PayPal has stopped processing payments for Auckland based Mega, the file storage and encryption firm, amid claims it is not a legitimate cloud storage service.

NetNames, a US group with funding from the Motion Pictures Association of America, pressured Visa and Mastercard to stop processing users’ payments for Mega, claiming its service was not legitimate or legally compliant, Mega said in a statement on Monday.

PayPal, the online payment system, was in turn pressured by the credit card companies to cease payments as well.

“PayPal has apologised for this situation and confirmed that Mega management are upstanding and acting in good faith,” the company said in a statement to the NZX.

“PayPal acknowledged that the business is legitimate, but advised that a key concern was that Mega has a unique model with its end to end encryption which leads to ‘unknowability of what is on the platform’.”

Mega was launched by internet entrepreneur Kim Dotcom in 2013 to replace his Megaupload empire, which was frozen after his high profile arrest at the behest of the US 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 the 2014 general election.

Earlier in 2015, Mega, which is controlled by interests associated with Australian investor Paul Choiselat, extended its deadline for a reverse NZX listing until March 31, from January 31.

Under the deal, TRS Investments would acquire Mega for $NZ210 million ($A203.26 million) by issuing 700 million shares at NZ30 cents apiece to Mega shareholders, after undertaking a 148 for one consolidation.

Mega shareholders would then own 99 per cent of TRS, which would change its name to Mega.

The cloud-storage firm said it is in talks with undisclosed alternative payment providers to replace PayPal which should be resolved by March and won’t further delay Mega’s planned reverse listing plans.

Mega says it now has 15 million registered customers across 200 countries.

BusinessDesk