Bitcoin fans were thrilled to see car manufacturer Tesla add bitcoin as a payments option last week.
But a quick scan of the fine print suggests that bitcoiners should probably lower their expectations. It could be dangerous for their financial health to pay for a Tesla with bitcoinrather than dollars, especially if a refund is required.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
Bitcoiners have long dreamt of bitcoin payments going mainstream. The awkwardness of Tesla’s foray into bitcoin payments is symptomatic of how difficult it will be to achieve this goal.
All U.S. states have passed laws that protect car buyers unlucky enough to be stuck with vehicles that have manufacturing defects. These “lemon laws” vary by state, but in general any new car owner who has been sold a lemon has the right to a complete refund, or “buy back.” Tesla provides its customers with a long list of their lemon law rights here.
New car buyers have a certain time period to exercise their lemon law rights. Florida law, for instance, stipulates a car buyer has 24 months to make a lemon-law claim to the seller. The car seller is typically entitled to a few attempts to fix the car. But if it can’t, then the state’s lemon law is triggered and the owner can ask for all of his or her money back.
So when Tesla sells you a new $50,000 car, it isn’t just selling you a hunk of metal, plastic, rubber and a battery. It is also selling you a long-term relationship with Elon Musk. That is, you are purchasing his promise – a multi-year IOU in his name – to repay $50,000 cash when the conditions of your state’s lemon laws are triggered.
Unfortunately, the way that Tesla has specified this long-term relationship privileges people who pay with fiat over those who pay with bitcoin. To see why, look at the last page of Tesla’s three-page “Bitcoin Payment Terms & Conditions” below.
In short, if your $50,000 Tesla is a dud and your state’s lemon law entitles you to a refund or buyback, Tesla says it will pay you back in one of two ways. It will return the exact amount of bitcoins from the time of purchase. Or it will pay back the $50,000 in U.S. dollars. It reserves the right to choose which, bitcoin or dollars.
And that’s the danger. If the price of bitcoin has plunged by 50%, there’s a good chance Tesla will refund your lemon with $25,000 worth of bitcoins, not a $50,000 check. Congrats, you’re $25,000 poorer.
Buy a Tesla with regular U.S. dollars and you’re guaranteed a full $50,000 refund.
What if bitcoin’s price has doubled? If you qualify for a lemon law buyback, you’re probably not going to get $100,000 in bitcoin back from Tesla. Tesla reserves the right to pay the refund in fiat, so it’ll probably just send you a check for $50,000.
Given reports of Tesla car unreliability, Tesla buyers may be particularly likely to require lemon law protection. Unfortunately, Tesla obliges its bitcoiner customers – but not its fiats – to give up a big chunk of their lemon law benefits.
That’s not a very fair policy for a company that wants to be seen as bitcoin-friendly. Bitcoin customers are being asked to bear all the risk of bitcoin price declines while all the benefits of price rises go to Tesla. It’s “heads I win, tails you lose.”
The difficulty of bitcoin payments
Tesla’s contortions around bitcoin purchases are emblematic of how tricky it is to refashion a speculative asset such as bitcoin for payments.
We usually think of a payment as a one-off experience between a buyer and a seller. But as the Tesla example reveals, a payment is often the first dance move in a long-term relationship between the two parties. Warranties, return policies and government regulations mean that buyer and seller can be married for years.
Put differently, purchases are in many ways like debts, not payments.
Defining all of the conditions of a long-term debt relationship is easy when the U.S. dollar is involved. The dollar is stable. But bitcoin is an awkward unit for denominating debts. Bitcoin could collapse next week. Or its price might rise to $1 million. All the risks and rewards of holding bitcoin have to be apportioned to the various counterparties over the lifetime of the contract. That gets complicated.
In Tesla’s case, a more equitable way to structure its long-term relationship with bitcoiner customers might be to allow them to share the upside. If bitcoin’s price rises by a factor of 10, then a buyer who spent $50,000 worth of bitcoin on a Tesla merits a $500,000 refund if the Tesla proves to be a lemon.
But this introduces a new problem. Tesla would have to cope with a wave of returns as bitcoiners sabotage their $50,000 Teslas in the hope of getting a big $500,000 bitcoin bonanza!
Better to pay for a Tesla with money that doesn’t fork, rise by 10,000% or collapse.
Alternatively, if a customer spends $50,000 worth of bitcoins on a car, Tesla could promise to refund a flat $50,000, even if bitcoin falls in value. However, Elon Musk has tweeted that all bitcoin payments will be retained by Tesla as bitcoin rather than being converted into fiat money. This is a big change from other corporate “we accept bitcoin” moments, which behind the scenes were just another way for companies to accept fiat from customers.
In light of this policy, it would be risky for Tesla to promise flat $50,000 refunds. Tesla’s debts to its bitcoin-paying customers would be denominated in dollars while its reserves would be in bitcoin. This foreign exchange risk would be costly for Tesla to absorb.
Finally, what happens if there’s a split, say like the 2017 chain fork that brought us Bitcoin, Bitcoin Cash and Bitcoin Gold? It’s not apparent in Tesla’s Terms & Conditions how it would pay out post-split lemon law refunds. A buyer who qualifies for a refund might end up receiving Bitcoin 1 from Tesla, not Bitcoin 2, and thus could lose a big chunk of the original purchase price of the malfunctioning Tesla.
Better to pay for a Tesla with money that doesn’t fork, rise by 10,000%, or collapse. And that, in a nutshell, is why payments in bitcoin are unlikely to ever take off. The dollar is too easy.