Repeal the California Money Transmission Act | Hacker News Reader

Repeal the California Money Transmission Act

blog.rongarret.info

98 pointslisper50 comments

“The theory is that by requiring businesses that move money around on behalf of third parties to get licenses and post large bonds, that this will cut down on fraud. This theory was almost immediately falsified by the discovery that Moneygram, a licensed money transfer agent, had engaged in a massive fraud. And this was not an isolated incident. So the MTA clearly does nothing to prevent fraud.”

X mitigates Y. Y occurred. Thus X does nothing?

Posting bonds isn't to prevent fraud as much as to limit losses from disorderly unwindings. Think of it as the transaction equivalent of capital reserves.

Is the system broken? Yes. It's slow, fragmented, and overly cautious which serves to protect vested interests. But this article does a poor job of highlighting why the law is better dead than alive or modified.

Let's take as an example asset management regulation. Processors above a certain size must file capital adequacy, amongst other, disclosures. Regulators have the power to conduct investigations and, ultimately, suspend a processor's connections to the U.S. banking system. The advantage of a reactionary regulatory approach is speed and flexibility. Payment processors would be expected to fail from time to time, but fail gracefully, in a way that doesn't threaten to shut down the economy's ability to process payments (cash and bank-to-bank transfers are the safety mechanism).

> X mitigates Y. Y occurred. Thus X does nothing?

No. X was intended to prevent Y. Y occurred -- to the tune of $100M. And it was not an isolated incident. Therefore X fails to prevent Y. In addition, X has lots of deleterious effects, not least of which is stifling competition.

> this article does a poor job of highlighting why the law is better dead than alive or modified

That's why this article is part of a (long, and not yet completed) series.

> Payment processors would be expected to fail from time to time

This is only true because the underlying infrastructure is antiquated and broken. With a modern payment processing system based on a secure protocol there is no reason a payment processor should ever fail (other than fraud, but that is already a crime under federal law).

Posting of a bond, whether by a criminal defendant, civil plaintiff, or as a condition of some license is never presumed to eradicate malfeasance. It is a deterrent only: if the bond is sufficiently large then the person or business so bonded will be strongly hesitant to risk losing it. Hesitant, but not otherwise restrained.

But if you make the bond absurdly large and never enforce the law, then no one bothers getting it because A) they can't resonably and B) there isn't any point.

Then add in twenty other ridiculous conditions and the whole thing becomes a total joke. Which is why HN companies don't bother complying at all, if they even know it exists.

The bond is meant to reduce, not eliminate, the frequency of fraud. It also makes winding up a failing institution smoother. Yes, this impacts efficiency, but it also decreases risk. One could argue about the size of the bond, but as a mechanism it's a technique with a good history across finance.

Also, no firm is bust-proof. There are a number of human and technical errors that could take down a payment processor. Payment processors are also exposed to payment fraud. There there is good old competitive pressure.

I would willingly take the risk of default on small purchases (< $100) in return for saving 3% on the cost of the transaction. This would pay off every 50 or so transactions -- and the failure rate is likely orders of magnitude lower than that.

Consumers don't bear the brunt of the risk of a payment processor folding. The merchant with millions of accounts payable, an unsecured claim, does.

I agree with the core of the post: the system is too cautious. I disagree with the call to lower the bar for starting a payment processor to parity with a photo sharing app.

Repealing the MTA would not lower the bar "to parity with a photo sharing app". There are still a whole host of federal regulations that you have to comply with.

Perhaps this would be a more concise argument than the multi-series approach? In essence, federal regulation is more than enough and the California finish is superfluous.

Yeah, I probably should have said that explicitly. I'm trying to keep an awful lot of balls in the air right now, and sometimes one of them falls on the floor.

Well, the Moneygram fraud mentioned in the blog wasn't about small purchases - they got done for knowingly providing payment processing to scammers who were swindling people out of their life savings!

I think one of the problems people are having is that mitigate means "lessen the impact of" not "completely eliminate" a problem. So saying:

   X mitigates Y. Y occurred after X to the effect of $N.

is largely unhelpful, unless you provide a supporting statement of:

   Prior to X, Y occurred to the affect of $M.

