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Money transmission laws are complex. (See http://www.thinkcomputer.com/corporate/whitepapers/heldhostage.pdf http://www.thinkcomputer.com/corporate/whitepapers/
Money transmission laws are complex. (See http://www.thinkcomputer.com/corporate/whitepapers/heldhostage.pdf http://www.thinkcomputer.com/corporate/whitepapers/heldhosta... .) They're designed to be complex. Most of the laws passed in the past twenty years have been designed by one man, Ezra Levine (http://www.mofo.com/ezra-c-levine/ http://www.mofo.com/ezra-c-levine/), who is now a lawyer at Morrison & Foerster. His client is The Money Services Round Table (TMSRT), and its membership comprises some of the largest money transmitters in the country.
Square has a money transmission license in California but it is not part of TMSRT. What's surprising about this situation is the following:
1) Square has a lot of lawyers. It has enough money and clout that they are probably very good lawyers. Yet even all of that money, clout (Jack Dorsey) and lawyering could not protect Square from this insane regulatory regime.
2) It is not clear to me, having studied this topic for two years basically full-time, that Square actually is a money transmitter. They might be, but they might not be. Per federal regulations (I think 31 CFR § 1010 point something), they aren't; they are a payment processor, but states ignore these regulations. Even though the definition varies from state to state, it's hard for me to figure out what Square does with money that is not done on behalf of a bank, and banks are exempt from every state money transmission statute to the best of my knowledge. Usually it's just assumed that their agents are also exempt (hence the federal "payment processor" term--suddenly you're not a "money transmitter").
3) State regulators talk to one another but these laws are rarely, if ever, enforced. Virtually every payment startup I know of that isn't Square is violating them, including several YC startups, and even non-payment startups. It's not clear to me what happened in Illinois that their department of banking decided to take the lead on this. I wonder who has a major presence in Illinois that was upset enough that it happened. (Obviously not Visa--they're an investor.)
Square might want to consider filing an amicus brief in my company's case against the California Money Transmission Act (http://www.plainsite.org/flashlight/case.html?id=716056 http://www.plainsite.org/flashlight/case.html?id=716056) and/or joining the coalition of entrepreneurs and investors I have helped to assemble in opposition to the insanity that is the money transmission regulatory regime in the United States, especially given AB 786 in the California legislature (http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=ab_786&sess=CUR&house=B&author=dickinson http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=ab_7...) and the hearing about it on March 11 (http://abnk.assembly.ca.gov/hearings http://abnk.assembly.ca.gov/hearings). E-mail me at aarong@thinkcomputer.com. This issue will not go away unless we make some noise about it.
Why is your counsel withdrawing from that lawsuit?
What issue do you want to have go away? The need to post bonds if you're going to offer a product to the public that involves you taking their money, storing it, and forwarding it to someone else? Or just the specifics of those requirements?
I remember the kernel of your argument against CA's law being that their bond requirement wasn't transparent; that the stated requirements were "minimums" that could be ratcheted up without amending the actual law. That seems like a valid complaint, but a valid answer to it would simply be to set the stated requirements much higher; they'd be transparent, but you'd still have been priced out of the market --- because it's an expensive market to operate in!
I'm not sure what Ezra Levine has to do with any of this. The money transmitter laws of a lot of states are similar because they're based on model regulations drawn up by an association of regulators in the early '90s. Did Levine help author those regs? So what? Do we think Western Union was trying to shut Square down before most states even had commercial dialup Internet access?
Thomas,
First, it's nice to know that you're interested in my views the subject. Before (https://news.ycombinator.com/item?id=3595814 https://news.ycombinator.com/item?id=3595814), you did not seem to be.
You have summarized my position incorrectly. Generally, there are two major distinct requirements that the MTA sets forth: tangible net worth and surety bonds. These requirements are independent and cumulative (not mutually exclusive). There are further two types of surety bonds required that in aggregate (and the law explicitly requires aggregation for most startup-type activity) must be valued at $750K minimum. At 3% per year that costs a startup at least $22,500 per year just to operate in one state.
Contrary to your summary, that number is clear. The number that is not clear is the tangible net worth requirement. The current statute sets it at a minimum of $500K, again, independent of the surety bonds. The statute then gives the Commissioner (or his/her subordinates) the power to raise that number to any level on a case-by-case basis, without even informing the applicant. So the bar can change, and you can be told that it HAS changed, but you do not necessarily need to be told what it is. I was told $1M, $2M, $20M, and $80M in one meeting, later to be told $1.5M--maybe. This is a constitutional due process issue if there ever was one. It's also an issue of giving a single bureaucrat unfettered discretionary power--another constitutional problem.
You can apply anyway (for the $5,000 non-refundable application fee), but if you are rejected, you must inform other states that you have been rejected from applying for a license, and there is a highly increased risk that they will in turn reject you in their own state. This cascading effect poses serious constitutional problems.
If you break any part of any state money transmission law without meaning to, and even if you have been advised by a lawyer that you are in the clear, you are in violation of 18 U.S.C. § 1960(a), which means you and your investors could go to jail, because that's what 1960 actually says (http://www.plainsite.org/laws/index.html?id=14426 http://www.plainsite.org/laws/index.html?id=14426). And it has been used against people, mostly Muslims (http://www.plainsite.org/laws/index.html?id=14426&table=cases http://www.plainsite.org/laws/index.html?id=14426&table=...).
Furthermore, as I see you pointed out, the aggregate burden of complying with 47 state laws far outweighs any nominal (and I would argue illusory) consumer protection benefit--another constitutional problem under the Pike test.
So what would I like to see go away? All of this. In its place I'd like a single federal regulator like Canada's FINTRAC that charges no fees, registers companies in the space, and performs real-time checks on operational funds used to keep these companies running. Current bank regulators barely use computers for actual regulation, which is why MF Global and Peregrine were able to fail even though they were capitalized in the eight and nine figures (see http://www.aarongreenspan.com/writing/essay.html?id=77 http://www.aarongreenspan.com/writing/essay.html?id=77).
Your argument that the "answer to it" is to make requirements even higher does not scale or in my opinion even make any sense. Those examples at least prove it wrong. By your logic there should only be three mega-companies with trillions of dollars that can comply with these amazingly high requirements. We have that now. It's not working very well. Most people call it "too big to fail" and see it as a problem.
A better solution is FDIC-type insurance for money transmitters. Companies pay premiums based on risk to insure each other, instead of buying limited surety bonds to insure only themselves.
Lastly, Ezra Levine has to do with it because he wrote the MTA. He also wrote Hawaii's law. He also wrote about twenty other laws. http://www.moneylaunderingconference.com/2012/speakers.asp http://www.moneylaunderingconference.com/2012/speakers.asp ("He is the author of money transmitter licensing laws in many states and has been instrumental in the passage of model money transmitter safety and soundness laws in numerous states.") From the GCMT 2006 conference web site which is no longer on-line: "Since 1986, Mr. Levine has represented a wide variety of check issuers, funds transmitters, stored value issuers, bill payment entities and internet funds transmitters with regard to all aspect of the approximately 45 state statutes dealing with licensing of payment instrument issuers, funds transmitters and the like." And, "He has had an active role in the enactment of the money transmitter laws in Oregon, Minnesota, Washington, Iowa, West Virginia, Illinois, Wyoming, North Carolina, Florida, Idaho, North Dakota, New Jersey, Tennessee, Maine, Vermont, Arizona, the District of Columbia and Indiana."
So yes, we do think that Western Union has been trying to prevent the creation of new innovative services since before most states even had commercial dialup Internet access.
Aaron