Friday, March 01, 2013

Cutting to the chase: Repeal the California Money Transmission Act

This is the fifth post in a long series.  I've gotten a lot of complaints about cliffhangers and hidden agendas so I'm going to cut to the chase here and then go back in later posts to fill in some details.  And I should probably say this up-front too: there is no "big reveal" at the end of this story.  I spent three years getting the runaround from various banks, and I don't know why.

However, there are some things that I did learn as a result of this experience.  I'm going to just lay them out here without a whole lot of support because there's a deadline looming.  For now I hope you will give me the benefit of the doubt that these are things that I have come to believe are true as a result of firsthand experience and some fairly extensive research.  If you want some of the gory details, you can find them here.  (Note: this is a very long document, well over 200 pages.  And it was not compiled by me.)

1.  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.  Retail transactions (actually, any money transfer transaction) could be profitably brokered at 0.1% or less.

2.  In a normal free market, competitors would arise to undercut the credit card companies and drive costs down.  This is not happening.  There are a lot of new payment companies out there, but they are all (as far as I can tell) UI veneers over the existing inefficient and expensive infrastructure.  This is not to say that these companies aren't adding value; they are.  But none of them (again AFAICT) are addressing the really fundamental problem, which is that moving money costs much more than it should.

3.  One of the principal reasons that startups don't address this problem is that it is essentially illegal.  The regulatory framework in the U.S. makes it all but impossible for a startup to move money legally except by using the existing, broken, inefficient, expensive infrastructure.  (Just today, Square was hit with a cease-and-desist order in Illinois.)

A prime example of the regulatory framework that makes it impossible for startups to tackle this problem on their own is the California Money Transmission Act (MTA).  The MTA was enacted last year, and it put the final nail in an already pretty sturdy coffin for financial startups.

Why was this innovation-killing law passed?  Because a coalition of existing money transmission businesses formed a coalition called the Money Services Roundtable and convinced the California legislature that this law was needed in order to protect consumers.  It's a plausible theory (which is how they were able to bamboozle the legislature into passing it) but it is wrong.  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.  The only actual effect of the MTA is to make it all but impossible for new competition to enter the market.

My goal in writing all this is to try to enlist your help in getting the MTA repealed.  The California legislature is right now considering modifying the MTA.  Unfortunately, the draft legislation currently on the table is a total sham, and will likely end up making the situation worse.  The good news is that because this legislation is on the table there is a public hearing that will be held on March 11 in Sacramento, and so it is possible to get the draft legislation changed before it is voted on.  You don't have to attend this hearing to have your voice heard, you can submit written comments for the record as well.  I urge you, especially if you are a resident of California, to do so.

You can send your comments via email to Mark Farouk:  Here's some sample verbiage, but you should write it in your own words:
Dear Mr. Farouk: 
I would like to have the following comments entered into the record for the March 11 hearing on the California Money Transmission Act.  I believe that this act does nothing to protect me as a consumer.  To the contrary, it erects barriers to entry that favor existing players, suppress competition, and thus ultimately hurt consumers such as myself.  I urge the legislature to repeal the MTA.
Written input for the hearings is due on March 6.

If you want additional information please feel free to contact me:  And if you do write a letter to Mr. Farouk, if you cc me and give me permission, I will also forward it to the relevant legislators and their staffers on your behalf.


Anonymous said...

Wouldn't you then have another 49 equivalent (give or take) pieces of legislation to deal with? Seems like the kind of thing that would have to be done at a federal level (of course I know nothing about the financial system and you've been mired in it...)

Aaron Greenspan said...


Yes, but it would send a clear message to other states and Congress that something really needs to be done. And right now, even though it takes a lot to get Congress to do anything, the alternative isn't pleasant to think about: more crimes for entrepreneurs.


Ron said...

Yes, but we have to start somewhere, and the rest of the country pays attention to what California does. This is a real opportunity to make a real difference. But the clock is ticking.

Fellow Traveler said...

If you guys still believe in a political solution, then I recommend you go with the advice above.

Otherwise I recommend you check out my project, the Open-Transactions project:

I also recommend Bitcoin, which, similar to Bittorrent, is censorship-resistant:

Really, it's a moral imperative.

Anonymous said...


Anonymous said...

This a wasted effort. Government passes laws to give it control. IT doesn't matter if the laws are "Bad", bad laws for us are good laws for them.

The system is how it is by design.

It's pathetic that otherwise smart people can be hoodwinked by such an obvious and constantly repeated swindle.

But then, you don't think gold is real money and you think fiat currency is?

Dude, your heart is in the right place and I don't mean to bash you at all... you're just lost in the woods still.

