Today [2011-04-30] PayPal called to say they were freezing my account because they consider Bitcoins an “ecurrency”. I told them that they had given me permission on two separate occasions to sell Bitcoins. They responded, “that department isn’t authorized to make those decisions.” The official statement in my account says “This limitation cannot be appealed.”

CoinPal beta - Buying bitcoins with PayPal

  • When I started coding CoinPal back in December 2010, I emailed asking for permission to sell Bitcoins using PayPal. I also emailed seeking clarification on whether selling Bitcoins met their definition of “currency exchange”. After about two weeks, I received no response to either email. I decided to start operating the site, thinking they wanted to see something working before spending time on a response.
  • After operating for two months, PayPal’s anti-fraud department called me to discuss some earlier chargebacks. We spoke for 20 minutes and PayPal told me it was fine to sell Bitcoins as long as I kept chargebacks low. Two months after that, PayPal placed a 5% reserve on my account. I spoke with the high-risk goods department on the phone a few days later. They were fine with me continuing business as long as I had a reserve on the account to cover any chargebacks that might arise.
  • During the entire time I operated CoinPal, my fraud rate was 1.5% That includes the first wave of fraud when I was still learning how the scammers operated. If that first weekend is excluded, my fraud rate was 0.9% I obviously honored my end of the arrangement.
  • During the four months that CoinPal operated, it helped introduce Bitcoin to 1,484 people by distributing 60,858 BTC (not counting MoneyPak trades). It also helped 76 people bootstrap their OTC ratings.
  • My personal view is that PayPal freezing my account is a coming of age for Bitcoin. Previous PayPal account freezes in the Bitcoin community were related to chargeback volume. That was obviously not the problem here. Someone inside PayPal specifically decided that Bitcoin was a big enough risk that it should be prohibited. I see no greater compliment to a Hydra than cutting off one of her heads
..the dream lives on..

So long, CoinPal, and thanks for all the bitcoins!

After selling more than 60,000 bitcoins since its launch four months earlier, the operator of CoinPal has ended the service.

The operator posted an announcement describing the reason: PayPal froze the operator’s account after determining that bitcoin was an “ecurrency”.  PayPal’s Acceptable Use Policy specifically states that the service may not be used for a money service business that performs currency exchange activities however CoinPal’s announcement describes how the operator believed prior approval had been granted.

Another service by the operator, CoinCard, was halted but will likely re-open at some point.  CoinCard allows its customers to sell their bitcoins and receive payment through electronic delivery of a virtual gift card.  PayPal will no longer be offered as one of those redemption methods.

Because bitcoins are non-reversible and are not exposed to the risk that there will be a a chargeback or payment reversal, alternative methods do remain for where bitcoins can be sold in exchange for PayPal funds.  The #bitcoin-otc marketplace for instance shows multiple offers to buy bitcoins using PayPal as payment and rates offered are similar to those CoinCard had offered.

The loss of CoinPal though will be more significant to the Bitcoin community.  Many holding Bitcoin currency today used CoinPal to buy their first bitcoins.  The purchase limits were not large but for those new to bitcoin CoinPal provided a process for buying bitcoins that was familiar and quick.

There are almost no traders left on the #bitcoin-otc marketplace who still accept PayPal as a payment method due to potential risk that the transaction could be fraudulent or that a chargeback will occur after the bitcoins have already been delivered.

It is also unlikely for another service to try to do what CoinPal did as PayPal will likely take action towards any other services as well who exchange bitcoins for PayPal.

With CoinPal gone and few PayPal-friendly alternatives, those wishing to purchase small amounts of bitcoins, inexpensively, will likely need to use a cash instrument.  In the U.S., Dwolla and PopMoney are ACH-based and thus are not subject to credit card chargebacks.  The bitcoin exchange Mt. Gox is readying an automated method that, when completed, will allow Dwolla to be used to add and withdraw funds with the exchange.

Those in Europe are less affected as they have the ability to send bank wires (SEPA) to Mt. Gox, for a small fee.  Those in the U.S. do have the option to send a bank wire transfer though the per-wire fees to do so are prohibitive unless a larger amount of money is involved.

Though the ability to trade PayPal for bitcoins and vice-versa was a convenient service, Bitcoin has progressed past the point where it was greatly beneficial to have PayPal as an an option.  The options for buying and selling bitcoins have expanded rapidly in the four months since CoinPal opened.

Offsetting this loss may be the discovery that PayPal was not the only option available for for buying bitcoins but it particularly wasn’t that great of an option to begin with.  Wouldn’t it be ironic if the biggest take-away from this is that PayPal’s competitors make significant gains as a result?

We wouldn’t have reached this point so quickly without CoinPal having existed for the time that it did however.  For that we are grateful.

[Update: PayPal also took action over the weekend against another exchange , Bitcoin Morpheus.]

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