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Paypal Presents Payment to Placate Piqued Purchasers; Persists in Peeking into Pockets of Patrons

Did you have a PayPal account between April 2006 and November 2015? During that time, did PayPal ever place a hold or reserve on your account? Did PayPal suspend or cancel your account? Than this post is good news for you.

Zepeda v. PayPal (Case No. 10-CV-02500), a class action lawsuit that has been working its way through the United States District Court for the Northern District of California, appears to have been resolved with PayPal offering to pay a cash settlement to PayPal account holders whose assets were essentially seized by PayPal. PayPal is an enormous company with millions of customers and a lengthy track record of having sticky fingers when it comes to transactions that violate PayPal's nebulous and ever-changing terms of service - this settlement will almost certainly be enormous, as well. In addition to essentially stealing from their own customers, the Zepeda suit brought to light evidence that PayPal has violated several rules of the Electronic Fund Transfer Act.

All PayPal users should review the lawsuit settlement's webpage, which is the easiest way to submit a claim to receive part of the cash settlement. The site also contains the formal notice of court deadlines and requirements.

Why am I writing a post about this? PayPal was required to notify all of their users of the settlement via email (you should be able to view a copy of the email I received here) - so everybody already knows about this right? Well, the problem is that a substantial number of people who would be eligible for receiving a settlement will disregard the one email notification that PayPal is required to send them, because it looks like spam or some worthless service announcement message. Courts in the United States have long relied on dubious forms of notification in civil matters, and although a direct email is better than other methods that courts have found to be acceptable - like posting a small advertisement in a local newspaper - it still sucks.

I have mixed feelings about the top management of PayPal. Pierre Omidyar is responsible for putting together the excellent news organization First Look Media, which has rapidly overtaken the most established newspapers in the country for producing ground-breaking investigative reporting related to foreign policy and national security (their domestic coverage of policing issues is also great; their domestic political coverage is not so great). Then you have PayPal co-founder Max Levchin go on Charlie Rose to cheerlead for domestic surveillance.

Why do the personal opinions of PayPal's executive staff toward national security have any bearing on this post, which was supposed to be about some lawsuit settlement? In the immediate aftermath of September 11th, the US government granted itself extraordinary new domestic surveillance powers. In addition to the listening in on phone conversations, reading emails and sniffing web traffic, law enforcement, regulators and spies forced banks to hand over enormous amounts of data about financial transactions and the banking behavior of their customers. The PayPal brand emerged this same year with X.Com adopting the PayPal label. By 2002, PayPal had an IPO and was acquired by eBay.

PayPal survived the emergence of the US surveillance state by adopting incredibly invasive practices related to the tracking of customers and readily sharing that information with anyone in government who asked for it. It is worth comparing the meteoric rise of PayPal, and the relative silence with which they were greeted by financial regulators, with the stunning accusations of systemic impropriety that have been leveled against those in the Bitcoin business. Despite millions upon millions of dollars from pornography, phishing and other shady operations finding their way through PayPal accounts, only Bitcoin has been labeled as somehow essentially a tool for those profiting from crime, sex and similar seedy operations. PayPal was allowed to operate within existing an regulatory framework, while lawmakers have insisted that new rules must be created to reign in the lawless Bitcoin.

Fifteen years ago, PayPal was seen to be just as disruptive to established financial interests as Bitcoin - both PayPal and Bitcoin allow online commerce without the need for a credit or debit card, after all. The difference is not in the threat to the financial services sector but in the threat to regulators and law enforcement. Where PayPal is centralized and allows for easy snooping of both purchases and money transfers, Bitcoin is de-centralized and can be used to facilitate anonymous online commerce.

With centralization comes corruption, which brings us back to the lawsuit. For some financial services companies, public proof of theft of the course of a decade would lead to going out of business. Yet PayPal survives while the competing Bitcoin is throttled in the crib. Despite evidence of impropriety in financial Bitcoin *exchanges* such as the now-defunct Mt Gox, Bitcoin makes it largely impossible to do what PayPal has been doing - which is seizing customer assets as part of a funds transfer between individuals. Bitcoin makes such a thing impossible because no third party is required to transfer funds (Mt Gox got into trouble during the process of converting Bitcoin to other currencies, which is a different matter - Paypal isn't a currency exchange, so that's a topic for another discussion). Perhaps there are larger lessons to be learned here about the consequences of centralization to innovation and the resulting penalties to consumers. I'll leave that as an exercise to the reader.