Even with Policy Changes, Selling Bitcoin Through PayPal Is a Risky Transaction

By Kyle Torpey Oct 29, 2014 2:52 PM EST

PayPal bitcoin

NEW YORK (InsideBitcoins) — One of the first rules that new users of bitcoin are forced to learn is that there are no chargebacks in cryptocurrencies. Some users are able to learn this from a more experienced bitcoin enthusiast who decides to show them the ropes, while others are forced to learn this valuable lesson on their own through personal experience.

In an interview with TWiT’s Leo Laporte from May 2013, Gavin Andresen talked about how he often receives emails asking if he can help someone gain access to lost bitcoins or reverse a fraudulent transaction. Anyone familiar with how bitcoin works as a payment protocol knows that there is nothing Gavin or any other bitcoin core developer can do to help these people.

Trading bitcoin for PayPal

One of the most prevalent forms of fraud in the early days of bitcoin involved trading bitcoin for fiat currency via PayPal. The buyer of the bitcoin would send some U.S. dollars, euros, or another form of fiat currency to the seller, and then the seller would send the bitcoin to an address provided by the buyer. A few days later, the buyer would perform a chargeback on the transaction. The PayPal payment would be reversed, and the seller would be left with nothing at the end of the trade.

A change in policy

PayPal recently decided to update the PayPal User Agreement when it comes to digital goods. These changes will become active on November 18, 2014. The specific part of this policy update that pertains to bitcoin can be seen below:

“Clause 7.3 (“Ineligible Items”) of the PayPal User Agreement will be amended as follows:

7.3 Ineligible Items. PayPal Buyer Protection only applies to PayPal payments for certain tangible, physical goods. Payments for the following are not eligible for reimbursement under PayPal Buyer Protection:

  • Intangible items, including Digital Goods (subject to exceptions as listed in Section 7.6
  • Services
  • Real estate
  • Businesses (when you buy a business)
  • Vehicles, including motorcycles, caravans, aircrafts and boats
  • Custom made items with SNAD issues
  • Travel tickets, including airline flight tickets
  • Items that violate PayPal’s Acceptable Use Policy
  • Purchases made on eBay that violate eBay’s Prohibited or Restricted Items Policy
  • Items which you collect in person, or arrange to be collected on your behalf, including at a retail point of sale
  • Industrial machinery used in manufacturing
  • Items equivalent to cash, including prepaid or gift cards
  • Personal Payments”

Due to the fact that the above changes to their user agreement did not specifically mention bitcoin, cryptocurrencies, or digital currencies of any kind, I reached out to PayPal for further clarification on this issue. A PayPal spokesperson responded, “The PayPal buyer protections only apply to physical goods and do not cover digital items, which would include crypto currencies like Bitcoin.” In other words, these updated terms do remove PayPal Buyer Protection from sales of bitcoin and other cryptocurrencies.

Don’t start selling bitcoins via PayPal just yet

Although the removal of buyer protection for bitcoin sales is definitely a move in the right direction, there are still massive risks involved with selling bitcoin via PayPal. PayPal Buyer Protection is a valuable tool for scam artists and fraudsters, but they still have plenty of other options at their disposal.

I asked PayPal for clarification on whether or not payments involved with bitcoin sales could still be reversed by claiming the purchase was an “unauthorized transaction.” PayPal was unwillingly to make a clarifying statement on this point, which means that claiming a transaction was not authorized could still be a point of attack for a scammer.

It’s possible that PayPal may use the IP addresses in account login histories to decide whether or not someone’s account has actually been hacked, but there are also issues with that method of seller protection. Although PayPal has been known to restrict the use of VPNs in the past, it may still be possible for a user to basically fake a hack on their account for the purpose of defrauding a seller of bitcoin.

If a PayPal user does not get the decision they want from the dispute resolution process, they can always turn to their credit card provider. It’s possible that the funding method used to purchase the bitcoin can still be used to process a chargeback, and PayPal has not been clear as to whether or not they would work with card providers to prevent this issue.

Selling bitcoin via PayPal is still a high-risk activity

Although these updates to the PayPal User Agreement seem like a move in the right direction, selling bitcoin via PayPal should still be viewed as a high-risk activity. The existence of chargebacks is always going to be an issue with any service that offers various forms of escrow or buyer protection. The issues associated with chargebacks are one of the core reasons bitcoin was created in the first place.

You can follow @kyletorpey on Twitter.

Facebook Comments


  • cwick

    sam do you still work for xcoins? i knew wade, and have talked to his replacement nick. nick was supposed to put me on the new beta site where xcoins is now allowing banks, but i cant get him to get back to me. hit me back and let me know if youre still there…would appreciate it….thnx….chadwick

  • cwick

    they screwed me so bad…a guy scammed me using stolen c.cards, and i now owe pp about 12k….

  • Sam

    May I suggest a safer alternative, xCoins.io. Users receive money with PayPal as usual, but they give bitcoin as a secured loan, instead of selling it. If something goes wrong (chargeback), the lender is protected by the loan agreement. Disclaimer: I work for xCoins.io

  • This should NOT be a problem!

    When I sell Bitcoin to someone, my address will show that the Bitcoin has moved from my Wallet to the buyers Wallet!

    This is VERY easy to confirm or even automate.

    As long as the charge back is removed, BITCOIN should be the safest item to sell through paypal!

  • Anon Wibble

    I’m actually boycotting paypal because of chargebacks.

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