Canna-businesses have a unique problem: They are making huge profits in an emerging market unmatched in financial growth, yet they cannot secure any of it with the bank. The U.S. banking system falls under the Federal Reserve, which is solely responsible for national regulating, and weed remains federally illegal, categorized as a Schedule 1 drug with no medical value and a high potential for abuse.
Despite this incorrect classification of marijuana by the Drug Enforcement Agency, people are unable to deposit cannabis-related monies into any national banks. All weed deposits are subject to federal seizure, which is why both banks and marijuana businesses are dubious of transacting with each other. Business owners mostly transact in cash and stash their profits under floorboards and in pillow cases.
Cash-only sales put marijuana businesses at high risk of crime. They are targets for criminals who rob and steal from them. Now, the State of California is debating whether a public cannabis bank would resolve cash problems for this lucrative industry. Financial experts predict the marijuana market to generate more than $6.5 billion in state taxes by 2020.
On August 10, State Treasurer John Chiang met with fellow members of the Cannabis Banking Working Group in Los Angeles. Founded by him in December 2016, just after voters approved recreational use of marijuana, the group met to discuss banking access and explore options for cannabis-related businesses. According to an estimation by the state, at least 70 percent do not even have bank accounts.
Chiang believes a public bank would service more than just weed companies. The idea of state banks is not new. In fact, it is becoming increasingly popular ever since the 2008 financial crash, particularly among those unhappy with the U.S. system of private financing. Local treasury officials would run a public bank and be beholden only to state taxpayers, able to provide low-interest loans to the public.
Currently, the Bank of North Dakota is the only state-run financial institution in the United States. It is not subject to federal regulations, and instead of the Federal Deposit Insurance Corporation, the State of North Dakota insures all deposits. Established in 1919, this public bank served local agriculturists who could not access loans through the federal banking system at the time.
Other states are considering similar strategies, such as Massachusetts and Colorado. In response to the U.S. financial crisis, Massachusetts has been considering a state bank since 2010. After studying the issue extensively, the state found insufficient public interest for public banking and decided the process too complex, risky, and duplicative of other agencies to warrant the effort.
Public banking in California would have its own unique challenges, such as the ongoing issue of federal prohibition of marijuana. Public banks do not provide complete financial solutions, which mean that even with a state-run bank, weed will remain a mostly-cash operation. As just one example, canna-businesses will still be unable to use debit- and credit-card firms legally or transact across state lines.
Private bankers warn against populist opportunism. Perhaps unsurprisingly, they almost unanimously caution against public banking. At the meeting in Los Angeles, president of Colorado Bankers Association, Don Childears, told the gathering, “I would suggest you really do not underestimate the challenges and complexity” of financial banking operations.
Currently, states are issuing guidance for marijuana businesses operating between the legal boundaries of state and federal laws. Nonetheless, financial institutions are under no obligation to provide canna-companies with banking services, and many simply do not. National banks would rather forego profits than get into legal trouble with federal agencies.
There are financial institutions offering help to cannabis companies. Some, such as the Massachusetts Century Bank and Trust, which is a private, family-owned business, is dedicated to helping canna-businesses navigate risky financial ground. However, with the federal government still vehemently opposed to marijuana legalization, most will not discuss their operations publically.