
In Fifty Days, Payments Innovation Will Stop In Silicon Valley - thinkcomp
http://www.quora.com/Aaron-Greenspan/In-Fifty-Days-Payments-Innovation-Will-Stop-In-Silicon-Valley
======
hristov
In the interest of correctness I should point out that the half a million fee
is not a fee but a bond. The state does not take it but it is kept in a trust
for people that may be injured by the particular money transmission business
that gets a license.

Thus, if a money transmission business steals someone's money you can sue them
and when you win you can take your money from the 500,000 bond so you are sure
they will not run out on you.

I am not sure whether it is a good law (I have not done enough research to
figure that out), but I just wanted to clarify. The quora post made it look
like the state was just greedy and taking all the money for themselves.

~~~
ra
Thanks for clarifying.

I'd like to add that this is a good practice in the financial industry, and
isn't a bad thing at all. It's consumer protection.

And, $500k is actually a pretty low figure for this type of 'bond'.

For example, in Australia I believe you would need a banking license (or a
guarantor with a banking license) which requires a deposit of at least $40M in
to an escrow account which is managed by the central bank.

~~~
lhnn
I'd like to say this should not be legislated, and people should choose who to
do business with on their own. If they offer the government a bond to cover
losses, then people might go to that business instead of some startup. OTOH,
perhaps I don't care when all I'm investing in my "Silicon Valley
Facespacecash" bank is $20.

Another reason to use alternative currencies...

~~~
drndown2007
That works in theory. But have YOU read all the fine print when opening an
account with your bank? I haven't either -- everything we do is based on some
common sense and trust. If we had to verify everything we did with everyone we
did it, our way of life would end.

~~~
premchai21
> But have YOU read all the fine print when opening an account with your bank?

Yes. Paraphrased:

Bank agent: “You'll also have to sign this.” (Hands over a sheet of paper.)

Me: “Let's see here… […] ‘comply with the Deposit Agreement and Disclosure’. I
need to see a copy of the Deposit Agreement and Disclosure, please.”

Agent: “Of course.” (Hands over a booklet.)

Me: “All right. Well, you may have to wait a bit…” (Starts leafing through the
booklet. Cut to analog clock, then to clock fifteen minutes later.)

It was the same thing with signing up for public storage. “… ‘agrees to the
Privacy Policy, which is incorporated by reference’. I don't seem to have a
copy of the Privacy Policy here.” “Here you go,” and another sheaf of paper
appears.

Note that in these cases I'm _still_ basing my interpretation on a lot of
contextual and cultural information, because while the alternative of trying
to get them to lock down all the definitions separately would be amusing, it
would fail. In many cases, every one of the relevant providers is in a
position to drop me, whereas I'm reliant on at least one of them accepting me,
so the power balance is tipped heavily in their favor.

------
jrockway
Doesn't all regulation stifle innovation? If I wanted to sell a homes in a
skyscraper made of papier-mâché, building codes would prevent me from doing
that. But that's not necessarily a bad thing: the first time someone leaves
their soldering iron on while they're not using it, the building burns down
and we have five hundred dead families on our hands. "Innovators" tend to
think about the good aspects of their ideas rather than potential downsides,
so the government has stepped in to prevent the downsides from being too bad.

In this case, the government is saying, "make any new innovative money
transmission system you want, but keep $100,000 in an account so when you fuck
up someone's paycheck, they can sue you and you can pay the damages you owe."
Not too unreasonable.

Regulation is bad for businesses individually, but it's good for society in
aggregate. Progress may be slowed, but it's still happening and happening with
fewer horror stories along the way.

~~~
dpatru
Government regulation is in just about every case either not needed at all or
better provided through non-coercive institutions. Since government innovates
more slowly than private industries, government regulation tends to become
outdated, going from common-sense prudence to arbitrary burden on innovation.
For example, right now the Mississippi River in the US is flooding, destroying
many homes. This is a huge loss partly because homes are very expensive. Maybe
it would make sense to have some housing constructed of paper-mâché, not try
so hard to resist disaster, but instead concentrate on making it cheap to
rebuild. Government building codes prevent this kind of innovation.

Regulation reflects a lack of creativity. It says, "There is no other way to
do this." But maybe there is another way and the politicians just can't think
of it. They shouldn't be allowed to limit other, more enlightened people.

The above assumes that regulations are honestly designed to promote the public
good, a dubious assumption. Often I suspect that regulation is designed to
protect influential but inefficient businesses against competition.