Now if M <= N, X is a complete failure. If M > N it is some sort of success, (adjusting for the costs of X is assumed here). Now, there is valid discussion about the how much M needs to be greater than N to make X worth it, but, this sort of comparison is needed to properly discuss X.

> ...expected to fail from time to time, but fail gracefully, in a way that doesn't threaten to shut down the economy's ability...

How's that regulated graceful fail working for ya? Seems like it broke down completely a few years back in the home credit sector. Instead, we had too-big-to-fail, socialized downside supporting privatized risk-taking, huge gov't bailouts, and not a single wrist effectively slapped.

The truth is, it is very, very difficult if not impossible to regulate commerce in a way that is fair and has a limited set of intended consequences. Any time you regulate, you are telling willing parties they may not transact business on their preferred terms. By doing that, you take the rational actor out of the picture, and replace it with a hypothetical rational agent made up by some bureaucrat who generally makes up arbitrary rules under pressure from vested interests.

The deposit-taking function of FDIC-insured banks failed gracefully. So did broker-dealers of centrally cleared securities, i.e. those processed at clearinghouses. The parts that junked up were negotiated between private parties.

Rational actors are hypothetical. There is a cost to forcing every transaction to bear the full burden of due diligence. Pooling these costs under a trusted agent makes sense. Note that stock exchanges and clearinghouses, which have strict eligibility requirements, emerged from the free markets.

1. Law is passed to reduce fraud. 2. An incident of fraud occurs under the new law. 3. Law is pointless and should be repealed.

1+2 do not imply 3.

I don't know much about the California MTA. It may very well be a terrible piece of legislation that prevents desperately needed innovation. But the argument presented here is laughable.

It's more like...

1. Paid lobbyist writes law to protect enormous clients, convinces consumer advocates and legislators that it's in the best interest of the public and that there is "industry consensus" (actual words used).

2. Many incidents of fraud occur under the new law, including one that is nationwide to the tune of $120 million (settled for $100 million in three weeks to avoid an admission of guilt) involving one of the paid lobbyist's clients, whose license for some reason is not revoked.

3. Law is protectionist and not in the public's interest and should be repealed.

Issues like this are complex and deserve our attention. The argument isn't laughable, it's just the tip of a very complicated iceberg.

If the issue is complex the author shouldn't try to dumb it down as far as he did.

"The financial system in the U.S. is horribly inefficient. Retail transactions conducted with credit cards cost 2-3%, which is a ridiculously high cost given today's technology."

No.

The reason banks charge high transaction fees on credit cards has to do with how credit cards are billed. The billing cycle for a card is 30 days, after which you have 30 days to pay. This is effectively a loan for which you are paying zero interest. Somebody must pay, though, because you are risky, unsecured debt and your interest rate is maybe 12 percent. Up to two months of free credit therefore costs the bank two percent, which they charge the merchant.

Credit card companies could shorten this billing cycle once the delays of snail mail are no longer commonplace, but that doesn't reduce the transaction cost--it only moves it from the merchant to the consumer, who now begins to accrue interest charges earlier. Consumers could theoretically pay off their debts faster and thus pay less interest, but only to a point, because most consumers live paycheck to paycheck and will carry a balance until their biweekly paycheck isn't eaten up by rent and auto payments--roughly a month.

And I would argue that most consumers and banks prefer the grace period and simple interest calculations; it makes the whole billing process easy to understand.

What are the fees charged for a purchase made with a bank card instead of a credit card.

(debit cards in Canada, not sure what you call them in the states)

The interchange fees for debit transactions start around 0.8% for Visa. The exact fee varies by card type and by merchant category code. That's about half what Visa charges on low-end credit cards.

Just because my interest rate is 12% doesn't mean that this is the cost to the bank. The cost to the bank of floating this loan is the rate the bank pays for its money, which has been about 0.2% for the last four years. But you do raise a valid point: part of the problem is the conflation of payments and credit. I'll be writing about that in a future post.

The bank's costs also include bad debt and fraud, which are high for credit cards; are you including those in your figures? At any rate, the opportunity cost to the bank of giving free credit to the consumer (by structuring the billing cycle this way) is the retail cost of the money (what you would have paid them) not the wholesale cost.

