eBay 2002 Annual Report Download - page 56

If PayPal were found to be subject to or in violation of any laws or regulations governing banking, it could
be subject to liability and forced to change its business practices.
PayPal believes that the licensing or approval requirements of the OÇce of the Comptroller of the
Currency, the Federal Reserve Board and other federal or state agencies that regulate banks, bank holding
companies or other types of providers of electronic commerce services do not apply to PayPal, except for
certain money transmitter licenses mentioned below. However, one or more states may conclude that,
under its or their statutes, PayPal is engaged in an unauthorized banking business. PayPal received written
communications from regulatory authorities in New York, most recently in February 2002, and Louisiana
expressing the view that its service as it formerly operated constituted an unauthorized banking business,
and from authorities in California and Idaho in 2001 that its service might constitute an unauthorized
banking business. PayPal has taken steps to address these states' concerns, and has received a conclusion
from the New York Banking Department that its current business model does not constitute illegal
banking. PayPal also has obtained licenses to operate as a money transmitter in California, Louisiana and
Idaho. However, we cannot assure you that the steps PayPal has taken to address state regulatory concerns
will be eÅective in all states. If PayPal is found to be engaged in an unauthorized banking business in one
or more states, it might be subject to monetary penalties and adverse publicity and might be required to
cease doing business with residents of those states. Even if the steps it has taken to resolve these states'
concerns are deemed suÇcient by the state regulatory authorities, PayPal could be subject to Ñnes and
penalties for its prior activities. The need to comply with state laws prohibiting unauthorized banking
activities could also limit PayPal's ability to enhance its services in the future. Any change to PayPal's
business practices that makes the service less attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on eBay, in which case our business would
suÅer.
If PayPal were found to be subject to or in violation of any laws or regulations governing money
transmitters, it could be subject to liability and forced to change its business practices.
A number of states have enacted legislation regulating money transmitters and PayPal has applied for
licenses under this legislation in 28 jurisdictions. To date, PayPal has obtained licenses in 20 states and the
District of Columbia. As a licensed money transmitter, PayPal is subject to bonding requirements,
restrictions on its investment of customer funds, reporting requirements and inspection by state regulatory
agencies. If PayPal's pending applications were denied, or if it were found to be subject to and in violation
of any money services laws or regulations, PayPal also could be subject to liability or forced to cease doing
business with residents of certain states or to change its business practices. Any change to PayPal's
business practices that makes the service less attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on eBay, in which case our business would
suÅer. Even if PayPal is not forced to change its business practices, it could be required to obtain licenses
or regulatory approvals that could impose a substantial cost on PayPal.
If PayPal were to be found subject to or in violation of any laws or regulations governing electronic fund
transfers, it could be subject to liability and forced to change its business practices.
Although there have been no deÑnitive interpretations to date, PayPal has assumed that its service is
subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result,
among other things, PayPal must provide advance disclosure of changes to its service, follow speciÑed error
resolution procedures and absorb losses from transactions not authorized by the consumer. In addition,
PayPal is subject to the Ñnancial privacy provisions of the Gramm-Leach-Bliley Act and related
regulations. As a result, some customer Ñnancial information that PayPal receives is subject to limitations
on reuse and disclosure. Additionally, pending legislation at the state and federal levels may restrict further
PayPal's information gathering and disclosure practices. Existing and potential future privacy laws may
limit PayPal's ability to develop new products and services that make use of data gathered through its
service. The provisions of these laws and related regulations are complicated, and PayPal does not have
extensive experience in complying with these laws and related regulations. Even technical violations of
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