~~~
yequalsx
You wrote:

"Since government innovates more slowly than private industries, government
regulation tends to become outdated, going from common-sense prudence to
arbitrary burden on innovation. "

The space program spawned a tremendous amount of innovation. Public research
universities throughout the nation innovate on a grand scale. The internet is
an example of government innovation.

Regulation does not reflect a lack of creativity. It reflects an
acknowledgment of a problem and steps to address the problem. Sometimes side
effects occur and are bad and the regulation needs to be reanalyzed. Sometimes
there is regulatory capture (by private entities).

Government had to mandate the use of seatbelts. This led to airbags because
after the government made safety an issue innovations were made in this area.
They probably would have been made without government intervention but
government got the ball rolling and the innovations occurred sooner as a
result of government.

Regulations can be good, bad, or neutral. But talking about "non-coercive
institutions" makes your view look extreme.

~~~
Retric
The air force actually developed seat belts from scratch.
<http://en.wikipedia.org/wiki/John_Stapp> demonstrated that the human body
could withstand vary high G's for short periods, and because more pilots where
dieing in car accidents than airplane accidents the air-force was willing to
do some vary important basic research.

Which brings up the basic issue, the incentives of car makers / home builders
/ bankers to create safe products does not line up with society's benefit from
safe products without some external input.

------
stephenr
They want companies that operate like banks, such as PayPal, to be licensed.
I'm not sure I see the downside. PayPal has a shocking record of abusing it's
customers, and it can only do so because it isn't bound by the same laws as
banks are.

Personally, I think if you rely on PayPal/etc for your business, you're asking
to get financially raped.

~~~
thinkcomp
If they wanted companies to be licensed they could just require a license.
Instead they require a license and a bond worth millions of dollars in some
cases, nominally to protect consumers. Yet if you have a million consumers in
a state and a $1,000,000 bond, that means that if the company defaults, each
consumer gets back a dollar.

This doesn't sound like consumer protection to me. It sounds like an
artificial barrier to entry.

Also, PayPal has had licenses in all states that require them since its IPO,
and clearly there's no connection between this issue and customer service.

~~~
pyre
Well, there is a (flawed) line of reasoning that says that if you can come up
with $1M then you must be more trustworthy than someone that can't.

~~~
zackattack
I don't think it's _that_ flawed.

Would you elaborate?

~~~
pyre
Trustworthiness is not tied to money, the ability to make large sums of money,
or the ability to convince others to loan you money/invest in you.

~~~
tapp
Depends on context; in some cases it absolutely is.

Courts often "trust" people to go free temporarily if they can post bail
pending trial. Lenders will "trust" you with their money in the form of a loan
if you can post collateral.

------
pilif
Here in Europe, PayPal (which is acting like a bank) had to get a banking
license (like any other bank). As far as I know they didn't go bankrupt yet,
so it can't be a wholly bad thing.

If I drive a vehicle that acts like a car, I need a drivers license. If I run
a service that acts like a bank I need a banking license.

I really don't see a problem here.

~~~
tluyben2
They are talking innovation; sure Paypal can get licenses like that, but a
startup can't. Most (by far) startups don't have 500k to lock away. And most
don't have the money to pay the license fees. So yes, it's an issue as far as
innovation of payment services goes; now suddenly you NEED to get millions in
investment and that all doesn't go into the product but instead into
government crap.

~~~
mattmanser
And most startups don't go into banking. Seriously, if you're going into that
kind of business you should have that kind of money behind you.

~~~
dpatru
Why is banking (specifically money transfering) different than other kinds of
business? Seems to me that money transfer is a particularly easy business for
the market to regulate. A failed money transfer is a lot easier to spot than,
say, a dangerously defective physical product.

~~~
mattmanser
A fraudulent one isn't though.

You're also dealing with especially sensitive data, life ruining data if it
gets into the wrong hands.

------
yoyar
So, a new startup comes along, and things are going well. The have new,
innovative ideas that satisfy the needs of consumers. They manage to get a few
hundred thousand dollars from a VC so that they keep operating for another 6
months. This startup offers a service that is cheaper, safer, quicker and
generally more efficient that what is currently available. All of a sudden
they'll be breaking the law unless they hand over half a million to the
government. They can't find the money. They're done. You never hear about it.
Other new companies that might have added value in the marketplace come along,
look at the regulatory hurdles, and don't even try.

