Regulating Internet Payment Intermediaries

This paper examines legal and policy issues raised by changes in payment methods related to the rise of the Internet. The two major changes – the rise of P2P systems like PayPal, and the rise of Internet billing systems (EBPP) to replace the use of paper bills and checks – both involve new intermediaries that facilitate payments made by conventional payment systems. The paper first discusses how those systems work. It then discusses problems in the framework currently used to regulate those systems in the United States, which has not been updated to protect consumers from the special problems those systems raise. Finally, the paper considers problems with the potential shift of payments services from the heavily regulated banking industry to new and unregulated Internet-related startups. The paper considers a variety of strategies for producing a level field of competition between banks and the new entities and at the same time providing adequate protection for the consumers that use the systems in question

Regulating Internet Payment Intermediaries

The Internet has produced significant changes in many aspects of commercial interaction. The rise of Internet retailers is one of the most obvious changes, but oddly enough the overwhelming majority of commercial transactions facilitated by the Internet use a conventional payment system. Thus, even in 2002, shoppers made at least eighty percent of Internet purchases with credit cards. To many observers, this figure has come as a surprise. The early days of the Internet heralded a variety of proposals for entirely new payment systems – generically described as electronic money – that would use wholly electronic tokens that consumers could issue, transfer, and redeem. But years later, no electronic-money system has gained a significant role in commerce. The continuing maturation of the Internet, however, has brought significant changes to the methods by which individuals make payments. Person-to-person (P2P) systems like PayPal now make hundreds of millions of payments a year between individuals. The most common purpose is to facilitate the purchase of items at Internet auctions, but increasingly P2P transfers are used to transfer funds overseas. Less far along, but gaining transactions rapidly, are a variety of systems for electronic bill presentment and payment (EBPP). Interestingly, both of these developments follow a less ambitious path than the still-hypothetical electronic-money systems: they involve the use of intermediaries to piggyback on existing systems to provide payment. Thus, in essence, they use the technology of the Web site to facilitate the use of conventional payment networks. However disparate these developments might seem at first glance, they present a common challenge to the regulatory system. Unlike banks, which control the execution of payment transactions in conventional payment systems, the intermediaries that populate these new sectors generally are not inevitably subject to regulatory supervision. At most, they are subject to regulation as money transmitters (akin to the regulation of Western Union)

The Promise of Internet Intermediary Liability

The Internet has transformed the economics of communication, creating a spirited debate about the proper role of federal, state, and international governments in regulating conduct related to the Internet. Many argue that Internet communications should be entirely self-regulated because such communications cannot or should not be the subject of government regulation. The advocates of that approach would prefer a no-regulation zone around Internet communications, based largely on the unexamined view that Internet activity is fundamentally different in a way that justifies broad regulatory exemption. At the same time, some kinds of activity that the Internet facilitates undisputedly violate widely shared norms and legal rules. State legislatures motivated by that concern have begun to respond with Internet-specific laws directed at particular contexts, giving little or no credence to the claims that the Internet needs special treatment. This Article starts from the realist assumption that government regulation of the Internet is inevitable. Thus, instead of focusing on the naive question of whether the Internet should be regulated, this Article discusses how to regulate Internet-related activity in a way that is consistent with approaches to analogous offline conduct. The Article also assumes that the Internet\u27s most salient characteristic is that it inserts intermediaries into relationships that could be, and previously would have been, conducted directly in an offline environment. Existing liability schemes generally join traditional fault-based liability rules with broad Internet-specific liability exemptions. Those exemptions are supported by the premise that in many cases the conduct of the intermediaries is so wholly passive as to make liability inappropriate. Over time, this has produced a great volume of litigation, mostly in the context of the piracy of copyrighted works, in which the responsibility of the intermediary generally turns on fault, as measured by the intermediary\u27s level of involvement in the challenged conduct. This Article argues that the pervasive role of intermediaries calls not for a broad scheme of exoneration, premised on passivity, but rather for a more thoughtful development of principles for determining when and how it makes economic sense to allocate responsibility for wrongful conduct to the least cost avoider. The Internet\u27s rise has brought about three changes that make intermediaries more likely to be least cost avoiders in the Internet context than they previously have been in offline contexts: (1) an increase in the likelihood that it will be easy to identify specific intermediaries for large classes of transactions, (2) a reduction in information costs, which makes it easier for the intermediaries to monitor the conduct of end users, and (3) increased anonymity, which makes remedies against end users generally less effective. Accordingly, in cases where intermediaries can feasibly control the conduct, this Article recommends serious attention to the possibility of one of three different schemes of intermediary liability: traditional liability for damages, takedown schemes in which the intermediary must remove offensive content upon proper notice, and \u27hot list schemes in which the intermediary must avoid facilitation of transactions with certain parties. Part III of this Article uses that framework to analyze the propriety of intermediary liability for several kinds of Internet-related misconduct. This Article is agnostic about the propriety of any particular regulatory scheme, recognizing the technological and contextual contingency of any specific proposal. Because any such scheme will impose costs on innocent end users, selecting a particular level of regulation should depend on policymakers\u27 view of the net social benefits of eradicating the misconduct, taking into account the intermediaries\u27 and innocent users\u27 compliance costs associated with the regulation. Still, the analysis of this Article suggests three points. First, the practicality of peer-to-peer distribution networks for the activity in question is an important consideration because those networks undermine the regulatory scheme\u27s effectiveness, thereby making regulation less useful. Second, the highly concentrated market structure of Internet payment intermediaries makes reliance on payment intermediaries particularly effective as a regulatory strategy because of the difficulty illicit actors have in relocating to new payment vehicles. Third, with respect to security harms, such as viruses, spam, phishing, and hacking, this Article concludes that the addition of intermediary liability in those cases is less likely to be beneficial because market incentives appear to be causing intermediaries to undertake substantial efforts to solve these problems without the threat of liability

Defining and Regulating Cryptocurrency: Fake Internet Money or Legitimate Medium of Exchange?

