Alice sells the private key of her Ethereum wallet to Bob. Bob pays through UTRUST. Alice is notified that the money is in escrow and sends the private key to Bob. Bob claims the key does not work. Alice opens a dispute.
Tell me how the UTRUST Mediator resolves this transaction.
Good question I haven't thought so much about. But you are right, a situation like this can hardly be solved probably. But maybe if Alice gives the private key to the mediator? Something someone would probably never would like to do...
You already figured out giving your private key to the mediator has a risk. The mediator may take the funds in the address, then refund Bob. Alice will say the mediator stole the money, but it is her word against both Bob's and the mediator's.
There is a sort of a built-in solution for these kind of transactions in the form of signatures and multi-signature wallets. Several escrow protocols based on signatures have been developed, for example the 2-of-3 multisignature. Some of those are still vulnerable to other kinds of attacks, such as extortion.
But there is not a word about escrow protocols, flaws and vulnerabilities in the UTRUST whitepaper.
Well maybe they haven't thought about this kind of problem and thought a mediator would be able to handle all problems which could occur. Hopefully they will think about it again and try to get a good solution for this or maybe they just forgot to write about it.