They might have provided a service that would be beneficial to the consumer
and they might have hired a bunch of programmers once they had established
themselves. The established companies already in the market would have had to
lower prices and become more efficient to compete. Instead, the competition is
crushed, you never hear about it, never know about it.

This is what this law is designed to accomplish. Nothing to do with Paypal.
Stop talking about Paypal.

Many regulations serve the interests of politically well connected powerful
oligopolies in this way. This is just one example. The reason put forward is
always that this is some way of protecting you. That, if this regulation
didn't exist, these companies wouldn't have to be responsible. In reality, it
strengthens the hold on the marketplace of the oligopoly already in place and
makes you more vulnerable to them.

Keeping companies out of the marketplace stifles competition. This is not good
for you, the consumer.

~~~
jonknee
> All of a sudden they'll be breaking the law unless they hand over half a
> million to the government.

Or put up a few coins for a surety bond. If you're a financial startup and
your investors don't trust you enough to put up bond money, you should
probably find a different niche (or investors).

~~~
yoyar
So, we assume they're going to commit some type of fraud or crime up front so
they have to submit to posting bond, but the investors are supposed to trust
them with another half million. Or, as you put it, a few coins. Wow, in your
world a half million is a few coins. You live in a universe different than
mine.

~~~
jonknee
Fraud or criminal elements are not required. Old fashioned screw ups and
security lapses do the job of losing other people's money just fine too. The
bond requirements are just a method of basic consumer protection. Money
transfers are a serious business with serious consequences, if your investors
don't trust you with either the funds for the bond or the payments on a surety
bond, you really are in the wrong business.

A surety bond means you only have to pay a small portion of the total. It's
similar to insurance. You pay a company with larger resources to vouch for you
in case you have a problem. Instead of ponying up (the refundable) $500K you
pay something like $25k. You don't get it all back if you close up shop, but
you didn't need to put much capital out there. This is how a lot if not most
licensing bonds work.

------
gyardley
Reminds me of mortgage lead generation.

If you want to take people's names and then pass them on to mortgage brokers,
LowerMyBills style, you have to register as a mortgage broker in almost all
fifty states. Requirements vary widely from state-to-state but included
obnoxious things like high fees, local residency requirements, and annual
written tests.

The end result - mortgage lead generation didn't stop, but it became something
that was difficult to legally bootstrap. You needed one hell of a GC, and he
needed to have experience. Venture-backed companies had a big advantage in the
space.

As long as the rewards are high enough, I suspect the same will be true here.
Nothing great, but not the apocalypse.

------
tzs
His argument makes no sense. He says that 43 other states have such
regulations, so that if you want to do business nationally you have to get
licensed in each, at costs ranging from less than California's new cost to
more than California's new cost.

So what is the significance of California making it 44 states? I doubt a new
payment system that only works in a handful of states has much of a chance, so
if regulation kills payment innovation it would have have been killed long
ago, when the majority of other states adopted regulation.

~~~
JoshTriplett
The difference: if you start a business in California, you have to care about
California law, and federal law, but not necessarily any other states' laws.
Similarly, Internet businesses don't legally have to collect sales taxes for
states other than their home state (and most don't make the mistake of putting
their HQ in a state with sales taxes), though various states have attempted to
(illegally) claim otherwise.

------
rbanffy
You know... If you look like a bank, walk like a bank and quack like a bank,
you should obey the same regulations banks do.

Some laws exist to protect the establishment. Others exist to protect society
from it. I am not sure where this one sits.

------
robflynn
How does this affect SaaS billing companies such as Chargify, Spreedly,
Recurly, et. al. since they're merely passing along information to a gateway?
I assume not at all, if I understand what I am reading.

What about something like Stripe? It sounds like they may be affected?

This does not sound particularly fun or exciting.

~~~
thinkcomp
Credit and debit cards are issued by banks and banks are exempt from money
transmission laws.

This is why you see most startups gravitating toward niche markets that
revolve around the existing infrastructure, but those niches are becoming
awfully narrow.

In contrast, I contend that the system itself is flawed and needs to be
replaced.

