Commentary

eBay Invites Internet Regulation, Backs Online Gambling Ban

This article appeared in Foxnews.com on June 7, 2006.

Rep. Bob Goodlatte is in the process of pushing through Congress a bill that would “ban” Internet gambling. I’ve previously explained why the bill is bad public policy.

But since that column, it has come to light that online auction giant eBay has thrown its support behind Goodlatte’s efforts. Why would an Internet company open its arms to congressional regulation of the Internet?

Some speculate that eBay is attempting to win favor with Goodlatte, who also happens to sit on the Congressional Internet Caucus. There’s probably some truth to that. But there’s another, more likely explanation for eBay selling out the e-commerce world: Good, old-fashioned protectionism.

First, a brief history lesson is in order.

eBay owns PayPal, the popular, online payment system favored by millions of auction sites, membership-based, sites, and bloggers. This wasn’t always the case. PayPal was actually founded in the late 1990s by Peter Thiel and Max Levchin, two libertarian-minded Silicon Valley entrepreneurs with a revolutionary vision. Thiel and Levchin saw the potential for PayPal to grow into a kind of private currency.

In his book The PayPal Wars, early PayPal marketing guru Eric M. Jackson recounts a stirring speech Thiel gave to the company’s early staff.

“PayPal will give citizens worldwide more direct control over their currencies than they ever had before,” Thiel said. “It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure.”

Unfortunately, that vision never panned out. PayPal thrived when it came to innovating and adapting to stay a step ahead of its early competitors. But the company proved less adept at slaying its more formidable antagonists: Lawyers and politicians.

Class-action suits spurred by trial lawyers attacked the company from one side, while frivolous patent-infringement claims pummeled from the other. State governments piled on next, arguing that the company should be subject to expensive banking regulations.

New York Attorney General Elliott Spitzer then struck at the very heart of Thiel and Levchin’s vision: Spitzer subpoenaed documents related to PayPal’s use in online gaming sites, arguing that the company’s refusal to snoop in on what its customers were doing with their own money on their own time was in violation of New York’s anti-gambling laws.

A U.S. attorney later followed Spitzer’s lead, and invoked the PATRIOT Act to investigate PayPal for suborning illegal activity with respect to Internet gambling.

The young start-up stammered. And fell. In the end, complying with the regulators, appeasing the politicians and fighting off the civil and criminal litigation was too much to bear. Thiel and Levchin abandoned their vision, and sold PayPal to eBay, a company with an established Internet presence, an experienced legal team on staff, and — to the detriment of PayPal’s loyal customers — a conciliatory corporate culture.

One of the first things eBay did after acquiring PayPal was to reconcile with Spitzer and the Justice Department. eBay paid a $10 million fine and promised to bar PayPal’s customers from using the service for online gaming. The company later announced an even more restrictive policy, forbidding customers from using PayPal for adult-oriented products and services, as well as “non-adult services whose Web site marketing can be reasonably misconstrued as allowing adult material or services to be purchased using PayPal,” a move that coincided with the Bush administration’s war on Internet pornography.

PayPal even suspended the accounts of bloggers who posted content on their sites that the company deemed offensive.

Today, Thiel and Levchin’s vision for PayPal is long dead. But it lives on in similar, offshore companies like Neteller and FirePay. These companies are safe and reliable (FirePay is traded on the London Stock Exchange), but aren’t subject to U.S. law, and so can be used for all sorts of goods and services the U.S. government has determined Americans aren’t grown-up enough to purchase. The most notable of these is Internet gambling.

Once your money leaves your bank account for a Neteller or FirePay “online wallet,” there’s no way to know how you then spend that money. Your bank doesn’t know you’ve set up an online poker account, or bought a plane ticket or a bottle of wine.

Enter Rep. Goodlatte. Goodlatte’s bill bans the use of financial services to facilitate Internet gambling sites. It’s already illegal to operate a gaming site on U.S. soil. But most experts agree it’s still legal to “place” a bet. Goodlatte wants to put up a wall between the domestic “bet placing” and the offshore “bet taking,” which FirePay and Neteller make possible.

If banks and other financial institutions are going to be responsible for policing what their customers do online, as will happen should Goodlatte’s bill become law, it’s safe to assume that they’ll comply by simply banning all transactions with offshore payment services.

Which means that Goodlatte’s bill’s main effect will be to shield PayPal, a domestic company, from foreign competitors (foreign competitors that, ironically, are doing exactly what PayPal’s founders envisioned).

What’s more, the letter eBay government relations director Brian Bieron sent to Goodlatte announcing the company’s support of his bill actually goes above and beyond what any gambling foes in Congress have called for. Bieron in fact calls for the actual prosecution of Internet gamblers themselves, a policy which could only be enforced by allowing law enforcement officials to essentially begin monitoring everyone’s online activity, including tracing visited websites back to IP addresses.

A law similar to what Bieron is advocating hit the books in Washington State this month. It makes online gambling a Class C felony, on par with child pornography.

The funny thing is, even as eBay has joined Rep. Goodlatte’s moral crusade against gambling, the company’s overseas operations are moving into the gaming business. According to the gaming industry publication igamingnews.com, PayPal Europe has recently entered into agreements with two online gambling services to allow PayPal to be used by Europeans who want to gamble online.

Industry insiders estimate that as much as 4 percent of the U.S. population participates in online gambling. That’s about 12 million people. It’s likely that a good percentage of those 12 million active, online users also patronize eBay. I wonder what they’d think if they knew that eBay has called for them to be arrested and prosecuted?

Radley Balko is a policy analyst specializing in “nanny state” issues and author of the forthcoming study “Overkill: The Rise of Paramilitary Drug Raids in America.”