Senator's letters reveal pressure on MasterCard, Visa to stop processing payments for Mega

As NZX reverse listing looms, the Dotcom-founded file-sharing service is suddenly left high-and-dry without a payment processing system — but its chief executive says a solution is in train.

It has now been more than a week since PayPal stopped processing payments for Mega.

The Kim Dotcom-founded file-sharing site was forced to temporarily eliminate data caps and provide free extensions for paying subscribers.

It's still twisting in the wind – not a great look as its reverse listing on the NZX approaches (March 31 is the latest date following a series of push-backs). 

Mega chief compliance officer Stephen Hall says the chain of events goes like this: NetNames produced a study that identified Mega as one of a series of cyberlockers that harbours copyright-infringing material. NetNames is part-funded by Dotcom's arch-nemeses, the Motion Picture Association of America (MPAA), which is also a party to the civil action lodged against him in a California court.

NetNames then lobbied Patrick Leahy, a Democrat who represents Vermont in the US Senate and serves as a ranking member on its Judiciary Committee (Hall notes Leahy has received campaign donations from several Hollywood studios).

Senator Leahy in turn pressured MasterCard and Visa, Hall says.

And the credit card companies in turn leaned on PayPal to stop processing payments for Mega, which it did on February 27.

MasterCard and Visa declined to answer NBR's questions, while PayPal has yet to reply.

Mr Leahy's press secretary was happy to confirm the senator had seen NetNames' report, and forwarded NBR copies of the letters that the senator subsequently sent to the respective chief executives of MasterCard and Visa in November – apparently setting in chain the series of events that has left Mega high-and-dry for a payment solution.

Read the senator's letter to Visa and MasterCard's bosses here

In short, the senator encourages the Big Two credit card companies not to do business with the "cyberlockers" identified by NetNames which, he writes, "exist to unlawfully store and disseminate infringing files around the world." Payment processors gain around $US130,000 revenue from each of the cyberlockers, Senator Leahy notes. He sees this money coming from unlawful activities, and tells MasterCard and Visa's CEOs that by supporting payment processing for sites like Mega, they lend cyberlockers a "harmful imprimatur of legitimacy."

Mr Hall says Mega complies with the laws of the US and New Zealand; moves quickly to remove any infringing material; and has as good if not stronger protection against infringing as other file sharing services such as the popular Dropbox. He also notes that encryption is now common to many services, including Google Drive (encryption is a key point of concern for NetNames as it means Mega is essentially like a secret Swiss bank of online data, with no way of knowing what some people are squirreling away, or sharing with their circle).

It's unsettling that Visa and MasterCard would (apparently) target a company that is not breaking any law.

However, there is a nuance here. Mega is the only service of any scale that allows its customers to control encryption, meaning it can't snoop on customer files not matter what agency is leaning on it, or indeed serving it with a warrant.

The end-user controlled encryption, for its file sharing and the recently introduced MegaChat, is a selling point for Mega. Certainly, Kim Dotcom has been pushing them hard on social media recently.

But it's also not clear, from NBR's point-of-view, how end-user encryption sits with the recently introduced  Telecommunications (Interception Capability and Security) Act, which requires a network operator to make communications interceptable (a grey area is that the law gives the ICT Minister discretion to decide if the obligations imposed on network operators should also be imposed on a service provider such as Mega; Mega chief executive Graham Gaylard and I debate that point during his Ask Me Anything session here).

Meanwhile, Mr Hall is pitching the PayPal pull-out as no particular big deal. There are many other payment processing solutions out there he says, and he's right (though PayPal's one-click system is one of the most popular).

But there's also the issue that PayPal and its rivals are tied to your credit card, and for most people that means MasterCard or Visa. Alternatives like BitCoin are right-on, but still niche – and Mr Dotcom and Mega investors want hundreds of millions of customers, not a few cutting-edge geeks.

Mr Hall says he's confident he can find a company willing to withstand political pressure.

On Friday morning, NBR asked Hall how Mega's hunt for a new payment processing solution was going.

"Three new providers have been signed up and a significant group is keen to work with Mega," he replied.

"We are happy with the progress and expect to implement several payment systems over the next few weeks."

Do these new systems support MasterCard and Visa payments?

"You’ll have to wait and see," he replied.

Dotcom steps back
Mega was launched by Mr Dotcom in 2013 to replace his Megaupload empire, which was frozen after his high-profile arrest at the behest of the US federal government.

He has since stepped back from the firm to fight his extradition and to bankroll the Internet Party, which failed to gain seats in Parliament at last year's general election – although he was very active over Christmas as he negotiated a deal with a hacker group that had brought down Sony's network, offering premium Mega accounts if the group stood down.

Earlier this year TRS, which is controlled by interests associated with Australian investor Paul Choiselat, extended its deadline for a reverse listing until March 31 from January 31. Under the deal, TRS would acquire Mega for $210 million by issuing 700 million shares at 30c apiece to Mega shareholders, after undertaking a 148 for 1 consolidation. Mega shareholders would then own 99% of TRS, which would change its name to Mega.

The company claims it now has 15 million registered customers across 200 countries, up from seven million customers when the TRS reverse listing was announced last year.

Some 18.8% of Mega's shares have been frozen by a restraining order over the assets of Auckland businessman William Yan.

Shares of shell company TRS last traded at four-tenths of a cent.

ckeall@nbr.co.nz

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