~~~
robflynn
Ah, thank you for explaining that to me. I some how missed that from reading
the link. Though, it was quite verbose and I am, admittedly, partially into a
celebratory post-coding-session bottle of wine.

I agree. The system most definitely appears to be flawed.

Isn't Paypal forced to operate as a bank in Europe as opposed to the way they
exist in the U.S.?

~~~
chokma
Yes, Paypal operates with a Luxembourg banking license in Europe
(<http://en.wikipedia.org/wiki/PayPal#Bank_status> ).

Note that banking in Europe is in part regulated by national law of the member
states. To operate as a bank in Germany, you need not only 0,5-5 million € as
starting capital (depending on the type of financial transactions you are
getting into), but you also need two reliable* executive managers who have at
least three years experience leading a bank of the intended size (or similar
experience).

Thus, the barrier to entry is rather high in Europe, too. But after that, if
you get big enough, the tax payers will pay all your bills, like in the US.

* no criminal record and no other facts known that would cast doubt on their trustworthiness.

~~~
18pfsmt
Yes, Europe is full of regulations, and I don't think anyone that's read HN
for long enough isn't tired of hearing about a lack of innovation in Europe
vs. the US (especially SV).

------
hessenwolf
Can't I just live as a shareholder in silicon valley, basing my limited
company and shill directors in Alabama, and leasing the limited company
software produced by my other company in California?

Requirements:

2 limited companies.

Licensing agreement.

Alabama-based Non-executive directors (cousin Ed and Chuck).

~~~
tptacek
Then your other company in California have to post the bond. The software has
nothing to do with it.

~~~
hessenwolf
The company in California produces software components. It is not involved in
any financial transmissions whatsoever. That is my point.

~~~
tptacek
Then as long as you don't transfer money in California, you're fine. If you
do, you need a license. Note the part of the law that refers to the travel
costs incurred to get an inspector to whatever part of the country you
domicile the business-end of your business in.

------
Groxx
> _Oh, and if you want to do business nationwide, you'll need 43 more of those
> licenses from almost every state._

Does this mean California is just another state in a long line of similar
laws? Or is there something unique about California's situation in this aside
from it containing Silicon Valley?

~~~
bad_user
California is also the home of many tech-savvy people that buy stuff online
... if you can't get a license to operate in California and maybe New York,
you may as well not exist.

------
adrianwaj
What's the jurisdiction? Some freshly made illegal company can operate to
California residents and be located outside of it (even the USA.) Are they
going to block the website to California residents?

------
dublinclontarf
And so we have one more reason to use Bitcoin.

~~~
lutorm
... whose exchange rate against the dollar has gone up by a factor of 6 over
the past weeks? If you had any debt nominated in Bitcoin, you'd be screwed.

~~~
jeffb
You wouldn't be screwed if your business operates in Bitcoins, and your
customers pay you in Bitcoins. If you take out a loan for 100 Bitcoins, you
will still owe 100 Bitcoins, regardless of the USD exchange rate.

If you aren't dealing in USD, it doesn't matter how much value the USD loses.

Similarly, if you had debt denominated in USD, it wouldn't matter how much
value the Zimbabwe Dollar or Weimar Republic Mark lost in hyperinflation. Your
debt burden would be the same amount of USD. It just depends on your frame of
reference.

~~~
DavidSJ
The dollar has not reduced in value by a factor of six in the last few weeks.
Nearly all of the change in the USD/BTC exchange rate is due to a reevaluation
of the _real_ value of bitcoins.

So even if you did all your business in them, it's likely prices would have
fallen _substantially_ in the last few weeks, and you would be screwed, per
the grandparent.

That said, the source of BTC's volatility right now is precisely the fact
_that_ few people are doing business in them, and nearly all demand for them
is speculative.

------
ChuckMcM
While I agree with other commentators that the prose is a bit over the top,
its an interesting move on the part of financial interests. (there was a great
report in the Murky News that special interests are writing the laws [1])

Clearly financial transactions have provided a means for the state to both
detect and to a lesser degree mitigate criminal activity. The phrase 'follow
the money' works because such activities are at their heart economic in nature
(trying to enrich the criminals) and understanding the path to that enrichment
often allows law enforcement to disassemble the criminal enterprise behind it.

That being said, I would not be the least bit surprised (although I did not
read through any floor debate if there was any) if the people who voted for
this law did so believing that they were addressing a great threat to society,
which is the proliferation of payment processors which are not accountable to
the state for tracking or even reporting their transactions in any form.

That does cut into 'innovation' as thinkcomp points out but it doesn't
preclude it. It changes the conversation from 'build it and see what works' to
something more along the lines of a slow plod from idea to implementation
while bringing legislators and law enforement along. The bad news is that
criminals are motivated to stay ahead of 'the system's abilty to track their
money, consumers need a value proposition and a trial period before they
switch so adoption rates are probably (not data driven, just intuition here)
lower.

Perhaps the next innovation is a payment processing company that provides the
regulatory shield for innovative sub companies.

[1] <http://www.mercurynews.com/politics-government/ci_15517816>

