As the debate rages on about the feasibility of establishing a state-run bank to handle the huge amount of cash flow from California’s legalized cannabis industry, growers, distributors and retailers are being left out to dry.
Because pot is still regarded as illegal by the Federal Government, industry players have nowhere to bank their money and face the daily threat of being robbed, or even worse.
There have been verified reports of pot dealers running around with duffel bags stuffed with cash as they go about their business, which includes paying their taxes.
The media has reported about a LA pot dispensary that deposits its cash by hiding behind a limited liability company that allegedly operates as a management firm.
Another report tells about a cannabis company loading cash into an armored vehicle which is then delivered to a Federal Reserve Bank in downtown Los Angeles. The cash is then transferred for deposit to a local credit union.
Not being able to deposit large sums of money legally is creating unnecessary problems for the legal pot trade and could open the door to tax evasion and money laundering.
The irony of the situation is that while the state has legalized recreational cannabis, the Federal Government classifies pot as a schedule one illegal drug, in the same category as heroin.
For fear of stepping on federal toes and being labeled as illegal merchants, banks are shying away from accepting the millions of dollars being generated by the cannabis trade.
State-run bank inquiry
That is why California’s State Treasurer, John Chiang, has called for an inquiry into the establishment of a state-run bank to handle the huge amounts of cash being generated by the sale of pot. This fledgling industry is expected to generate billions of dollars in taxable income for California – income that will benefit every resident of the state.
Chiang says the multi-billion dollar cannabis industry “could be the catalyst that propels public banking into becoming a reality.”
Together with state attorney general, Xavier Becerra, Chiang is investigating the feasibility of opening a state-run bank. This involves studying regulations, costs and operational issues revolving around a state-run bank. According to Chiang, this study could take up to one year to finalize.
Chiang echoes the calls of concern about a cash-industry that is putting people’s lives at risk and aggravating the ability of businesses to pay their pot taxes.
Establishing a state-run bank is not without its stumbling blocks.
Firstly, every bank needs a guarantor and the money needed to fund such an operation would have to come from Californian taxpayers. Most banks have the Federal Deposit Insurance Corporation (FDIC) as their guarantor, which safeguards customer deposits of up to $250 000 should a bank go belly-up.
Secondly, the federal government may not endorse the idea of a state-run bank because it still regards cannabis as an illegal drug and could, therefore, regard a bank receiving pot funds as a crime. California could, perhaps, take a leaf out of Hawaii’s book by completely eradicating cash out of the system using digital payments or crypto-currencies.
Other legalized pot cities across California are now exploring the possibility of creating their own municipal banks. This move is being supported by cities such as Los Angeles, Portland, Seattle and Washing, D.C.
What is a state-run or municipal bank?
Basically, a state-run or municipal bank is a public bank owned and operated solely by the state or municipal government. Instead of funds being deposited into a privately-owned third-party bank that is endorsed by the FDIC, the state or city-owned banks build up their own assets and deposits and insures the public bank’s money. A public bank can select whether or not to ally itself with the Federal Reserve system of operating and so opens the door for a cannabis industry public bank.
However, banking experts are more skeptical. They point out that creating a public bank requires huge sums of funding. It is estimated that the LA bank will need a start-up capital injection of up $250 million, with assets in the region of up to $2 billion.
Chiang’s Working Groups points out that without federal banking back-up a cannabis bank could be relegated to the status of a mere cash vault, without the ability to undertake inter-state transactions. Furthermore, the possibility of the Federal Reserve giving the nod to opening such an account is regarded as remote.
Cannabis industry is left stranded
So, while the public banking initiative for the cannabis industry is bogged down in a feasibility study-mode, the Californian industry players are left stranded with “pots” of money and nowhere to go – this despite the fact that California represents the world’s sixth largest economy and holds the promise of billions of taxable income which could be used to improve everyone’s way of life.
In the meantime, the state has issued about 675 temporary licenses to cannabis-related businesses.
Growing impetus of discontent
Adding to the growing impetus of discontent was the announcement by U.S. Attorney General, Jeff Sessions, who rescinded the Cole memo just four days after California legalized cannabis for recreational use. This has effectively put the freeze on banking activities and has left pot businesses stranded.
The Cole memo, introduced during the Obama-era, eased cannabis federal regulations.
This decision finds California’s state government, as well as the legal pot industry, scrambling around for solutions to handle the huge sums of cash the industry is expected to generate.