Debit cards are a whole different story, of course, because no credit is extended.

Links to the Hacker News discussions from previous parts, compiled because I was curious and on occasion a mention to a Hacker News discussion is made without a link:

Part 1: http://news.ycombinator.com/item?id=5265563

Part 2: http://news.ycombinator.com/item?id=5276471

Part 3: http://news.ycombinator.com/item?id=5295236

Part 4: http://news.ycombinator.com/item?id=5302661

When you say things like "does nothing to prevent fraud" and "does nothing to protect me as a consumer" you have lost me for I know these statements to be untrue.

4 or 5 long essays about a "simple solution" and yet I have almost no idea of what the solution might look like. Is it really that difficult to describe the user experience in a paragraph or 2?

I can describe it in one sentence: replace the existing protocol with one where payment authorization is done with secure digital signatures.

That's really not helpful. What is the user experience at the checkout counter? Are there any new instruments or hardware involved? How are such things deployed to consumers and merchants?

Troll. You already asked me that, and I already answered it.

Then please humor me and either point me to such an answer or repeat it here. When I walk into a store and pay with your service, what is the experience? Your answer need not mention digital signatures (unless you are referring to the actual signing on some sort of touch screen as you sometimes see these days; and in which case i know your solution is a non-starter for deployment reasons) or encryption.

And enough with the "troll" stuff. I am not remotely such. 16 very successful years in the payments industry.

http://news.ycombinator.com/item?id=5296345

That'd do nothing to stop the $100,000 fraud he mentions, which involved Moneygram processing payments for fraudsters that tricked people into sending money - the secure digital signatures would check out fine, since the account holder authorized the payment.

Actually, the right kind of digital signature scheme would help prevent this kind of fraud (though, of course, you can never completely protect people from their own stupidity). A signature would be valid only for a transfer from a particular account to a particular account. The only way a moneygram-style fraud could be perpetrated is if the fraudster persuaded you to sign a transfer to an account that they control.

In fact, with a proper modern PKE-based financial infrastructure, there would be no need for a business like Moneygram, which is one of the reasons that they will fight tooth-and-nail to prevent such a system from being established.

You'll still need someone to sign the public keys in order to prove that the person is who they say they are, otherwise it'd allow all the kinds of fraud that happened in the Moneygram case. (We've already seen a lot of this with Bitcoin for examples.)

No, you don't. It would certainly be helpful, but it's not necessary. You could, for example, get the public key directly from the recipient. If you want to send money to Uncle Joe, then Uncle Joe can write his public key on a piece of paper (or, more realistically, print it on a business card as a QR code) and hand it directly to you in a face-to-face interaction, no third party signer required. Indeed, no signer at all required in that case.

But you do raise a valid point, which is that identity binding in general is a hard problem. But there are solutions (trusted third parties, web of trust). Like I keep saying, this is a long story.

In addition to Ron's excellent summary, if you're not yet convinced but still interested as to why the MTA should be repealed--and it definitely should--it's a long and sad tale. (As I've said other places, I'm personally not against uniform, reasonable regulation at the federal level, but the MTA is the wrong way to do it for so many reasons.) Bits and pieces can be found here:

Think White Paper (Broad Overview)

Held Hostage - http://www.thinkcomputer.com/corporate/whitepapers/heldhosta...

Think Legislative Comments (Extremely Detailed)

November 7, 2012 - https://s.facecash.com/legal/20121107.dficomment.pdf

February 25, 2013 - https://s.facecash.com/legal/20130225.packetnumbered.pdf

Personal Essays

May 10, 2011 - In Fifty Days, Payments Innovation Will Stop In Silicon Valley - http://www.aarongreenspan.com/writing/essay.html?id=54

June 1, 2011 - In Thirty Days, Payments Innovation Will Stop In Silicon Valley - http://www.aarongreenspan.com/writing/essay.html?id=59

June 14, 2011 - Why I'm Furious with Silicon Valley - http://www.aarongreenspan.com/writing/essay.html?id=60