~~~
tptacek
Does contractor licensing and bonding cut down innovation in contracting?
Aren't most contractors firms of less than 10 people? Are there not hundreds
of them? How can you defend the argument that a yearly bond premium payment
that is less than many companies pay for liability insurance is a serious drag
on innovation?

~~~
ChuckMcM
Hmm, I'm curious how you equate building a contracting business is equivalent
to building a new payments system?

I agreed that the article's portrayal of the fees as extortionate was
hyperbole but agreed that raising the barrier to entry would slow down the
creation of new payment systems. If you accept that the rate of innovation is
related, at least linearly, to the creation of new companies in a product
space, then reducing the creation rate would necessarily reduce the rate of
innovation.

An alternative look at your question with contractors would be to ask "Has the
licensing and bonding requirements cut down on innovation in contracting
business models?"

I don't know how to answer that question without first removing the licensing
and bonding requirement and then observing the resulting market. It certainly
mitigates crime in the contracting market to some extent by making it more
difficult for a criminal to pass themselves off as a bonafide contractor. But
the current state of affairs don't say about whether or not the contracting
market would be more innovative without those restrictions.

------
rglover
A bit of a red scare here. All the time I was reading I was led to assume that
companies like PayPal and Square (imperative mechanisms for freelance these
days) were to be affected, ultimately though, this was dismissed toward the
end. I can understand the frustration here, but like a lot of people are
saying, those are the rules. Also, for the FaceCash folks, if you intend to
disrupt the financial industry in any fashion (in this case circumventing
traditional forms of cash transfer) you should be ready for a significant
amount of red tape and "fuck you."

~~~
thinkcomp
We're ready for it, but that doesn't mean we have to take it.

------
vgurgov
so what if my company uses paypal to process payments and send payouts to
users? do i have to care about this stuff or its just paypal's headache now?

------
waterlesscloud
What does this mean for systems like Facebook Credits?

~~~
technotony
Nothing. Facebook credits are not a money transfer system, it's whats known as
a 'closed loop' system. If they opened it up so that anyone can take a payment
with a facebook credit and receive dollars then they would start to fall under
the money transfer arrangements and would require these restrictions.

I don't think $500k is much of a barrier to them getting into this business
however...

~~~
_delirium
Can't anyone build a Facebook app that takes payment in Facebook credits, and
then cash out that payment into dollars?

------
wyuenho
I wonder how BankSimple is doing now.

~~~
kelnos
Probably just fine; I'm sure they had to apply for a regular banking license
anyway, and banks are exempt from money-transmission regulations.

~~~
shimonamit
I'm not sure about that. From their website:

 _However, BankSimple is not a "bank." We partner with chartered banks who
provide FDIC-insured products, leaving us free to concentrate on designing the
complete consumer banking experience, via the web and your smartphone._

What implications this has on their regulatory requirements, whether banking
or money transfering, would be interesting to discover.

~~~
gyardley
Yep, BankSimple doesn't have to apply for a regular banking license because
they don't hold the actual deposits. (See SmartyPig for an example of a
startup in the market that uses the same 'we don't hold the deposits'
strategy.)

Piggybacking off of someone else's banking license isn't trivial, but it beats
the delays and capital requirements associated with starting a bank.

Of course, they still have to deal with all the internal industry regulations
in order to offer things like ATM cards that work across ATM networks. Those
aren't regulatory requirements, but when you're dealing with VISA-size
entities they might as well be.

------
hnsmurf
Every company in Silicon Valley is actually a Delaware corp anyway..

