Diaspora hit by temporary PayPal embargo

update Online payments giant PayPal has today reversed its mysterious decision to block the account of decentralised social-network Diaspora.

(Screenshot by Luke Hopewell/ZDNet Australia)

Diaspora is an open-source, decentralised social network that offers users control over the data they upload and where it is stored. Still in its alpha phase, Diaspora was born out of Facebook's various privacy-related incidents.

Diaspora relies on donations to build the network. It is still one of the most successful projects on funding platform Kickstarter, raising its US$10,000 funding goal in just 12 days. Since then it has gone on to raise US$200,641.

Yesterday, however, PayPal froze the Diaspora Project's PayPal account, providing no apparent reason.

The Diaspora Project team immediately took to its blog to draw attention to the issue.

"We're sorry to say that PayPal has frozen our account, so we're currently unable to process contributions by credit card.

We're working as fast as we can to resolve this, and will have an alternative up ASAP. In the meantime, if you are able to contribute via Flattr, please do.

PayPal is notorious for arbitrary blocking of legitimate donations. We'll get this sorted out as quickly as we can."

Diaspora revealed in a later post that another payment gateway service had stepped in, and that community donations waiting to clear via the frozen PayPal account carried a total value of US$45,000.

Furthermore, PayPal told Diaspora that the account would be locked for 180 days, much to the dismay of the open-source social network.

"PayPal just sent us an email saying 'appeal denied', where they announced that they would lock up the Diaspora community’s donations for 180 days.

Yes, you heard that right. PayPal gets to earn interest on all of our donations for six months, while we have to wait for PayPal to come up with a reason to justify their decision."

The social start-up added that it would also look to get its lawyer involved in the debacle.

Seven hours ago, however, PayPal announced via its Twitter account that it had released the funds to the Diaspora Project and is working on the situation.

"We can't comment on specifics of Diaspora's account, but can confirm that we're working with them and have released their funds," PayPal tweeted.

PayPal told ZDNet Australia that sometimes account holds are necessary for security reasons.

"It's unfortunate when holds happen, but considering the volume that goes through PayPal, the instances are limited in proportion. PayPal serves more than 100 million people around the world, completes more than 5 million transactions a day and total payment volume is more than [US]$3,600 every second. While it is never our goal to negatively impact any of our customers, maintaining a secure payment service is our top priority to in turn provide merchants, consumers and charitable causes a global payment option they can trust," the payments service said in a statement.

Mystery continues to circle the reason for the payment embargo, but this is not the first time that a start-up has had its funds frozen after a large number of donations flowed in.

Cult video game hit Minecraft also ran into a PayPal embargo last September, after sales of the game exploded. PayPal froze the developer's account, worth €600,000.

"My account is still limited. I've called them three times, they keep telling me it's being reviewed. Most recently they told me it'd take up to two more weeks for it to get resolved, and that if they decide something bad's [been] going on, they're going to keep the money," Minecraft developer Notch wrote at the time.

The Diaspora Project has promised more information on the situation soon.

More on this story as it develops.

Updated at 3:14pm, 20 October 2011: added comment from PayPal.