The Internet is exploding today with reports that PayPal allegedly froze funds intended for charity after deeming it “not a worthy cause.” It all stems from this blog post on, a self-titled “fail blog of hand crafts.”

Out of the kindness of their hearts, the folks at Regretsy created “a giant gift exchange program, where you could buy a gift for the over 200 children [they’re] helping.” They state in their blog post that eventually they received so much money, they decided to send out monetary gifts as well. However, this holiday dream quickly turned into a nightmare when PayPal allegedly froze Regretsy’s account. The Regretsy folks, barely disheartened, decided instead to take toys that were already purchased and offer them up for sale on their site. “You could buy them according to what you wanted to spend, and we would send them on to the recipient of your gift, just like any other retailer.” If this sounds familiar, let me remind you that Amazon allows people to anonymously send gifts to people through its Wish List program.

It's PayPal's World - We Are Simply Living In ItHowever, Regretsy reports that PayPal once again shut it down. It’s said the company demanded that Regretsy “must refund all the donations and purchases that have not been processed.” One of the most shocking details comes from the alleged conversation the author of the Regretsy blog post had with a PayPal representative. The author tells PayPal that in the PDF instructions for the Donate button, it says the button can be used for “worthy causes.” The PayPal representative is said to have responded that what Regretsy was doing was not a worthy cause — it was charity. Regretsy reports that the representative tried to prove his point with an example: “You can use the donate button to raise money for a sick cat, but not poor people.” So charity is not a worthy cause, if what the Regretsy story alleges is true — at least not in PayPal’s world. What’s more, PayPal made Regretsy return the donations, as well as the sales from the toys. Sounds about right if PayPal was only trying to protect those who gave money to Regretsy, except for the fact that PayPal keeps all the hefty transaction fees for its own gain.

So there you have it, folks. From Regretsy’s reported interactions with PayPal, it seems that you are forbidden from using PayPal to accept donations to buy toys for needy children, and forced to return the money that was donated for the cause. However, at the same time, PayPal happily walks away with the profits it made from those same transactions. Is PayPal going to return those fees? Probably not.

I talked with a friend of mine who is currently studying law and asked for his opinion; here are his thoughts:

First off, Regretsy did not break any policies or agreements. Furthermore, PayPal states on [its] website that “donations not associated with a charity or nonprofit organization don’t need to meet these requirements, but all donations are subject to review.” So clearly [PayPal] allow[s] donations to any company, organization, or person.

If Regretsy’s side of the story is as black and white as reported, I, like many others, find this situation extremely unsettling. The problem, though, is that there is no true PayPal alternative. I can’t easily send money to friends and family using my debit card, and there aren’t that many services competing with PayPal that offer a high quality level of service. What I personally would like to see is that wire transfers be made free — at least transfers that stay within the country. I know that in Europe, wire transfers are used as frequently as cash is exchanged, primarily because they are free. Why is it so expensive for us here in the United States?

Whether it is guilty of these allegations or innocent, PayPal has entered a self-invoked death spiral on the social media front by the way it’s dealing with the situation thus far. People who have left posts on PayPal’s Facebook wall have reported many of the posts being deleted, perhaps in an attempt to conceal the situation. If that truly is PayPal’s intent, I can say that it will not end well for the company in the slightest and it certainly will not help its case.

I contacted PayPal for a comment; here’s what the representative there had to say:

We can’t comment specifically on the account due to our privacy policy. However, we can confirm that the funds have been released and we are working directly with the account holder on this matter. We are working with Regretsy to make a donation to help [its] cause. We’re very sorry this occurred.

For reference, we have clear guidelines for any business [that] uses PayPal to accept donations. For example, we require certain documentation to prevent misuse of the donated funds and, if the recipient claims charitable status, to determine whether they are properly registered. As a regulated payment service, we’re also required by law to follow these guidelines.

We appreciate that this can be an inconvenience, but we have a responsibility to all our customers — both donors and recipients; or buyers and sellers. In this instance, we recognized our error and moved as swiftly as possible to fix it.

Fair enough, but what about the representative’s statement that giving toys to needy families is not a worthy cause? I am glad PayPal is taking some responsibility for this mess, but I also cannot wait to see how the rest of this unfolds. (Will the original representative be terminated? Will PayPal’s policies change as a result of this highly publicized incident? We shall see.)

What do you think about all this? Are you ditching PayPal forever or is it simply too vital a service for you to give up?