Dear California, Stop hitting yourself.
The California legislature struggles with the consequences of its own stupidity, harming the nation in the process.

July 4, 2013

Topics = { California Money Transmission Act }

They say that making laws is like making sausage: you don't want to see how it's done.

Luckily, in the more-than-two years that I have been fighting against the absurdity that is the California Money Transmission Act (MTA), I've never been forced to watch the process of lawmaking up close and personal. Not once has a legislator asked me, as a stakeholder, to offer any advice on how changes to the law might affect me or my employees. Nor have I ever been privy to the backroom conversations that have resulted in the various amendments to the bills that have amended the MTA since.

What I have seen, however, is how the legislative process looks once the product is effectively ready to ship. And even that is enough to make one queasy.

Yesterday, July 3, 2013, the California Senate had a hearing on several bills, one of which was Assembly Bill 786. AB 786 would amend the Money Transmission Act for the second time. The first time it was amended, in 2011, the legislature just changed the section numbers, and mandated that the Department of Financial Institutions (DFI, since merged into the Department of Business Oversight, or DBO) post all "final" orders on its web site—something that the DFI largely ignored and failed to do.

Sacramento is a special kind of hell. One enters it by crossing the Sacramento River over a peculiarly yellow bridge, directly aligned with the Capitol building across the mall. Every other building downtown over ten feet tall seemingly has something to do with the government. Look right, and that office building is actually the State Comptroller's office. (Even if California is broke, they can afford to keep the really nice fountain out front going.) Look left, and you'll see "DEPARTMENT OF" in an art deco typeface on an art deco building that hasn't been updated since art deco was all the rage. Look right again, and you'll see exactly the same thing. There are so many departments one almost expects to see a Department Department to keep track of the departments. Walk across the street to get one block closer to the Capitol building, and you might even get run over by the totally extraneous tram that would seem much better placed in one of California's more populated urban areas.

The Senate Banking and Financial Institutions Committee hearing was supposed to start at 1:30 P.M., but due to the Senate general session running longer than expected, it was delayed until the unspecified end of the session. This put me in a bind given that I had parked in a two-hour parking spot and I knew that the window to speak in opposition to a bill was exceedingly short and arbitrarily timed. One has a few seconds at most to stand up when the committee chair asks for opposition speakers. Eventually, I decided to make a run for my car, which was parked about a ten-minute walk from the Capitol building's front steps. I quickly learned why one should never run in 105°F heat, and certainly not when wearing dress shoes. (It's not long before you can't breathe. Fortunately, I brought water with me in the car remembering from the previous two hearings that Sacramento always seemed slightly warmer than Palo Alto.) I frantically made it back to the Capitol, where nothing had happened at all. About thirty people were still waiting outside the doors of hearing room 112, which were locked. The only difference was that now I looked completely disheveled.

Finally, at 3:00 P.M. the Senate had finished its debate (according to Assemblyman Pan, about something related to Christmas), and the doors were unlocked. Everyone wandered into the committee room, including a gaggle of young people in their late teens and early twenties who looked like they might be interns.

Led by Chairman Correa, with Committee consultant Eileen Newhall at his side, discussion around the first bill on the agenda, about granting preferred shares in co-ops, was fairly unremarkable; it went by quickly. The next bill was AB 786, which was the one I had driven two hours to oppose, again, in person.

Assemblyman Dickinson, the author of AB 786 and the chairman of the Assembly Committee on Banking and Finance, was there to introduce his bill. He read a brief prepared statement about how important it was to make sure that the MTA kept up with technological innovation and provided "regulatory certainty," similar to his remarks during the March Assembly MTA oversight hearing. As before, they seemed completely divorced from the reality of what the MTA actually does.

In support of the bill were eBay, Inc., parent company of PayPal, Inc., whose lobbyist and government representative were there to extol the virtues of "consumer trust and confidence;", the payroll industry's lobbying consortium, led by ADP, and the Technology Association of America. AB 786 conveniently grants the entire payroll industry an exemption from the MTA.

