UPDATE 5/12/11 3PM: In an email to BostInno Greenspan explains the law does apply to Mass-based companies doing business in California. He writes, “To clarify, Massachusetts-based companies absolutely do need to be licensed in California if even just one of their customers or merchants is located in California. The same goes for every other state that requires a license. See my comment to the Federal Reserve on the Durbin Amendment.” It seems the call to action below is therefore one other Boston area payments startups should also get behind.

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Yesterday Aaron Greenspan, known for launching houseSYSTEM before The Facebook went live and a subsequent litigation with Mark Zuckerberg over it, posted on Quora: “In Fifty Days Payments Innovation Will Stop in Silicon Valley.” Greenspan now operates the successful Think Computer Corporation, which has launched a mobile payments product called FaceCash that uses your face as a base for payment authentication (as opposed to your signature, for example, as in the current card payment paradigm).

In his post, Greenspan outlines California Assembly Bill 2789, passed into law in September, 2010 and effective January 1, 2011 as the Money Transmission Act (effective July 1 for any company already operating in California). The regulation requires any bank-like entity transmitting money domestically to acquire a license, at a cost of over $500,000 — an amount most startups dream about for their initial seed round.

According to Greenspan, this regulation and license fee varies from state to state; and until just a couple of years ago, it had only applied to those transmitting money internationally. His call-to-action post states that this will severely stifle payments innovation in the Valley, nodding to one startup with $20M in VC financing that has closed shop (although I sincerely doubt anyone with that kind of money shutting down as a result of this bill). He also notes how Square, with Visa as an investor, is not affected by the legislation.

I am by no means schooled in law, but I did browse Massachusetts regulation related to money transfer. At the surface, our state only appears to require these licenses for international money transmission. However, I am not certain where Federal Laws come into play around inter-state commerce here. Specifically, if I am headquartered in Massachusetts and transmit money to California consumers, must I pay those license fees to California as well? If not, it suggests the Boston area could become even more of a Hub for payments innovation and financial tech startups. (See PayPal’s Fig Card and WHERE deals in particular.)

Early this morning when I came across the Quora post I asked several savvy entrepreneurs operating here in the MassChallenge space the question, and they either did not have an answer or believed the California law (and fees) only apply to companies operating out of California. I also reached out to Greenspan, entrepreneurs in the payments space, and lawyers in the area to help sort through the question and understand whether this could affect the new economy in Massachusetts in a very positive way. I have not yet heard anything back.

Greenspan paints a bleak picture, and the comment stream calls for him to get lobbyists in DC involved. If you are interested in the debate on whether this law is good (i.e. it protects consumers) or bad (i.e. it stifles innovation), we also recommend the great discussion happening here on Hacker News.

Please leave any thoughts, clarifications, or insights related to the issue in the comments. We look forward to updating the piece as we learn more.