July 20, 2011 - The California Law That Should Send The President and Fellows of Harvard College (and Every Private University) To Prison - http://www.aarongreenspan.com/writing/essay.html?id=62

December 5, 2011 - Why I'm Suing the State of California - http://www.aarongreenspan.com/writing/essay.html?id=73

July 16, 2012 - Naked Regulation: Capital Requirements Don't Work - http://www.aarongreenspan.com/writing/essay.html?id=77

July 23, 2012 - Hypocrisy Comes Full Circle: Money Transmission Meets Campaign Finance - http://www.aarongreenspan.com/writing/essay.html?id=78

February 13, 2013 - In Nine Days, the California Money Transmission Act Could Get Even Worse - http://www.aarongreenspan.com/writing/essay.html?id=86

FaceCash Lawsuit (Think Computer Corporation v. Venchiarutti, et al)

http://www.plainsite.org/flashlight/case.html?id=716056

http://www.facecash.com/legal/brown.html

MoneyGram USDOJ Lawsuit (USA v. MoneyGram International, Inc.)

http://www.plainsite.org/flashlight/case.html?id=2334104

Square, Inc. Cease & Desist Letter (Illinois)*

http://www.idfpr.com/dfi/CCD/Discipline/SquarePersonifiedCDO...

* Not directly related to the MTA, but illustrative of how even licensure under the MTA for a California company with a former Secretary of the Treasury on its Board, good lawyers, and a very wealthy founder is not enough to comply and avoid violating federal law.

18 U.S.C. § 1960

http://www.plainsite.org/laws/index.html?id=14426

I am very happy to see this issue getting exposure. I have long been saying that CC are a big scam and essentially a protection racket taking 3% of every transaction. People get 1% cash back (when they're lucky) and they think that money came out of thin air. The fact that vendors cannot pass that cost on to CC users is part of the racket--and is finally being recognized as illegal.

But the OP gets at the heart of the matter: "Retail transactions conducted with credit cards cost 2-3%, which is a ridiculously high cost given today's technology. Retail transactions (actually, any money transfer transaction) could be profitably brokered at 0.1% or less."

Given the high fees on CC's I always wondered why there was no alternative card with lower fees, or why ATM cards still had 1% fees. Now I know it's because of legislation like this. I bet the CC companies paid lots of campaign donations to the legislators who passed this thing. If I was still in CA, I'd send the email he suggested.

> If I was still in CA, I'd send the email he suggested.

Are you still in the US? Money transmitters need to be licensed in 48 of the 50 states.

Repealing the California MTA still leaves sufficient federal legislation and other state legislation in place to effectively regulate payment systems. The MTA is just a bad law.

The California Money Transmission Act is only one small portion of a greater struggle that is going on across the planet; a struggle that cuts to the very core of our societies, our diplomacy, our fundamental rights and freedoms, and nothing less than the future our world. It is a logical outgrowth of globalization, of technology, and of the internet. For international finance is the last great systems, next to law and the rule of government itself, that has not yet been toppled or reorganized by internet based, distributed technologies. Media has fallen. Education has fallen. Retail has fallen. Transport has fallen. Manufacturing seems to be coming under threat.

Finance is certainly under threat, but it consistently beckons for state protection under the ruse of protecting the public from the ethereal boogeyman. Why? To cut to the chase, finance is government: they are in essence one and the same. Throughout modern history, the state's monopoly on physical violence has been used to collect taxes; taxes that must be paid in the state's own currency. Often, the use of foreign tender is made illegal. The money, otherwise backed by little, thus acquires value: you need it to stay out of the state's jails or system of punishment, to eat, and to live. Almost without exception, the state then further demands interest or otherwise manipulates their currency's value.

At the turn of the 16th century, Martin Luther's doctrine of the two kingdoms marked the beginning of the modern separation of church and state, which was enshrined in to law in many countries throughout the 20th century. I believe that today, citizens have had enough of financial abuses, and our societies stand on the threshold of one further separation: the separation of state and finance.

