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Interviews, Virtual Currencies

“US Money Transmission Laws Are Worthless and Unconstitutional”

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Interview with Aaron Greenspan, Harvard graduate, original creator of “The Facebook,” payments innovator, and autodidact non-lawyer.  (PART ONE)

Having been a teen tech entrepreneur, during college at Harvard in 2003 Aaron created the predecessor to Facebook, Inc., which also happened to be called “The Facebook.”  In 2009, he entered into a settlement agreement with Facebook, Inc. as well as his classmate Mark Zuckerberg, and then had the opportunity to figure out what he wanted to do next, so he followed a long-standing interest in payment systems and decided to try and tackle mobile payments.  From 2008 through early 2011, he invested essentially every piece of time, energy and capital at his disposal into making his payments initiative, called FaceCash, widely regarded as a success—until he was told that he would be thrown in federal prison by a state bureaucrat.

As you will soon see, to say that Aaron does not mince his words is the understatement of the century, so I am aware of the risks I am taking by presenting his strong point of view here. However, even though I do not necessarily subscribe to Aaron’s views and approaches, I decided to take the plunge and honor the spirit of this blog. I believe the current BitLicense proposal debate, and the nascent crypto-currency industry will be greatly enriched with his life experience and rigorous–and ruthless–analysis of the United States regulatory landscape.

Because Aaron provided a lot of links and additional material, I decided to split the interview into three parts:




Here goes PART ONE.  Enjoy and may your thoughts be provoked!


“The vast majority of my competitors operate today without a license in any state, or operated for years without them until I sued them in federal court.”

Juan: You and many others have argued that a ‘gotcha’ attitude in law-enforcement and irrational regulation are hampering innovation.  What would a ‘sane regulatory environment’ look like in your view?

Aaron: A sane regulatory environment would have at least two fundamental differences relative to the regulatory environment now.  The first difference is that it would be managed from Washington, D.C. at the federal level, and not at the state level.  The second difference is that it would involve at least some use of automatic, digital regulation mechanisms—not auditors who show up every four years with a pencil and a legal pad to scribble down some notes.  In this day and age, the payment system is a collection of Internet-based computer systems, and because of that, it makes no sense to regulate it based upon geographic state boundaries using tools that are fundamentally unable to interface with computers.

As for the “gotcha” mentality, so far the only company subjected to it appears to have been mine. The vast majority of my competitors operate today without a license in any state, or operated for years without them until I sued them in federal court. So to me the regulatory environment, at least in California, looks more like a libertarian paradise, which is just as bad. Generally, I don’t think regulation is a panacea, and I obviously think the state money transmission statutes are incredibly stupid and harmful. But I understand why consumer protection laws and mechanisms exist (the FDIC model is excellent), and as I’ve told the CEO of at least one well-known Bitcoin company, I really do believe in equal protection under the law. It’s part of our Constitution, and so I expect that if I have to obey the law, so does everyone else.

 “Right now we have a money transmission framework that protects a handful of specific corporate actors”

Juan: In your public testimonies to the U.S. Senate Banking Committee and Consumer Financial Protection Bureau you talk at length about the problems with money transmission regulation in general.

Aaron: Well, it’s certainly true that the testimony I submitted to the United States Senate committees that were investigating “virtual currency,” i.e. Bitcoin, was very long, and the subsequent comment letter I sent to the Consumer Financial Protection Bureau (CFPB) was maybe even longer, but there’s good reason for that.  The regulatory system is unbelievably complex to start with, and the resulting problems are correspondingly complex.  Every word I wrote is there for a reason.  You can find the Senate testimony here, and the CFPB comment from my company, Think Computer Corporation, here. (I would have actually written them both from Think, but I wasn’t sure if companies could actually submit written testimony to Congress; I’ve since learned that they can.  Next time!) Since writing both of those, I have learned through public records requests that various bureaucrats in the state regulatory agencies were fairly alarmed to see that I had been allowed to present testimony, and Promontory Financial Group even did an analysis of how much press my testimony had received.  I think that tells you something.

The questions we really need to be asking as an industry and as a country are who do we want to protect, how much, and what might unintended consequences look like? Right now we have a money transmission framework that protects a handful of specific corporate actors: Western Union, MoneyGram, Travelex, American Express, and banks. It protects them in a comprehensive manner: they expend virtually no capital as a fraction of their assets on writing and maintaining laws that are impossible for new competitors to comply with, and in return, they get a monopoly. The unintended consequences are grim: the broken patchwork of financial laws enables a thriving illegal drug trade that has contributed to unprecedented war-like violence in Mexico, and has exacerbated the biases that African-Americans and other minorities caught up in the drug trade already suffer from, especially in cities.

This looks nothing like a proper regulatory regime, and that is because it is not. It’s economic protectionism run amok. A proper regulatory regime would not protect consumers in name only; it would actually protect consumers in real life. It would do so by providing a backstop for financial fraud and by streamlining detection and enforcement of money laundering violations. There would be few side effects other than encouraging consumers to spread their deposits among multiple institutions to avoid exceeding insurance caps—which anyone who believes in portfolio diversification should support anyway.

“U.S. money transmitter laws and licenses are worthless and unconstitutional seven different ways”

Juan: In your list of proposed solutions, you talk about harmonization of money transmission statutes. Why do you think that all the efforts made by, for example, the NMTA (National Money Transmitters Association), and other groups representing other MSBs (e.g., FiSCA), have failed?

Aaron: I don’t know much about previous efforts to harmonize money transmission laws (MTLs), but my general sense is that the lobbying has been pretty spotty and weak in Washington, nor has there been there a clear enough example until recently of where the regulations have gone wrong.  The financial crisis in 2008 also presented financial regulators with multiple, simultaneous ten-alarm fires to put out—which I would argue they only did by smothering them in explosive powder that has yet to ignite—but money transmission problems were just a wisp of smoke by comparison.

