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Interview with Aaron Greenspan, Harvard graduate, original creator of “The Facebook,” payments innovator, and autodidact non-lawyer. (PART THREE)
Aaron was generous both in his time and in his responses, which led me to split the interview into three parts: In PART ONE: REGULATION AND INNOVATION IN THE UNITED STATES, Aaron talks about United States money transmitters laws and identifies, with unusual clarity and depth, what he believes is wrong with them.
In PART TWO: BITCOIN, COMMUNISM AND THE SURVEILLANCE STATE, Aaron lays out his controversial point of view on Bitcoin.
Read on for PART THREE: A YOUNG FINTECH ENTERPRENEUR’S DAY OF RECKONING, the final and most controversial one, in which Aaron has no qualms about naming and shaming some of the individuals that have not “treated him with respect.” Again, here is a brief intro on Aaron, for the benefit of those who haven’t read the previous posts.
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.
PART THREE: A YOUNG FINTECH ENTREPRENEUR’S DAY OF RECKONING
“If you really believe that someone or something should change, the best way to achieve that goal is to let them know.”
Juan: The onset of your personal quest to discover the root causes of what you felt was an unfair system was your experience of clashing with regulators, right? Please tell us more about that experience.
Aaron: The state bureaucrat I mentioned had threatened me, Robert Venchiarutti, remains the Deputy Commissioner of Money Transmission at the California Department of Business Oversight (formerly Department of Financial Institutions) today. At the time, Mr. Venchiarutti probably didn’t know that I had been on the receiving end of such a threat before, when in late 2005 / early 2006 I diligently reported a security flaw I discovered in a federal government computer system to the federal government. The New York Times picked up the story—they were the only newspaper that would report on it in a responsible manner, only after the flaw was fixed—which made the government officials quite upset. What ensued was without a doubt the most stressful period of my entire life. Even though I had just graduated from Harvard, I knew virtually nothing about the law, and I found federal agents with guns accusing me of violating the Computer Fraud and Abuse Act (18 U.S.C. § 1030) to be intimidating. Therefore, I had good reason to take Venchiarutti’s threat extremely seriously, and I also had good reason to be suspicious of his motives, because of the background research I had done on the sponsor of California A.B. 2789, which turned into the Money Transmission Act of 2010.
Juan: What do you think were Mr. Venchiarutti’s motives? What reasons did you have to take his “threat” seriously?
Aaron: I don’t know Venchiarutti’s motives and I don’t think it would be wise to speculate. Perhaps one day we’ll learn. However, I believe that any time a government official threatens you, from a police officer to a federal prosecutor, you should take that threat seriously.
Juan: In your public testimonies, and clearly here as well, you have no qualms about naming and shaming individuals and companies. Why is that?
Aaron: It works. If you really believe that someone or something should change, the best way to achieve that goal is to let them know. Sometimes telling a person to their face (or in writing) isn’t enough, and it requires broadcasting the message to a wider audience. Here, I can back up the claim that it’s an effective strategy with some evidence: the law in California has changed once, and it’s about to change a second time. My competitors’ business practices have changed, although not completely, and not fast enough. I think I’m generally a pretty friendly and unassuming person, but sadly, diplomacy does not effect change often enough, accurately enough, or fast enough to be a useful tool in high-stakes situations such as this. I tried. No one listened. Now they are listening.
“My taxes pay government officials to carry out an important official role, so I expect them to act accordingly and treat me with respect.”
Juan: Didn’t you ever feel you were burning an important bridge?
Aaron: I suppose my theory on bridge burning goes something like this: if a bridge is a rickety mess that will collapse at any moment and has a high likelihood of killing you, it’s probably better to burn that bridge and build a new one than take the risk of dying. Being nice to a shoddy bridge doesn’t make it any less shoddy. Along those lines, DBO regulators aren’t my friends. They’re government officials who are supposed to carry out an important official role. My taxes pay them to do that, so I expect them to act accordingly and treat me with respect.
