Peers have complained that Web-tapping legislation would undermine confidence in e-commerce in the UK. Meanwhile the Government's own e-commerce strategy has been delayed pending a Treasury spending review.
Opposition peers this week pleaded with the Government to rethink the Regulation of Investigatory Powers Bill - or face "heading for the rocks".
The Bill will require IT departments to hand over encryption keys to law enforcement agencies without informing company directors - a practice that could breach commercial confidentiality.
It is understood that corporate lawyers are advising businesses not to set up e-commerce units in the UK if the legislation is passed.
Lord Cope had earlier called on the Government to back down in the face of "very strong opinion against the Bill" which feared a "loss of confidence in electronic commerce".
Liberal Democrat Lord McNally went further, "If the Government doesn't heed the warnings it is getting, it is heading for the rocks. This Bill has real problems."
In addition, the London School of Economics said the Bill could cost British business up to £46bn over five years in implementation and lost e-trade.
The RIP Bill would cause a "loss of confidence in e-commerce, unacceptable costs to business and to the UK economy, confusion and uncertainty at numerous levels of business activity and an onerous imposition on the rights of individuals," said the LSE report, commissioned by the British Chambers of Commerce (BCC).
The BCC suggested there was "compelling evidence" that the enactment of RIP will create a trend among UK firms to establish a range of operations offshore, as reported by Computer Weekly.
Despite the criticism, the Government is adamant it will force the Bill through. "We are not going to withdraw this Bill," said Government leader Lord Bassam of Brighton. The Government said criticism of the legislation was largely anecdotal and rhetoric.
Next week the Lords will examine part III - Access to Protected Data - of the Bill, which will define the application of decryption notices to encrypted data.
Meanwhile, the Cabinet Office is set to miss a key deadline for the Government's e-commerce strategy, as policy makers await the results of a Treasury spending review.
Last year 30 June was set as the launch date for an annual "state of e-commerce" report. But this will not now be released until September. According to e-envoy Alex Allan, the report will not appear until Treasury priorities are set.
Allen said, "We will be publishing the first annual report in September, one year after the email@example.com report was published.
"This will allow us to set out in more detail the Government's plans for taking forward the e-commerce and e-Government agenda in the light of the spending review White Paper which the Chancellor is publishing in the summer."