Juan: If MT laws were to be harmonized or simplified, wouldn’t it be unfair to all of the previous companies who have had to invest in complying with the current regime (including, Google, Facebook, Amazon, Square and Paypal)?

Aaron: It’s kind of difficult to argue that this has ever been about fairness.  First of all, the current system is in place only because a bunch of huge financial incumbents asked for it.  So it’s clearly not “unfair” for the populace to ask for the system that giant companies rigged to be un-rigged—it merely removes the existing ill-gotten advantage.  As for the technology companies that decided to go along for the ride, that was their decision to make.  The technology lobby with its billions in combined revenue could have pretty easily rivaled Western Union and MoneyGram if it had decided that was what it wanted to do, but I’m sure meetings were had and decisions were made not to fight that battle.  So, if tomorrow the money transmitter laws went away and state licenses were worthless (which, they already are in a sense, because the laws are unconstitutional seven different ways), basically all of these technology companies could just keep doing what they were doing, but with lower costs and streamlined regulations.  That seems like a win-win to me for everyone but the Money Services Round Table (Note: The Money Services Round Table is a lobbying group representing the interests of the largest U.S. licensed money transmitters).

“State money transmission laws place far too much unfettered authority in the hands of unelected bureaucrats.”

Juan: What are the seven ways in which MTLs are unconstitutional?

Aaron: The (at least) seven ways money transmission laws are arguably unconstitutional are:

  1. Pursuant to the dormant commerce clause, Congress cannot delegate its Constitutional power to regulate interstate commerce (money transmission) to the states because doing so violates the Pike test, which is to say that it does more harm than good;
  2. Money transmission today takes place almost exclusively over the Internet, and according to ALA v. Pataki, the Internet is exclusively within the regulatory domain of the federal government. 18 U.S.C. § 1960 was written in 1992, before the commercial Internet existed.  Relatedly, it is often impossible to tell or pinpoint where a mobile payment has geographically taken place, leading to a commerce clause paradox;
  3. State money transmission laws, and especially California’s, place far too much unfettered authority in the hands of unelected bureaucrats, who can reject an application “for any other reason” according to California’s money transmission statute.  See City of Lakewood v. Plain Dealer Publishing.
  4. Rejection of a money transmission license application in one state starts a domino effect where other states are more likely to reject an applicant who has already been rejected elsewhere, which causes an unreasonable burden on interstate commerce;
  5. At least one state law, California’s, requires an applicant to apply in writing and pay a non-refundable $5,000 fee before actually knowing the full tangible net worth requirements to apply, which vary on a case-by-case basis, violating the Due Process clause of the Fourteenth Amendment;
  6. Some states (again, California) consider their money transmission laws “better” than those of other states, and so even having a license in Alabama may not permit a California company to do business as a money transmitter in Alabama, again leading to a commerce clause paradox;
  7. State regulators admit that they are biased against certain types of applicants (small businesses or businesses who have not applied nationwide), in violation of the Equal Protection Clause of the Fourteenth Amendment.

“A sane regulatory environment would be managed at the federal level, and involve the use of automatic, digital regulation mechanisms.”

Juan: Wow. I have been in the money transmitter industry for almost fifteen years, attended hundreds of conferences and events, and interacted with dozens of regulators and lawyers across the world, and I have never heard any of the above publicly discussed.  Never.

What’s your opinion on New York’s proposed BitLicense?

Aaron: It’s mostly a distraction.  The money transmission laws that were already in place covered Bitcoin as soon as FinCEN said they did in March, 2013.  There are a few minor nuances about acceptable securities and anonymity, but really, all of these companies needed licenses before, all of these companies need licenses now, and they can either keep whining about the “BitLicense” requirements or grow up, face the music, and realize that the payment industry is regulated.  How it is regulated is a legitimate question.  I’m still waiting for any company, Bitcoin-based or otherwise, to realize that and sign their name next to mine as I discuss these issues with legislators.

Juan: What will the world of payments, finance and money look like in 5 years?

Aaron: There’s no one comprehensive payment solution because there’s no one way we pay for things—a retail transaction is clearly different from an on-line transaction in a lot of ways.  But I do think retail transactions will start to look a lot more like what I envisioned with FaceCash, and I think on-line transactions will start to move away from cards and bank accounts and start looking a lot more like PayPal.  Whether or not those are the brand names that stick in five years, who knows, but the models clearly work.  As for Bitcoin, I think of Bitcoin enthusiasts kind of the way I think of guys I see on the beach with metal detectors.  There’s a small chance you’ll get rich (extremely small now that the initial hype has died down), but otherwise, it just looks kind of weird.

Juan: We can’t talk about MSBs without talking about the bank “discontinuance” problem, which has been going on for over a decade, and has become a global phenomenon and is now affecting Bitcoin companies.  Do you see a solution to this big problem?

Aaron: Barring some sort of legislative mandate that requires banks to follow strict criteria for when it’s okay to grant an MSB account and when it’s not, I don’t really see a solution.  Right now it’s all about connections.  That doesn’t seem fair or right.  On the other hand, I think the banks are correct to worry about how their accounts are being used, and I can certainly give several examples of banks that are being far too loose with their compliance regimens.

Stand by for PARTS TWO and THREE, coming up next and the following week, respectively.


Aaron can be reached at aarong@thinkcomputer.com.

About Juan Llanos

Innovative compliance, operations and technology executive leveraging emerging technologies, management and leadership best practices (and, above all, common sense!) to empower businesses and compliance professionals for success.


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