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Arbitrary State Money Transmission Laws Grant Monopoly Powers To Banks and Credit Card Companies

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As banks are becoming increasingly dependent on technology, and technology companies are increasingly capable of offering financial services, there is a gray area of financial regulation related to money transmission by non-banks that is becoming increasingly important. For historical reasons, each state regulates money transmission differently, with some imposing requirements on companies that make it virtually impossible for any new business to get a license. In Pennsylvania, for example, new money transmitters must secure $1 million worth of surety bonds; in Maryland, the application fee is $2,000 or $4,000 depending on whether or not one applies in an even or odd year.

The difficulty inherent in obtaining state money transmission licenses means that new technology companies are forbidden by law from competing with the banks--some of which have paid lobbyists a lot of money to get these laws on the books in the first place. When there isn't any competition in an industry, it becomes far too easy for the incumbents to abuse their power through price increases and poor service.

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Supporters: Aaron Greenspan, Eric Teasley, Jonathan Wallis
Opponents: None
Section This issue has not been linked to a statute yet.
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Solution Unify the Money Transmission Regulatory Framework Under the Department of the Treasury
Right now, each state legislature determines whether or not to regulate "money transmission," which is often (but not always) defined as the act of routinely holding onto funds that belong to others with the intent of sending those funds somewhere else, whether domestically or abroad. The ad hoc system of regulation has led to different application fees, license fees, background check requirements, net worth requirements, surety bond requirements, documentation requirements, and auditing requirements, all of which can end up costing around $20 million to comply with in aggregate nationwide. Ironically, all of this expense only ends up insuring consumers who use registered money transmitters. The riskiest money transmitters, who do not bother complying with state or federal laws, are not covered by the surety bonds that registered transmitters are required to obtain, and the FDIC insures only bank accounts.

In summary, the system is totally broken. Standards are desperately needed in order to 1) protect consumers better than the current patchwork can, and 2) allow new entrants with new technologies to lower the price of financial services in general. The Department of the Treasury has already issued some standards through its Financial Crimes Enforcement Network (FinCEN), but the states generally ignore them. Congress needs to explicitly pre-empt state laws so that FinCEN can actually make some sense of this mess and keep people safe.
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Solution Extend FDIC Insurance Coverage to Money Transmitters
Money transmitters should pay an FDIC premium, just like a bank, so that each company doesn't have to spend millions of dollars and years of time obtaining 46 individual surety bonds. Since money transmitters have different risk profiles than banks, the coverage amount doesn't need to be as high--something like $10,000 per account would be more than adequate for most companies' needs.
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