Opposed to the bill were Consumers Union, the bone-headed lobbying group that believes the only way to protect consumers is by erecting even more barriers to entry, and myself, making precisely the opposite argument on behalf of Think Computer Corporation, which has been so barred for no good reason.

I brought several documents with me to back up my points, but I didn't end up referencing any of them for fear that the Committee simply wouldn't care. My concerns were justified. After my comments, which were fairly detailed even without the documents, only one senator had a question about anything I had said, which he directed at Assemblyman Dickinson: "does [the MTA] cover law firms?"

Dickinson—a lawyer in private practice before being elected—responded by saying, " the best of my knowledge DFI at this point has not considered lawyers' trust funds, uh, to constitute, uh, money transmission, I think by common sense understanding of what money transmission is, it would not encompass lawyers' trust funds and this bill does not mandate that lawyers' trust funds be covered." This response was remarkable for two reasons. First, there is no explicit exemption in the MTA for lawyers, so it does cover lawyers, whether or not they use trust funds. Despite Dickinson's answer, the senator questioning him realized this, and implied that he expected the issue to be corrected in a future draft. Second, Dickinson cited a novel legal theory of "common sense understanding" to explain the apparent exemption for lawyers. I did not have a chance to ask him after the hearing if a similar "common sense understanding" might be applied to mobile payments or, for that matter, everything.

But Dickinson continued, admitting that there was a larger issue of the difficulty of defining what constitutes money transmission. "The original legislation defines it in a circular manner: it essentially says money transmission is money transmission." Indeed. Under his "fixed" definition, Dickinson's own web site encourages visitors to donate through an unlicensed money transmitter, ActBlue LLC.

Dickinson's statement about the larger issues, while correct in a very general sense—there are definitely larger issues involved—is still actually wrong. As it turns out, it's not that difficult to define money transmission. What is difficult is articulating specifically what kinds of money transmission should be regulated, without causing absurd side-effects as the MTA has, and in turn, how that regulation should occur.

According to one of the documents I brought but didn't reference, an article by Paul Starr entitled "A Wasted Crisis?" in the July 15, 2013 edition of The New Republic, veteran legislators of the Dodd-Frank financial reform fiasco state, "We favor a strong set of simple rules rather than regulatory discretion." AB 786 does the opposite, granting regulators all the discretion they could possibly ever want and then some, to allow them to evaluate the "quality" of applicants' management, and consider "any other factor" they deem relevant. The color of your skin, perhaps. How expensive your suit looks. Or your hair style.

According to another document, a graph I created of MTA application times directly contradicting former DFI commissioner Teveia Barnes's testimony before the Assembly, what haphazard regulation there is seems to be occurring very slowly. Ms. Barnes testified that the DFI approved applications in under 120 days on average. The real average is closer to 252 days, which means almost waiting a year on your application. The fastest application ever granted? Facebook Payments, Inc., in a record 52 days. It's amazing what a fraud-riddled IPO can do.

According to another document, a series of UC Berkeley studies published in PNAS and featured on the PBS Newshour, wealthier individuals (and even individuals who are merely made to feel wealthy) are less likely to follow laws. The MTA works on the opposite premise: that the richer one is, the more one can be trusted. False.

According to another document, the New York Attorney-General had just announced that he was looking to issues with payroll cards. Meanwhile in California, AB 786 would exempt the payroll industry, but no one else.

I didn't get into these details because looking around the room, it was clear the legislators didn't care. The only one who understood any of the issues on the dais was Eileen Newhall, the unelected Committee Consultant staring down at me who I had never met in person, but with whom I had talked to via phone and e-mail countless times before. Eileen (as with Mark Farouk on the Assembly side) officially works for the Committee, which means its chairman, and although she is merely a consultant, consultants wield unmatched power to influence the Committee members.

Even with the most knowledgeable and well-meaning individuals in the consultant role—and Eileen is definitely well-meaning—there are a few problems with such an arrangement. One is that there is no check on the consultant's expertise, but another is that the consultant does not have to be an expert, i.e. qualified to consult, in the first place. Although Eileen often expressed concern and occasionally took the time to listen and actively help, for which she deserves credit, her background is not in economics or banking or financial institutions. It's in geology. Occasionally this void of knowledge about financial issues would come through in our conversations, leaving me stunned.