~~~
hnsmurf
I think it's a relevant distinction. Clearly the California company doesn't
apply to all corporations in the world or even country. The point is there's
likely a loophole that for an interstate or international software corporation
will render the regulation toothless.

------
braindead_in
What does this mean for freelancing sites? Or for services like AdSense where
credit accumulates in a user's account till it's withdrawn? Do they have to
get a license too?

------
gokka
Here goes one more reason to use Bitcoin, that's where the real innovation is.

~~~
technotony
Bitcoin is operating in a legally very grey area, you can bet your bottom-
dollar that as soon as they get real traction laws like this are going to come
down on the ecosystem extremely fast.

~~~
dublinclontarf
Im quite sure most of what Bitcoin is used for is already illegal, but that
doesn't mean anything. It's just being used for what people have always done,
this is the government outlawing perfectly normal things. Thanks to bitcoin
(and it's growing network of services that operate from cypherspace) we
nolonger have to dance to the governments tune.

~~~
Groxx
I'm sure similar claims can be made for Linden dollars, which have been used
for _far_ more transactions over the years than Bitcoin has.

Why single out Bitcoin? Because it's new?

~~~
gokka
Bitcoin is much more powerful then Linden dollars, Egold etc. because it
allows transactions online, anonymously, and has no central authority. No
other payment method has ever had all three of these characteristics.

~~~
Groxx
No?

I can create an anonymous Second Life character at any time, linked only to my
account info (an email - Mailinator solves that). I can build something in-
game and sell it, creating money with no person bound to it. Or be given money
in-game for a real-world purchase, leaving me with money that _still_ has no
connection with me. There's _barely_ a central authority, as there's nothing
stopping you from passing money around in-game, which would be the major
barrier to illegal trading. And what is there is rather impotent, as
everything can be done just as anonymously as in Bitcoin - they can get your
IP address, but only if they're watching, and that's far from an
identification. Just go to a coffee shop.

Bitcoin just makes it easier, and fault/attack-tolerant. It's been possible
for quite a while. Though perhaps the most useful aspect to this is that
transactions aren't revokable, where they are in nearly any other non-physical
system.

------
nextparadigms
Can this affect Bitcoin, and if so, how?

------
AntiVigilante
no bitcoins in CA

------
truthtechnician
Today I learned Hacker News is filled with libertarian ideologues.

It's amazing that people who pride themselves in critical thinking and problem
solving (hackers), can actually be so naive as to believe this nihilistic Ann
Rand crap.

HN is starting to look more like Reddit every day.

~~~
evgen
HN has always had its share of libertarian partisans, some who were reasonably
cogent and some who drank the Randian kool-aid and did not notice when it
dissolved their brain. The difference is that on HN you will see a lot more
pushback from people who are not going to let the second class of ideologues
get a free pass on their BS (e.g. the responses to various "just let the
market sort it out" tropes being dragged out by the usual suspects.) On Reddit
the moderates would be downvoted into oblivion and this discussion would have
turned into a libertarian circle-jerk within fifteen minutes.

------
xnerdr
If you run a node on Bitcoin, aren't you technically a payment processor?

I wouldn't be surprised if this is step 1 of a 3 step plan on Bitcoin
takedown. Clever too I might add, so props to whoever came up with it.

------
marknutter
Who is John Galt?

~~~
eropple
Some obnoxious bint beloved by people who clamor to be his oppressed,
destitute underclass.

(What's that? They all think that they'll _be_ him? Statistics would like to
have a word, folks.)

------
daimyoyo
So is paypal going to shut down after this goes into effect?

~~~
robflynn
I don't think they'll go anywhere.

I assume they can easily afford any cost involved. I wouldn't be surprised if
they already have the licenses while existing as a non-bank.

------
foobarbazetc
Boohoo, cry PayPal a river.

In most countries outside the US, PayPal is regulated like a bank. This means
PayPal can't just lay claim to your money and never give it back to you.

~~~
rrc
Actually, I wouldn't be surprised if PayPal supported the law. Many
regulations protect large, established players by raising the cost of entry
for new market participants. PayPal can afford to post this bond, but many
bootstrapped start-ups probably can't. This is just one of the ways regulation
_can_ increase the price of products and services; they decrease competition,
allowing established players to raise prices.