For as we have seen over the past few years, at present we have a financial system that sees itself above the law. A financial system that, despite reaping vast profits and efficiently systematizing both usury and the total, constant, warrantless international surveillance of private citizens and corporations alike (for it is inseparable from the state), has for the past twenty or thirty years failed to provide meaningful innovation or reduction in price, to provide transparency, to provide protection against corruption, to provide any meaningful service to society. Instead, we largely see the finance industry doing its best to stifle and defeat the threat of change, all the while scratching the state's back and imposing economic blockades against organizations and nations alike without any form of due process.

Thus, it is perhaps too optimistic to expect the state, intertwined as it is with the existing system, to punish our financial overlords. Luckily, this is not a requirement. Simply by refusing to artificially stifle innovation, the winds of change will come, they will whisk through the vacuous marble halls of old finance, they will carry fresh ideas, they will underpin great movements toward transparency of governance, they will empower the collective individual, and they will take no hostages.

State-sanctioned or not, this change is coming. We as humanity will continue along our historic trajectory: the technologically-backed shift away from nations and nationalism - Einstein's "infantile disease, the measles of mankind" - towards a human society. We will find ways to remove the state/financial overlords of old, and to enable for the whole of humanity - not just multinational businesses and the dynastic capital of old - the capacity to replace oligopolies of usury and fear with cooperation and enterprise, without regard for borders.

It is said that one cannot resist an idea whose time has come. Make no mistake: the shackles of old are opening, and only fools will attempt to hold them in place.

> It is a logical outgrowth of globalization, of technology, and of the internet. For international finance is the last great systems, next to law and the rule of government itself, that has not yet been toppled or reorganized by internet based, distributed technologies. Media has fallen. Education has fallen. Retail has fallen. Transport has fallen. Manufacturing seems to be coming under threat.

This would be interesting, if any of it were true. Media is still totally dominated by cable news and talk radio. The application of the internet/computers to technology has been a miserable failure. Online universities are a punchline rather than a credible alternative to brick-and-morter institutions. Amazon's revenues are less than 1/7'th as much as Wal-Mart's, and a bit smaller than Target's. Transport is booming for completely non-internet related reasons--people are traveling more than ever despite the availability of internet communications. Our highways are congested, our airports are overloaded, etc. I'm not even sure what to make of the manufacturing comment. What internet-related or distributed anything is threatening manufacturing?

As far as I can tell, the only thing the internet has really replaced is physical mail, phone calls, and mail-order catalogs. And in the process it has been far more centralized, not more distributed.

All fair points, though I would suggest we are in the early stages of change at present and that the average citizen of the US is a poor benchmark for global media consumption habits. While some areas, such as China, are rushing toward the supermarket model it is not yet dominant in global terms and perhaps will never be. A common tendency of each era in history is to say "here we are! things are complete! (weren't things great a long time ago)" whilst in fact major changes have not yet begun or have not yet been recognized as significant. What we need to do is zoom out.

This article is long on opinion and short on actual facts.

If you want the actual facts, follow the link in the second paragraph. You'll find over 200 pages worth of facts.

It's odd that there are restrictions on "transmitting" money. Doesn't the USA do this already with hot money? How hypocritical. :)

Bitcoin.

This law is all about the company moving money around, not a restriction on the money itself. So using BTC would not make a difference.

Correct. If you are a fan of Bitcoin then you should definitely favor repeal because right now all Bitcoin exchange services are unlicensed and therefore illegal under the state and federal statutes.

If an exchange is in a different country then how can it be illegal?

The only law that affects me is both the law of the country the exchange is located and the law of my country.

Being as the exchange I use is based in Hong Kong and my country is Australia, USA laws do not apply to me.

I understand that the USA law will apply to the majority of BTC users however, because most of the exchanges and developers are all USA based, unfortunately.

Also I believe that Bitcoin-Central is licensed to operate in the European union.

Sorry, I was thinking of U.S. exchanges. You're correct that international ones are outside of the scope of U.S. law--though interestingly, California does take the view that the MTA can police other states.

You don't need a money transfer agent if you're using bitcoin. You just send it to the other party directly.

It's possible, though, that the law could interpret the global web of bitcoin miners to be "money transfer agents" and then all hell would break loose. I guess all the miners would just move out of california. :)

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