Sex industry and cryptocurrency: A match made in risky business

New technology could help adult companies avoid usual complications of traditional finance options

NEW YORK— Sex-toy entrepreneur Polly Rodriguez is sick of bankers giving her funny looks.

Her online shop, Unbound, sells candy-coloured vibrators, bangle handcuffs and other intimate products for women. Despite selling out inventory, Rodriguez said she struggled to find a bank that would extend her a small-business loan. She chalked it up to finance industry jitters when it comes to sex.

Now she sees a ray of hope coming from digital currency.

“When you get labelled as an adult company, you get blacklisted, effectively,” Rodriguez said. “The moment you put it into code and take out the subjective moral judgment, it’s a shift.”

Banks and credit-card companies can be hidebound when it comes to adult businesses, which can be big moneymakers. Sex toys alone haul in more than $20 billion (U.S.) a year around the world, and by 2020, sales are expected to reach almost $30 billion, according to London-based market-research firm Technavio. Still, financial firms consider sex-toy sellers high risk, lumping them in with businesses such as escort services and pornography websites, which can sometimes flirt with illegality.

Credit-card companies are also wary of chargebacks, which happen when a cardholder claims a transaction is fraudulent. For instance, a man charges his pornwatching to his card, then denies he was doing it when his wife discovers the payment, leaving the card company to eat the money.

Freedom from such complications has some adult companies cheering the swell of digital currencies, including Bitcoin and Ethereum, and the rise of digitalpayment tokens, which could help them skirt skeptical intermediaries and allow customers to make direct payments.

Xavi Clos, head of production at BaDoink VR, a virtual-reality porn-produc- tion company, said that tokens show big potential in the adult industry because they’re anonymous and direct ways to accept payment. The problem, he said, is “for actual commercial use, there’s nothing that’s ready for prime time yet.” Transaction costs are still too high, and the infrastructure, subject to hacks and freezes, must improve first.

That’s not for a lack of trying. A cottage industry of digital-payment mechanisms for sex-focused businesses is emerging. One early entrant, SpankChain, is setting up a payment ecosystem based on the Ethereum blockchain.

In a white paper, authored by “Spanktoshi Nakabooty” — a reference to Bitcoin’s anonymous creator with the nom de guerre Satoshi Nakamoto — SpankChain explains how the tokens can be used as payment tools for webcams. The virtual payment arrangement will differentiate itself by charging a 5-per-cent fee on performer earnings, compared with the 30 per cent to 50 per cent charged by traditional cam services, according to the Nakabooty white paper.

Such tokens would revolutionize webcams, which allow performers to stream live shows while users reward them with virtual tips. Paymentprocessing costs currently chew up a lot of their earnings. This year, CEO Ameen Soleimani said SpankChain would promote its own webcam site as a demonstration project. Porn actress Giselle Palmer starred in its first live-cam show on New Year’s Day.

Another coin for the adult-entertainment industry, called Intimate, aims to cater to webcam businesses but also extend to businesses including sex-toy retailers, short-stay hotels and escort services in countries where they’re legal.

Intimate founder Reuben Coppa spread the word about Intimate’s initial coin offering at a cryptocurrency conference in New York in November. Coppa wore a T-shirt bearing the company’s logo, which resembles a stylized thong.

Coppa, an Australian who speaks a mile a minute, zigzagged from talk of the ICO to other projects that will go with the payment mechanism. The company is developing something called Intimate Reputation, a blockchain-enabled rating system that allows escorts to know more about their customers before meeting them in person.

“Right now, what they rely on is phone calls and the tone of text messages” to determine whether an interaction with a client will be safe, Coppa said. “By applying something like an Uber or Airbnb rating, they could make behaviour better.”

Companies such as SpankChain and Intimate face an uphill climb with regulators already leery of ICOs.

The U.S. Securities and Exchange Commission warned investors last year that they are likely hotbeds of fraud and created a cyber division that will focus in part on violations. The unit comes as ICOs raked in more than $2 billion in capital last year, according to analysts at Autonomous Research LLC in New York. Companies are also betting that users will eventually get comfortable paying with virtual currency, which is far from certain.