I'd suggest:

Rothbard: What has the governmetn done with our money.
Hazlitt: Economics in one lesson
Rand: Atlas Shrugged

You see the evil that this law is, you haven't yet understood how to fight that evil.

But you can if you will embrace liberty.

Ron said...

> This a wasted effort.

And that is a self-fulfilling prophecy.

> Rothbard Hazlitt Rand

The utopiates of the pseudo-intellegentsia.

Bah, life is too short for this.

Anonymous said...

Any idea how this sort of legislation would affect a non-profit's ability to collect and transfer donation?

Ron said...

IANAL, but I'm pretty sure non-profits don't count as money transfer agents. They actually take possession of their donations, but because they are tax-exempt this doesn't matter the way it would if a for-profit took possession of the money.

Don Geddis said...

I enjoyed the story, thanks. I don't know much about financial regulation, but I wouldn't at all be surprised if the CMTA was an example of regulatory capture, which after all is a well-known type of non-market failure.

I also understand that you spent years on a particular effort, and failure is frustrating (even if it was a "good bet" that just happened not to work out). I also get that this particular topic may be time-critical.

Still, despite all that, I ... expected more? ... given the original teaser. Phrases like "stopped writing for...a year", "advantages to staying off the radar", "big banks present such a threat to the global economy", "dismiss me as being paranoid", etc.

That seemed to promise a dark, widespread secret. But what you've described seem more like a standard case of government failure, just like "monopoly causes profits above social optimum" or "tragedy of the commons means that all the grass is eaten and everybody starves". You could have been talking about overfishing in the oceans. Or, even just in regulatory capture, how the US patent system was enshrined in the Constitution, but the current implementation does not meet the goals explicitly stated there, and instead patent wars have become yet another tool of the powerful and lazy.

I'm not surprised that financial regulation isn't effective. Nobody wants to see grandma all confused and conned, and so "we must do something". It's the same naive impulse, directed at a highly technical field, that leads to spiralling health care costs, and to "security theater" with TSA and the airlines. People who mean well, but don't know what they're talking about, make good-sounding but ineffective decisions on complex policy issues.

So. You're telling us that US financial regulations are one of these. Didn't know that, but it doesn't come as much of a surprise. But it surprised you?

Don Geddis said...

@Anonymous: "you don't think gold is real money and you think fiat currency is"

If you actually learn about what money is, you'll see that it's perfectly clear that, for thousands of years, gold was one of the most common and stable forms of money, throughout the world. But at the same time, in the modern world, there's no question that fiat currency is fulfilling that role today.

This is separate from whether, in your imagination, there is some hypothetical world that is "even better", perhaps where everyone returns to using gold as money. (I, personally, don't think that would be a better world, but that's a completely separate argument, irrelevant to this main point.)

The main point is: fiat currency serves as the "medium of exchange", and the "unit of account". Gold only competes as a "store of value", but falls woefully short of the first two functions (in the modern world).

So, yes, it's absolutely clear that gold is not "real money", but fiat currency is.

Ron said...

> I ... expected more? ... given the original teaser.

I apologize. The dramatic impact of the story was somewhat blunted by the schedule. I was hoping to get out one more installment before the call to action on the MTA but I ran out of time.

> it surprised you?

That not a single bank would take me up on a business plan that would bring them hundreds of millions of dollars in deposits and tens of thousands of high-quality customers, yes, that surprised me. (Still does.)

That the banks' control of government is so complete that even the Obama administration couldn't even *indict*, let alone convict, a single player in the sub-prime fraud, that surprised me.

That five years after the second biggest financial meltdown in the country's history nothing has changed, and the banks can continue to operate as parasites on the economy to the tune of 3% of the retail economy (for starters) with absolute impunity and secure in the knowledge that nothing can challenge their hegemony, that surprises me.

That a bank could control the arbitration industry to the point where it could brazenly steal $80,000 from me despite the fact that I had a slam-dunk case against them, that *really* surprised me.

By the time the HSBC drug-money laundering case came around I was past being surprised.

Basically, the tin-foil hat crowd who maintain that democracy is dead and the world is actually controlled by an oligarchy of a few large banks (and maybe a handful of ulta-rich families) appear to actually be correct. Maybe you knew that all along. I didn't. In any case, I'm sorry I disappointed you.

Ron said...

Oh, and the fact that the vast majority of the people who work in the financial industry don't understand how their industry actually works under the hood, that surprised me too.

Don Geddis said...

"the tin-foil hat crowd ... appear to actually be correct"

Excellent! See, now that's the kind of grand conclusion that I was waiting for! :-)

Your top level posts were entirely too reasonable. This little chain of five examples and a tin-foil conclusion ... now, that fulfills the promise in your original teaser!

Sam said...

The situation itself exists because the "leaders" you speak of are not working for the people. They have sacrificed their people and countries already.