In Nine Days, the California Money Transmission Act Could Get Even Worse
Financial lobbyists attack Silicon Valley.

February 13, 2013
Also published on Quora

In May, 2011, in In Fifty Days, Payments Innovation Will Stop In Silicon Valley, I warned that the California Money Transmission Act of 2010 was about to go into effect, and that if it did, payments innovation would effectively stop as Silicon Valley found itself subject to the arbitrary whims of financial lobbyist Ezra Levine, servant to The Money Services Round Table. This one man has changed money transmission law in practically half of the United States. His client group has only a few members, but you've probably heard of most of them: American Express, Western Union, MoneyGram, Travelex and RIA Financial Services.

It's now 2013, and I think it's safe to say that my prediction has come true. Television advertisements from Chase and Citi encourage us to take digital photographs of our paper checks. The most advanced mobile payment system in the United States is in use daily at one and only one retailer: Starbucks Coffee. Startups and their investors avoid having anything to do with holding money if they know what's good for them. FaceCash remains shut down. And before you cite Square as a counterexample, remember that they process credit cards, and that Visa is a major investor.

I've been in touch with legislative staff in the United States House of Representatives, the United States Senate, and both houses in the various legislatures of various states, including of course, California. For two years they have all done nothing. Most have written off the issue as immaterial. One (who has recently realized the issue's importance) admitted that he assumed me to be just another raving madman.

Raving madman or not, I learned tonight that the California Money Tranmission Act is about to get a lot worse. The California Assembly hearing on the MTA scheduled for November, 2011 (oddly, at PayPal's headquarters) was abruptly cancelled a few days before and never re-scheduled. "Working groups" that were promised for December never materialized. Nonetheless, and somewhat miraculously, Mark Farouk, consultant to the Assembly Banking & Finance Committee, has told us that a bill is ready to go before the legislature! Right now! He wrote it all himself! And the deadline is next Friday by 5:00 P.M.!

Where did this bill come from? We have no idea. Who contributed to it? The group of entrepreneurs and investors I've been working with for about a year certainly didn't. (I sent a nineteen-page formal comment letter to Farouk and others in November right before the hearing, and it went completely ignored. See What does the proposed bill say? Well, it does say some things.

For example:

Section 2040 of the Financial Code is amended to read

(a) An applicant for a money transmission license must possess, and a money transmission license holder must maintain at all times, a minimum net worth computed in accordance with generally accepted accounting principles of:
a. $100,000 up to $500,000 depending on, estimated or actual transaction volume.
b. The commissioner may increase the amount of net worth required of an applicant or license holder, up to a maximum of $2 million, if the commissioner determines, with respect to the applicant or license holder, that a higher net worth is necessary to achieve the purposes of this division based on:
i. the nature and volume of the projected or established business;
ii. the number of locations at or through which money transmission is or will be conducted;
iii. the amount, nature, quality, and liquidity of its assets;
iv. the amount and nature of its liabilities;
v. the history of its operations and prospects for earning and retaining income;
vi. the quality of its operations;
vii. the quality of its management;
viii. the nature and quality of its principals and
ix. persons in control;
x. the history of its compliance with applicable state and federal law; and
xi. any other factor the commissioner considers relevant.


Section 2084 of the financial Code is amended to read

(3) The fact that the licensee holds the eligible security in a custodial capacity as an agent of its customers in a pooled account titled in the name of the licensee for the benefit of its customers.
(a) The commissioner shall make a determination of the appropriateness of (3) on a case-by-case basis.


Section XXXX is added to read

Whenever the commissioner deems it necessary for the general welfare of the public, he or she has continuous authority to exercise the powers set forth in this division whether or not an application for a license has been filed with the commissioner, any license has been issued, or if issued, has been surrendered, suspended, or revoked.


Section XXXX is added to read

(a) Whenever the commissioner believes from evidence satisfactory to the commissioner that any person has violated or is about to violate a provision of this division, or a provision of any order, license, decision, demand, requirement, or any regulation adopted pursuant to this division, the commissioner may, in the commissioner's discretion, bring an action, or the commissioner may request the Attorney General to bring an action in the name of the people of the State of California, against that person to enjoin that person from continuing that violation or doing any act in furtherance of the violation. Upon a proper showing, a permanent or preliminary injunction, restraining order, or writ of mandate shall be granted and other ancillary relief may be granted as appropriate.

(b) If the commissioner determines that it is in the public interest, the commissioner may include in any action authorized by subdivision (a) a claim for ancillary relief, including, but not limited to, a claim for restitution, disgorgement, or damages on behalf of the persons injured by the act or practice constituting the subject matter of the action. The court shall have jurisdiction to award additional relief.

If your eyes just glazed over, at least read this (emphasis added): "Whenever the commissioner believes from evidence satisfactory to the commissioner that any person has violated or is about to violate..." Now, you can have a one-way ticket to federal prison for thinking or saying something offensive to Deputy Commissioner Robert Venchiarutti or his subordinates. Whether you call it Thought Crime or Minority Report, this is terrifying.

There's also one change that attempts to address the fact that virtually every payroll company in the state violates the MTA, but it actually fails to address the core issue, which is that payroll companies hold money that is then forwarded to government. Lawyers, escrow companies, universities (e.g. Stanford), realtors, and best of all, political campaign contribution aggregators—all of which also break the law on a daily basis—are also left unaddressed by the proposed bill.

Therefore, virtually all of the modifications to the Money Transmission Act are designed to give the Commissioner of the California Department of Financial Institutions even more authority to make arbitrary decisions on a case-by-case basis. Exactly zero of the modifications are designed to benefit startups or mobile payments. (Remember, the net worth requirement isn't really lowered to $100,000 if the commissioner can just increase it again without even telling the applicant what it has been increased to.)

Not to mention that the MTA and all similar money transmission laws are unconstitutional to start with on Commerce Clause and Due Process grounds. Along those lines, tomorrow, Judge Lloyd will have had the State's Motion to Dismiss the FaceCash lawsuit on his desk for a full year (see without doing anything.

In summary, if this bill or a derivative version of this bill passes, it will be even harder for startups to innovate in the payment sector, and more likely that at some point an entrepreneur will have to face a federal prosecutor like Steven Heymann thanks to 18 U.S.C. § 1960 (§1960. Prohibition of unlicensed money transmitting businesses). According to his prosecutors in the District of Massachusetts (if you believe them, which I do not), Aaron Swartz's lawyers could have bargained them down to six months in prison. 18 U.S.C. § 1960 recommends a maximum of five years in the statute.

I'm calling on everyone in the Valley to do something and counter the financial lobby simply by telling Mark Farouk and the California legislature what they think. It's time we repealed the Money Transmission Act, and it's further time for Congress to step up and fix the broken system that governs money transmission.

Here's Mark Farouk's contact information:

Mark Farouk
Chief Consultant
Assembly Banking & Finance Committee
Assemblymember Roger Dickinson - Chair
(916) 319-3081-p
(916) 319-3181-f

Be respectful. Be polite. CC me if you want ( Just don't be quiet.

Aaron Greenspan is the CEO of Think Computer Corporation and author of Authoritas: One Student's Harvard Admissions and the Founding of the Facebook Era. He is the creator of the FaceCash mobile payment system, ThinkLink business management system, and PlainSite legal transparency project.

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Bob Snyder
July 10, 2013 at 2:19 PM DT

Can you move this to a new state? That's easier to work with?

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