16 November 2011

Whence Regulation?

Ever heard of Dwolla?

Dwolla was founded by 28-year-old Ben Milne; it's an innovative online payment system that sidesteps credit cards completely.
Milne has no finance background, yet his little operation is moving between $30 and $50 million per month; it's on track to move more than $350 million in the next year.
Unlike PayPal, Dwolla doesn't take a percentage of the transaction. It only asks for $0.25  whether it's moving $1 or $1,000.

Sounds like a good idea, right?  What took it so long?
What did you do for the first two years when Dwolla wasn't technically legal?
Well it was legal, we just couldn't operate outside of Iowa. For the first two years we built out the platform. We did a sh*tload of testing on a small scale because legally we couldn't launch Dwolla nationwide.  We spent two years inside of Iowa fine-tuning Dwolla with the financial institutions, building out some of the initial models, and trying to figure out how to legally do what we do. [Emphasis added.]
How'd you find a legal loophole?
Moving money is an exceptionally regulated business.  We're in Iowa, which is sort of conservative — I don't know if that helped us or hurt us, but in the long term I think it helped us.  We figured to do this legally, we had two options: we could take in a tremendous amount of money and go out and get licenses, which is how most people do it.  But we didn't have access to that kind of capital here.

It’s easy to see why the government would, say, ban smoking:  it isn’t beneficial to anyone, at least in terms of health.  It’s more difficult to understand why the government would ban something like Dwolla, which doesn’t appear to have any downside.  Well, except for its competitors (large banks, e.g.).

Some regulation is born out apparent concern for people.  But some is born out of bribery.  Specifically, big businesses support a host of anti-market legislation because it gives them a market advantage.  Conservatives need to learn this, because big business is no one’s friend.  As Adam Smith once observed, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  This usually means petitioning the government to set policies in place that hamper or prevent competition.

Just because the market is more trustworthy than the government doesn’t mean that businessmen are more trustworthy than politicians.

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