Square Slapped With Cease And Desist By Illinois State Department
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The requirements to get a license in Illinois are straightforward: you need to meet a (low-seeming) net worth requirement, you can't have outstanding regulatory problems with the state, your management can't be felons. You also have to post a surety bond equivalent to max(100k, daily average volume).
If Square isn't already required to be a money transmitter in (say) CA or NY, it'd be surprising if they had to be one in IL, but either way this seems like a speed bump for Square.
If you are big enough to be noticed by the states as a major money mover, you're probably big enough to get the proper licenses to conduct business. The last thing we need is deregulation in the financial space.
Second, even though separate bonds are required by each state, what prevents insurance companies from simply selling you a surety bond product that meets the requirements of multiple states simultaneously?
I wonder who and how much money got passed under the table to investigate and pursue this.
Yes, I realize that no money may have been passed and that someone might have just been doing "their job" (as they see it).
Square is part of the financial services sector. It's regulated, and always has been, for good reasons. There is no need to turn the imposition of reasonable licensing requirements into a anti-government rant.
What boggles my mind is that many of the same people who go off on things like this also think the government doesn't do enough to regulate oil companies, banks, etc. Guess what--people who work in those industries think they're the "good guys" too, and tirade against the government for imposing regulations to keep them "innovating." "We shouldn't regulate tech companies, it just hinders innovation, the government doesn't understand the space anyway" is pretty much precisely parallel to the thinking that got us deregulation in financial services.
Some Government regulations are in fact reasonable, even a libertarian such as myself can concede that.
Someone else pointed out that Square doesn't really hold funds, they transfer them. (I haven't verified this statement.) Even if this is true... they still have access to a lot of people's funds and could very easily steal them.
Your other points are also spot on.
UPDATE: I was a little surprised myself that the net karma score for the parent comment was positive.
UPDATE 2: "I don't even understand the motivations behind posts like this." To be a little snarky I guess and to raise eyebrows and questions. At face value, little value is added by the comment... until someone replied and added to the discussion.
If not, then can someone explain to me how Illinois has the power to enforce this statute? I am not a lawyer, but it would seem to me to be a pretty clear case of interstate commerce, which is under federal jurisdiction.
Every US state seems to have a variant of these rules; for instance, here's every license Paypal needs to operate:
If someone uses Square to accept a payment or receive the benefit of a payment within the state, they can regulate it. If Square disagrees or believes the law is unjust, they can cease business in the state, or file a lawsuit against the state.
Also, the "not you or I" part was unnecessary.
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) 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_7...) and the hearing about it on March 11 (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.
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?
First, it's nice to know that you're interested in my views the subject. Before (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). And it has been used against people, mostly Muslims (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).
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 ("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
You've basically restated what I said but in much greater detail. Thanks.
I'm choosing my words less carefully than you are. When I said the states could "answer" your objection, I meant that the points you raised about transparency could be blunted by becoming very transparent but also more onerous.
I wrote a comment about financial regulation on a thread about financial regulation and you launched a personal attack against me for it, as you often do.
Just now, I did not restate what you said. I explained in great detail why the state of affairs is NOT as you say.
Perhaps in the future you could choose your words more carefully.
That exchange, like this one, is characteristic of the way you communicate on HN. You could just respond to questions or even refute them aggressively. Instead, you take things personally and create smokescreens.
It's an unfortunate habit because in this particular discussion you are probably in greater command of the facts than I am, and yet you spend credibility on pointless innuendo that is easily knocked down.
(I obviously have my own expansive portfolio of unfortunate HN habits, but unlike you I'm not appealing to HN for help in any particular cause, so I think it matters less for me.)
PlainSite's database of public information (which is freely available to non-lawyers) is a public good. Operation Asymptote is an attempt, from which I have no way of profiting exclusively or directly, to increase the value of that public good. The only way that I might profit from Operation Asymptote is indirectly. So your argument that the "effort that happened to be remunerative to [my]self" is plainly false and deliberately misleading and possibly damaging to my reputation.
Your insightful comments about computer security on this forum are a public good. You might profit from them if someone finds them one day and agrees with or wants to know more about something you say--but so might anyone else.
The difference here is that you are (wrongly and publicly) accusing me of improper conduct for failing to note that I might profit from more public information being available, and I am not accusing you of anything because helping to improve the commons is supposed to help everyone profit, and I am glad to learn about computer security from you, and to also see you make a living from it.
So this is my last warning. Stop harassing me.
Thanks for all the information, though. That was a fascinating read. FWIW, I'm on your side and would like to see some sensible regulation at the federal level, rather than a patchwork of state laws.
Payment processor and/or agent status should apply if you are handling data and information only and not for a moment become 'holder' of the money - i.e., if the money passes directly to, say, a bank account held by the recipient company based on your data.
If the money at any time held in your name and you just have data saying that $X belongs to A, $Y belongs to B - then even according to common sense you should be licenced and post the bonds. And to the extent that banks are exempt in payment regulations, they have the same (or stricter) requirements in their regulation as credit institutions - i.e., they don't put bonds based on payment volumes but they have capital requirement regulation that provides a similar assurance of solvency.