lock = Scale Without Risk

Why payment-first enables passive sellers:

Traditional escrow:

Isabel has €1,000
Wants to process 100 transactions per day (€10,000 volume)
Must lock BCH first → Can only do 10 transactions
Throughput limited by capital

Payment-first (Asgaya):

Isabel has €1,000
Payment arrives → Immediately funds covenant → BCH released
Can process 100 transactions per day with same €1,000
Throughput unlimited (bot automation + no lock time)

This is why notification bots are viable:

Payment-first unlocks the passive seller model.

Fraud Scenarios & Resolution

Scenario 1: Seller Receives Payment, Doesn’t Fund Covenant

What happens:

1. María pays Isabel €100.50 via Bizum
2. Isabel's bank confirms receipt
3. Isabel stops her bot (malicious)
4. Covenant times out (24 hours)
5. María receives notification: "Seller did not fund covenant"

María’s recourse:

Option A: Contact seller directly

Option B: Request refund

Option C: Legal action

Timeline:

Result: María gets her money back (via refund or court order)

Scenario 2: Covenant Expires, Elena Never Claims

What happens:

1. María pays Isabel, covenant funded
2. Elena receives notification
3. Elena doesn't claim (forgot, phone died, etc.)
4. Covenant expires after 24 hours
5. BCH locked in covenant, unusable

Resolution:

Current design (needs refinement):

Why Isabel is still liable:

Current design (Phase 0):

Scenario 3: Merchant Receives BCH, Doesn’t Give Cash

What happens:

1. Elena receives €100 BCH from covenant
2. Elena goes to Carlos's shop
3. Elena releases BCH to Carlos
4. Carlos doesn't give Elena cash (fraud)
5. Elena is stuck with no money

Resolution:

Unlike sender/seller fraud, this is local commerce:

Why merchant fraud is less likely:

Design decision (Phase 0):

Two approaches considered:

  1. Cosign approach (preferred): Covenant releases only after both Elena AND Carlos sign
    • Elena gets cash → signs
    • Carlos receives signature → signs
    • BCH releases to Carlos
    • Benefit: Limits when merchants can mint H€/HAu (only from covenants they cosigned)
  2. Two-transaction approach: BCH → Elena’s wallet first, then she manually sends to Carlos
    • More steps, worse UX
    • Elena has temporary custody (adds complexity)

Phase 0 uses cosign approach.

Why This is Better Than Reputation Systems

Old approach (MUSD, LocalBitcoins, etc.):

Problems:

Asgaya approach:

We’re not building a parallel justice system. We’re using the one that exists.

Compliance Advantage

Why payment-first helps compliance:

For Sellers (Isabel):

Regulatory classification:

For Buyers (María):

The banking system provides KYC. We don’t need to.

Limitations & Risks

What Payment-First Doesn’t Protect:

1. Seller has no capital recovery if buyer lies

2. Legal process is slow for cross-border

3. Small amounts might not justify legal action

Fraud Still Possible (Just Irrational)

Payment-first doesn’t make fraud impossible.
It makes fraud irrational (negative expected value).

Some people are irrational. Some will attempt fraud anyway.

Phase 0 will measure:

Success Metrics

Metric Target Indicates
Seller fraud attempts <1% Economic deterrence working
Disputes resolved without courts >95% Refund path effective
Legal actions filed <0.1% Most disputes informal
Average resolution time <7 days Reasonable for users
User losses due to fraud <€100 total System protecting users

The Bottom Line

Fraud protection in Asgaya:

✅ Payment-first - Seller receives fiat before locking BCH
✅ Bank traceability - Bizum includes full identity
✅ Legal precedent - Spanish courts prosecute (IR006 case)
✅ Economic deterrence - Fraud EV < -€1,900
✅ No reputation system - Legal system provides trust
✅ Enables passive sellers - No capital lock = scale

We don’t need to build a parallel justice system. We use the one that already works.

“The best fraud protection is making fraud stupid.” - Asgaya design philosophy

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