PayPal's File-Sharing Restrictions Drive Merchants to Rivals

PayPal's strict requirements for merchants that sell file-storage services have created an opportunity for competitors including BitPay, which processes payments in the digital currency Bitcoin.

Last week, four vendors that market the cloud-storage services of Mega — the new venture from controversial Internet entrepreneur Kim Dotcom — stopped accepting payments through PayPal. It is unclear whether PayPal dropped them or vice versa.

PayPal, a unit of eBay (NASDAQ: EBAY), allows such merchants to sell only file-sharing services it has approved. PayPal also makes these merchants monitor uploads to prevent copyright infringement — somewhat akin to banks monitoring transactions under anti-money laundering regulations.

Stop File Lockers and other antipiracy groups have accused Mega of facilitating illegal downloads. Its founder, Dotcom, faces extradition to the United States from New Zealand for his previous venture, Megaupload, a file-sharing site the U.S. government shut down last year for alleged copyright violations.

Hosting.co.uk, one of the Mega vendors that stopped using PayPal, turned to BitPay, whose service lets merchants accept bitcoins and converts them into dollars.

"Now that PayPal is trying to clamp down on file-storing sites, these vendors who've made investments in their servers and their infrastructure are saying … 'how are we going to accept payments?'" says BitPay founder Anthony Gallippi. "Some of them are looking at either accepting Bitcoin directly or using BitPay or another payment processor."

The other three Mega vendors that stopped using PayPal accept encrypted credit-card payments through other payment processors — two of them use Wirecard, the third uses Systempay.

A PayPal spokeswoman would not discuss the Mega vendors, but she said that as a general matter, its policy is to part ways with firms offering file-sharing services the company has not approved. She would not say whether PayPal approved Mega.  

Unlike PayPal, which requires both the consumer and the merchant to have accounts (unles the retailer offers "quest checkout"), only a merchant needs to have an account with BitPay to accept bitcoins, Gallippi says.

"PayPal is like a walled garden. It's more like the early days of the Internet, when somebody on AOL could talk to somebody on AOL but not somebody on Prodigy," he says. "BitPay is different, because there's no company behind Bitcoin."

Mega, meanwhile, remains under scrutiny for its potential to allow illegal file-sharing. Despite Dotcom's claim that the site is "the most legally scrutinized Internet site in the history of the Internet," the company has fielded 150 copyright-infringement warnings since its launch on Jan. 20, PCWorld reported.