It’s also worth noting that to the extent I burned that bridge, it was a toll bridge to nowhere, in the middle of my driveway, proposed and built by private contractors. It’s a bridge to nowhere because the Money Transmission Act will soon no longer be relevant; my efforts to improve the law in California have paid some dividends, however slowly. First, there was an oversight hearing, then the law was amended by A.B. 786 (2013), an it’s about to be amended again by A.B. 2209 (2014), which has passed the State Assembly and the Senate. A.B. 2209 will make it legal for FaceCash to operate in California again without needing a license, because retail POS transactions will finally be exempt, and because all of FaceCash’s users signed written contracts when signing up from day one regardless. The metaphorical bridge was in the middle of my driveway because I was apparently the only one required to drive on it, and it was built by private contractors because twenty of these laws are actually the work of one lobbyist, Ezra Levine, who sways state legislators across the country on behalf of the various members of the Money Services Round Table, which for those who don’t know, is a lobbying group representing the interests of the largest U.S. licensed money transmitters.
“It’s probably better to burn a collapsing bridge and build a new one than take the risk of dying.”
Juan: Do you regret having handled the whole affair the way you did?
Aaron: Absolutely not. I rather think that they might regret the way they handled the whole affair. I recently learned that before my meeting with Mr. Venchiarutti, he had been sued twice before: once for legal malpractice and again for fostering a racist and “hostile work environment” at the DFI/DBO. Both lawsuits were settled, with the DFI/DBO paying out $27,000 to one of its employees, Venchiarutti’s subordinate, in the latter case. That employee was also forbidden from ever attempting to transfer into the money transmission department again as part of the settlement—an odd condition. So it would appear that this particular California official has a track record—I just didn’t know that in 2011. Now a lot of people know, because I’ve posted it at a site I created with his name, and of course here as well. Jan Lynn Owen, DBO’s current Commissioner and a former senior lobbyist at Washington Mutual, where she helped accelerate the largest bank failure in United States history, also has her own web site along the same lines.
Juan: Apart from your case apparently being ignored, has there been any other reaction on the part of the California money transmitter regulatory agency?
Aaron: There hasn’t been any public reaction from the DBO, but the e-mail disclosures I mentioned before indicate that they obviously take it seriously and follow it closely. As for why Judge Howard R. Lloyd in the San Jose division of the District Court Northern District of California has been sitting on the constitutional lawsuit for almost 1,000 days now—a District record for non-stayed motions to dismiss as far as I know—I have no idea. Most motions of that type are resolved well within a year, and most typically litigants wait three or four months. That particular case is approaching three years of just waiting on the judge, which while strange and annoying, is also significant in that it would have been extremely easy for him to dismiss right away (which is what happens to most cases that are filed).
“I still think virtual currency startups should pay higher risk premiums relative to others, but if they think that preserving the status quo is their ticket to success, they’re wrong.”
Juan: What would you say to those who might think that calling for federal regulation is opening the door to more unwieldy, expensive Big Government-type regulations?
Aaron: Sounds like a lot of scary buzzwords to me. Federal notice and comment periods are generally much more transparent and forgiving than state comment periods, if they even exist. For example, California has had a number of “public” hearings on money transmission issues—including one blocks from my house—with only 72 hours notice given to those invited to the hearing. I had no idea that Bitcoin was being discussed at Mountain View City Hall in November, 2013, when I literally can walk to Mountain View City Hall because it’s less than a mile away and I’ve been one of the most involved citizens in the country on these issues. That kind of thing doesn’t happen with federal regulations. They’re obviously not all anywhere close to perfect, but at least there is a process that people in Washington take seriously, more transparency, and a lower likelihood of petty corruption.
As far as “unwieldy” and “expensive,” I don’t see how it could be any more unwieldy and expensive than what we have now for payments startups. I still think virtual currency startups should pay higher risk premiums relative to others, but if they think that preserving the status quo is their ticket to success, they’re wrong. I don’t know when I will win this battle, but eventually, I will win. Federal regulation of money transmission is inevitable.
Aaron can be reached at email@example.com.