Photo by Zach Copely

Torrent-friendly news blogs recently protested PayPal’s demands that torrent trackers allow the company to monitor their sites for possible copyright-infringing behavior.  Organizations that have refused to comply with PayPal’s terms have had their accounts frozen–a possible death knell for a wholly online business that depends on user contributions to operate.  PayPal has also frozen the accounts of other online operations such as Wikileaks and file-hosting sites MediaFire, DepositFiles, and PutLocker, whose funds were frozen for months when they objected to PayPal’s terms.

It is hard to blame PayPal for its risk aversion.  The owners of MediaFire, who have discontinued using PayPal since the account freeze, presumed that PayPal’s demands stem from the federal government’s shutdown of Megaupload, noting how PayPal was “burned” when Megaupload’s assets were seized.

On the other hand, such tactics may appear political to those who prefer free, relatively anonymous transactions that operate like cash, except that they are online instead of real-world.  Because PayPal is centralized and located within the jurisdiction of a sovereign nation, it is vulnerable to government pressure, both explicit or, as with Megaupload, merely incidental.

Some have pointed out that these vulnerabilities make PayPal risky as a medium of exchange, especially for anonymous buyers and sellers on websites where transactions are politically questionable (or downright illegal) in some countries.  John Matonis of Forbes argues that, “PayPal’s assault on file-sharing sites makes [a] business case for Bitcoin,” a peer-to-peer digital currency that has no centralized issuer like a country or bank.  Matonis describes PayPal’s behavior as a type of “payment intervention,” which occurs when a company uses the mechanism of exchange to detect or prevent transactions that are politically incorrect or locally prohibited, such as when Visa halted payments to online pharmacies.  According to Matonis, Bitcoin provides a “decidedly nonpolitical” currency alternative to payment processers like PayPal, with whom customers risk the whims of “morality judgments” or politically motivated restrictions.

Bitcoin functions over a peer-to-peer network, which logs and processes transactions and prevents double spending.  According to a study (PDF), it is currently the most widely used alternative currency and constitutes around $150 Million in digital “cash.”  The current exchange rate of a bitcoin is roughly $14, and each bitcoin is divisible up to eight decimal places.

As a novel and “experimental” currency, as described by the Bitcoin Project, Bitcoin is not without its problems and risks, including digital thefts, rapid (short-term) devaluations, and use in illicit transactions such as those on the online drug marketplace Silk Road.  Nonetheless, as more merchants begin to use Bitcoin, its value will stabilize and become more legitimate.  Recently, Bitcoin marketplace BitPay received a half-million-dollar investment from some notable internet entrepreneurs.  And the number of bitcoins in circulation is rapidly increasing.

But it is unclear whether Bitcoin will ever become as widespread and legitimate as PayPal.  The relative anonymity of Bitcoin transactions may concern governments who fear tax avoidance.  Not long after its introduction, a US Senator called for Bitcoin to be banned in transactions in this country.  This raises some interesting issues: Would such a ban be a good thing?  How would the ban be enforced?  Do we  actually want a form of currency that is apolitical and decentralized?  Or, will it facilitate a large number of illicit and black-market transactions?  And does the lack of a central issuer such as the Fed and the absence of monetary policy make such a currency risky and subject to market manipulation or panic-induced devaluation?  Time will tell.  But in the near term it is worth debating the effect a widespread “stateless” currency might have, particularly on the government’s ability to indirectly regulate commerce through private actions by payment processers such as PayPal.

Collins Kilgore

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