
Death By Regulation: FaceCash Is Shutting Down in California - thinkcomp
https://www.facecash.com/legal/ca.html
======
tptacek
The law specifically states that the tangible net worth requirement is a
floor, not a ceiling; like the surety bond requirement, it scales up with
transaction volume and net receivables. The DFI FAQ basically says that in
practice the minimum is more like $1MM.

There is a reasonable-seeming concern in this post: the California DFI has
effectively unpublished tangible net worth requirements, and ostensibly the
only way to find out what they are is to apply for a license and be rejected
--- which is something you have to disclose on all future applications even in
other states.

The notion of "tangible net worth" requirements is the flip side to the 2008
complaint about banks being able to overleverage and thus create "too big to
fail" scenarios. The subtext, I think, of the DFI's fuzzy requirements is: if
you meet the tangible equity requirements, you know you do. For the types of
businesses we're talking about, $500k is a joke (can you imagine Paypal being
backed by sums denominated in the single-or-double-digit hundreds of
thousands?) It's simply very expensive to be a money transmitter in a state as
big and dynamic as California.

~~~
Zak
This seems to be the same sort of thing people were[0] complaining about with
Apple's app store policies; that it was effectively impossible to know the
outcome of the approval process without having to invest a large amount of
time and money in advance.

[0] It is my impression that the process has been improved to the satisfaction
of most people who can be satisfied with such a process.

~~~
tptacek
The public interest in regulating funds transfer companies seems to outweigh
--- by, like, a lot --- our interest in a well-orded iOS App Store.

~~~
dhbanes
How is the public interest served by obscure, unpublished requirements for
permission to do business?

~~~
tptacek
Nobody here thinks it is.

~~~
dhbanes
So would you mind expanding on your comment? In what way is the public's
interest served by these requirements?

------
narrator
Walmart has been trying to get into banking in the U.S for a number of years.
They have had to deal with a lot of regulatory hurdles. They already have
banking operations in Mexico and Canada. If Walmart is having a hard time
getting past the regulators to disrupt this space, it's probably much harder
for a startup.

[http://www.americanbanker.com/usb_issues/120_9/wal-mart-
gets...](http://www.americanbanker.com/usb_issues/120_9/wal-mart-gets-
serious-1023966-1.html)

[http://www.washingtonpost.com/wp-
dyn/content/article/2006/04...](http://www.washingtonpost.com/wp-
dyn/content/article/2006/04/10/AR2006041001594.html)

~~~
ahi
Not really. Walmart's difficulties are because it's a real business.
Typically, non-banking entities are not allowed to own banking entities. There
are some very good reasons for this, primarily that if the non-banking entity
struggles they have a very good incentive to raid the piggybank and/or take it
down with them. After the past couple years it is easy to forget that banks
are supposed to be more stable and less risky than other industries.

Clarification: Walmart's difficulties are unrelated to a banking startup's
difficulties.

------
tzs
I find two things odd about this.

First, in one of his articles he says 43 states already have such laws, and
you need to be licensed with them to do business nationwide.

So, why is one more state (California) adding licensing a big deal?

Second, when I Google for more information I come across almost no one
complaining about this bill other than this one guy. If the bill is anywhere
near as bad as he claims it is, I'd expect to see a lot of discussion.

The last attempt to discuss it here on HN was quickly flagged and killed.

~~~
thinkcomp
Problem 1: California has a tangible net worth requirement and surety bond
requirements. Most states have the latter, but not the former. Some states
have asset requirements, but that means counting assets on the balance sheet,
not shareholder equity. California counts shareholder equity, so essentially
you have to have $500,000 in cash in the bank that isn't from a loan.

Problem 2: It's not really $500,000. The DFI uses its own non-published
standards which are much higher. This makes it impossible to know how much you
really need to raise.

Problem 3: Silicon Valley is in California.

Most of the people who should be complaining about this bill either don't know
enough about the law to know what to do, or they're just too small to know
that the law even exists. That's precisely the problem, though: sometimes
great innovations happen where you least expect them, and by regulating small
companies out of existence, they're not very likely to ever come up with
anything.

Also, VC-backed payments companies that have recently disappeared (Bling
Nation, for example) have no incentive to explain the true reasons behind
their disappearing.

------
tudorachim
For more background from the founder of FaceCash:

[http://www.quora.com/Aaron-Greenspan/Why-Im-Furious-with-
Sil...](http://www.quora.com/Aaron-Greenspan/Why-Im-Furious-with-Silicon-
Valley) [http://www.quora.com/Aaron-Greenspan/In-Thirty-Days-
Payments...](http://www.quora.com/Aaron-Greenspan/In-Thirty-Days-Payments-
Innovation-Will-Stop-In-Silicon-Valley)

~~~
CamperBob
From the first link: "Rather than invest in a productive, useful and frankly
unprecedented product such as FaceCash, venture capital and angel investors
have focused their time and billions of dollars of their money in companies
and entrepreneurs that have, in serial fashion, deceived co-founders, deceived
employees, and deceived customers. In many cases, shareholders are next.
Meanwhile, they've left companies like my own for dead."

Whining-like typing detected.

------
adrianwaj
Aaron - if a customer shows a shopkeeper a picture of a face that is not them,
what happens if the shopkeeper is tired or hungover and can't distinguish up
from down? Or, the shop just needs the money? If I was managing a shop, I
wouldn't want a hungover teenager "confirming faces." What am I missing here?
The only person I'd want confirming faces are customs officials and police
officers - where there's a clear need to show the right ID to such a person
and a clear disincentive to show the wrong one. At the same time, the checker
is compelled not to mess up. As a shopkeeper using facecash, what happens if
myself or my staff mess up, is there a liability? Why would I want that
liability? And if there's no liability, what's negating a potential fraud?
What happens if there is a dispute between a customer and a shopkeeper as to
the face in question?