Digitalization makes almost everything quicker, sleeker, and more efficient. Many argue cryptocurrency is the future of money and payment transfers. This paper explores how the unique nature of cryptocurrencies creates barriers to a strict application of traditional regulatory strategies. Indeed, state and federal regulators remain uncertain if and how they can regulate this cutting-edge technology. Cryptocurrency businesses face difficulty navigating the unclear regulatory landscape, and consumers frequently fall prey to misinformation. To reconcile these concerns, this paper asserts cryptocurrency functions as “currency” or “money” and should be treated as such for regulatory purposes. It also proposes each state implement a uniform cryptocurrency-specific framework following the Uniform Regulation of Virtual-Currency Business Act. Such a harmonious approach would reduce compliance costs for cryptocurrency businesses, protect consumers, and provide satisfactory state and federal oversight

Bitcoin: the wrong implementation of the right idea at the right time

This paper is a study into some of the regulatory implications of cryptocurrencies using the CAMPO research framework (Context, Actors, Methods, Methods, Practice, Outcomes). We explain in CAMPO format why virtual currencies are of interest, how self-regulation has failed, and what useful lessons can be learned. We are hopeful that the full paper will produce useful and semi-permanent findings into the usefulness of virtual currencies in general, block chains as a means of mining currency, and the profundity of current ‘media darling’ currency Bitcoin as compared with the development of block chain generator Ethereum. While virtual currencies can play a role in creating better trading conditions in virtual communities, despite the risks of non-sovereign issuance and therefore only regulation by code (Brown/Marsden 2013), the methodology used poses significant challenges to researching this ‘community’, if BitCoin can even be said to have created a single community, as opposed to enabling an alternate method of exchange for potentially all virtual community transactions. First, BitCoin users have transparency of ownership but anonymity in many transactions, necessary for libertarians or outright criminals in such illicit markets as #SilkRoad. Studying community dynamics is therefore made much more difficult than even such pseudonymous or avatar based communities as Habbo Hotel, World of Warcraft or SecondLife. The ethical implications of studying such communities raise similar problems as those of Tor, Anonymous, Lulzsec and other anonymous hacker communities. Second, the journalistic accounts of BitCoin markets are subject to sensationalism, hype and inaccuracy, even more so than in the earlier hype cycle for SecondLife, exacerbated by the first issue of anonymity. Third, the virtual currency area is subject to slowly emerging regulation by financial authorities and police forces, which appears to be driving much of the early adopter community ‘underground’. Thus, the community in 2016 may not bear much resemblance to that in 2012. Fourth, there has been relatively little academic empirical study of the community, or indeed of virtual currencies in general, until relatively recently. Fifth, the dynamism of the virtual currency environment in the face of the deepening mistrust of the financial system after the 2008 crisis is such that any research conclusions must by their nature be provisional and transient. All these challenges, particularly the final three, also raise the motivation for research – an alternative financial system which is separated from the real-world sovereign and which can use code regulation with limited enforcement from offline policing, both returns the study to the libertarian self-regulated environment of early 1990s MUDs, and offers a tantalising prospect of a tool to evade the perils of ‘private profit, socialized risk’ which existing large financial institutions created in the 2008-12 disaster. The need for further research into virtual currencies based on blockchain mining, and for their usage by virtual communities, is thus pressing and should motivate researchers to solve the many problems in methodology for exploring such an environment

Beyond Bitcoin: Issues in Regulating Blockchain Transactions

The buzz surrounding Bitcoin has reached a fever pitch. Yet in academic legal discussions, disproportionate emphasis is placed on bitcoins (that is, virtual currency), and little mention is made of blockchain technology—the true innovation behind the Bitcoin protocol. Simply, blockchain technology solves an elusive networking problem by enabling “trustless” transactions: value exchanges over computer networks that can be verified, monitored, and enforced without central institutions (for example, banks). This has broad implications for how we transact over electronic networks. This Note integrates current research from leading computer scientists and cryptographers to elevate the legal community’s understanding of blockchain technology and, ultimately, to inform policymakers and practitioners as they consider different regulatory schemes. An examination of the economic properties of a blockchain-based currency suggests the technology’s true value lies in its potential to facilitate more efficient digital-asset transfers. For example, applications of special interest to the legal community include more efficient document and authorship verification, title transfers, and contract enforcement. Though a regulatory patchwork around virtual currencies has begun to form, its careful analysis reveals much uncertainty with respect to these alternative applications

The Frontiers of Peer-to-Peer Lending: Thinking About a New Regulatory Approach

The growth of online alternative lending presents several advantages for both those seeking credit and those with excess capital to lend. Over the past decade, several different models of peer-to-peer lending have emerged in the US and U.K. Each of these models has developed in response to the different regulatory system it faces, which has led to the models’ different risk and reward profiles. However, the current regulatory framework for regulating peer-to-peer lending, especially in the U.S., leaves much to be desired. The inadequate regulatory regime not only hampers the potential for growth and further innovation in the industry, but also creates risks for consumers, lenders, and, as the sector grows, entire markets. There is no clear or easy answer as to the optimal regulatory regime, but regulators should at least consider the basic functions of peer-to-peer lending and how to address risks with a more comprehensive and sensible model for regulation