As in the Assembly, throughout the hearing, many of the legislators, including the chairman, ignored the person speaking in favor of looking at his or her smartphone. (There's a certain irony here when advocating for mobile payments.) So I took an effective shortcut and pointed out that the state had no right to regulate interstate commerce anyway, and should step aside for Congress.

After my comments, the Committee voted on AB 786. Six were in favor, none against. Just as in the Assembly, consent was unanimous, with a total of one question asked about the bill between the two committees. This struck me as odd, as I had peppered my comments with strong suggestions that the Committee members ask questions.

After debate on AB 786 concluded, the Committee moved onto its third and final bill for the day, AB 1162, concerning student debit card fees. At first, I stayed in the room out of politeness, but soon realized that the bill was actually quite relevant. Students at various University of California colleges were being blindsided by fees levied on pre-paid debit cards, and had banded together to introduce a bill forbidding such fees. Lawyers for the card vendors correctly pointed out that such a bill would already be pre-empted by the federal CARD Act, which is essentially true. (One lawyer, with a tendency to shout explosive "um"s into the microphone, also incorrectly, and rather shockingly, claimed that no "evidence" of such fees actually existed.)

After the parade of students voicing support for the bill had ceased, I decided to get up again and voice my own support on behalf of Think. Not too long ago, I was a student, and I would have been furious at having to pay such fees. More importantly, however, I wanted to make the point that this problem, which was occupying a considerable deal more of the Committee's time than the other bills, was directly linked to, and in fact caused by, the MTA. All of the fees involved were debit card fees. And as one senator asked, what alternative did the UC system have other than debit cards issued by Visa or MasterCard?


If the UC system could have issued financial aid or other funds to students via a mobile payment system such as the one that my company built, not only would it be faster (faster even than direct deposit), but it would be effectively free for the students and for the State of California. There would be no need for ATMs at all, whose location and maintenance is a perpetual issue of controversy. So what did the Committee have to say to that?


Afterward, I went up to my State Senator, Jerry Hill, who up until recently was chairman of the Committee but was abruptly re-assigned prior to the hearing. To his credit, he remains the only politician who has ever been willing to meet with me briefly about these issues. When I pointed out that the Committee had just granted a monopoly, only to find itself dealing with the outrageous fees that the very same monopoly was generating, he plainly agreed that I was right. He assured me that he'd keep fighting for my interests, and that he and Eileen were dismayed over what had taken place. Yet, he voted for AB 786—not against.

At Harvard, much of what was actually taught was taught in "section," small break-out groups where graduate students typically took the place of professors and reiterated what had been discussed in the prior lecture. These sections had a tendency to be torture, despite the individual brilliance of many of the students in the room.

Listening to the California Senate Committee on Banking and Financial Institutions reminded me of the worst sections I had ever been in, where pompous students droned on endlessly to hear themselves talk, where points with no logical basis were routinely voiced, and where important points were constantly omitted. I often left the room feeling stupider than when I walked in. Yet even the worst section at Harvard had never involved a group of students agreeing on a plan of action in the first twenty minutes, which they then howled about for the next hour and a half, hardly noticing the connection, even when specifically told of it.

It's notable that this kind of debate took place on the same day that Doug Engelbart, the father of modern computing and a brilliant California resident, passed away. What Dr. Engelbart achieved in the mid-1960s was truly at the cutting edge for the time. No one had ever created a more advanced system than NLS, and it took decades for others to live up to its promise. Since I was thirteen years old, I've wanted nothing more than to do the same: to re-invent the familiar, only with the best technologies available in my time. In California, even if one could find support from investors or government for something so audacious (which is effectively impossible now for other reasons), it wouldn't matter, for it is now illegal to innovate.

So do yourself a favor, California. Stop hitting yourself. It would take a lot less time, and who knows, in the end, you might even hurt less. Until then, I'll see you in court.


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July 4, 2013 at 9:36 PM EDT



July 9, 2013 at 4:35 PM EDT

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