------
r00fus
It looks as though it's less "regulation" rather than regulatory capture and
lack of transparency.

Why can't CA DFI actually state and publish the rules which would guarantee
licensing?

------
hirokitakeuchi
Something that confuses me is that FaceCash seem to be the only company that
is (outwardly) complaining/worrying about this.

Presumably this regulation will affect all of the other payments companies in
this space. (e.g., WePay, Venmo, Dwolla etc). It would be interesting to hear
their thoughts on this.

~~~
thinkcomp
Rich can confirm this (or not), but WePay is an agent of The Bancorp, Inc.
(<http://www.thebancorp.com>), which is a bank, so it's exempt from money
transmission regulations. The Bancorp told me this morning that they consider
WePay an exception and that they don't do it for anyone else anymore. I'd
talked to them a while ago, but they're not so good about returning phone
calls or e-mails.

Venmo doesn't have any licenses to the best of my knowledge. Maybe they're an
agent of someone, too.

Dwolla thinks that they're exempt but I'm not entirely sure that's true. They
have a credit union service provider as one of their investors, but that's not
necessarily the same as being an agent of a federally chartered bank or credit
union.

Noca, Xipwire, Cimbal, LendingKarma, KoolWallet and others are affected as
well.

------
davidu
I've seen this post, and your other posts on this subject.

I'm sorry to say it, but it seems like regulation is not why you are shutting
down, but inability to execute on your business is. WePay managed to not have
this be an issue. No VC I know has raised this as an issue of concern.

I'm not trying to troll, but startups are realy hard dude. Shit happens. Move
on. Find an alternate path. If you believe in the vision, you'll find a way.

~~~
thinkcomp
David,

I posted this to raise awareness about regulatory issues, not to solicit pity
or life advice.

I know that startups are hard; that's why I do them. It's just bullies like
you who make them especially so.

Aaron

~~~
davidu
Again, you're focusing on the wrong thing. Being honest (or "sharing my
opinion") doesn't make me a bully. You titled your post "Death by regulation"
and I think you're doing yourself a disservice by choosing to believe that
regulation is the reason why FC hasn't succeeded.

I'm happy to help. I'm a mentor at I/O Ventures where I hold office hours
periodically -- please feel free to drop in, or shoot me an email and I'll let
you know next time I'll be there. Even if you don't think I'm qualified to
mentor, I'm certainly a good person to bounce ideas off of, and you can
probably guess, I bring a healthy dose of reality to discussions. ;-)

~~~
thinkcomp
David,

I don't even know what to say. Your point seems to be "Shit happens...but it's
all your fault."

Also, I didn't say that FaceCash hasn't succeeded, and I didn't say that
regulation is "the" reason why. It's far too early to tell.

When your honest opinion is consistently derogatory toward a single person no
matter the circumstances, and you never have the faintest praise to offer,
then yes, I think that does make you a bully, albeit an honest one.

If you truly want to help, and you truly believe that I just don't know how to
"execute," whatever that means, then fine. E-mail me with what I should have
done differently, and I'll be happy to share some reality with you.

Perhaps you can offer some lessons on "execution" to Jeff Bezos as well. Based
on what the California legislature did to him today, he's clearly in need of
some mentoring.

aarong at thinkcomputer dot com

Aaron

~~~
mst
Calling somebody a bully always makes you look like an asshole.

Even if you're right.

I did so once, I believe I was and still am right, but looking back I still
believe I came across as an asshole by saying it and didn't achieve/gain
anything.

Don't waste time dissing people. Evolve, pivot, code around them. It's much
more productive, for you _and_ for them.

~~~
thinkcomp
This isn't a case of random, baseless name-calling. If it makes me an asshole
to defend my work (which I disagree with you on because I don't think it
does), so be it.

------
epscylonb
It is stuff like this that makes bitcoin look like it has potential.

I agree financial regulation is mostly a good thing, but I am also happy with
the concept of a financial wild west in the form of a crypto currency. As long
as people know what they are getting in to.

------
mikeryan
So I'm unclear (really - I'm not being obtuse) is the new law actually
impacting this or not? It sounds like the DFI has their own terms, how does
the law make a difference?

 _If the California DFI were to deny our application for a license, we would
be at risk of being denied licenses in every other state in which we apply.
(Each state's license application asks whether the applicant has been denied
any other kind of license for any reason.)_

If this is a problem why not just get all your applications in now before
you've been denied?

~~~
marshray
_If this is a problem why not just get all your applications in now before
you've been denied?_

Right, just submit an application now for everything you think you might ever
need to apply for in the future, everywhere. Imagine how many denials you will
have on your record then.

Not a good strategy.

~~~
tptacek
I think the suggestion was, get the license for Rhode Island and North Dakota
and Maine before going for California. According to their Legal page, Think is
only licensed in Alabama now.

------
mahyarm
You see all of these small banks and credit unions with 1-5 branches in total,
what prevents them from getting into this business? Or facecash doing
something similar? Get silicon valley bank involved as an investor/backing
bank or some other small bank?

~~~
tptacek
Nothing stops them from doing this. What they're upset about is that there is
no regulation that says "if you raise _X_ x $1MM, you will receive a money
transmitter's license"; they'd like to do it on their own.

------
latch
I still think we're crossing a line where innovation is going to cost
more/slow down - like it has for a lot of technologies before the internet
(see airplanes). Regulation is one of the two reasons I think this happens
(complexity being the other one).

