California cannabis bankingThe lack of reliable banking services has always been a problem for the cannabis industry. We’ve seen the dearth of banking options pose problems for fundraisers, advocacy groups, and state-chartered financial institutions.

Though 29 states and the District of Columbia have broadly legalized medical use of cannabis (eight of those states have also legalized adult-use), cannabis is still illegal under federal law and most financial institutions refuse to bank cannabis businesses. It is against this backdrop that  California State Treasurer John Chiang last week released a report (“Report”) outlining California’s approach to this problem. The Treasurer estimates California adult-use cannabis sales will exceed $7 billion by 2020 and will bring in approximately $1 billion a year in state tax revenues. The Report affirms that the status quo on cannabis banking is untenable for an economy the size of California’s.

The Report lists the following four areas as those on which the State of California must act:

1) Cash Handling for Collection of Taxes and Fees. The state cannot force financial institutions to bank cannabis businesses but it can implement strategies for an easier, safer, and more efficient way for cannabis businesses to remit their taxes and fees. In furtherance of this goal, the Report suggested the following:

  • State taxing agencies, the Treasurer’s office, and financial institutions should contract with an armored courier service to collect state tax and licensing payments.
  • The State of California should install smart safes and kiosks at government agencies and cannabis businesses.
  • California cannabis businesses should be allowed to use money services businesses for smaller tax payments.
  • California cannabis businesses should be allowed to use third-party payment services to make electronic payments (think PayPal or Venmo).

2) Expanding Cannabis Industry Access to Banking Services Under Current Law. California is not the first state to legalize cannabis for adult-use and the Report looked at Washington and Colorado where some credit unions are openly banking cannabis businesses. These Washington and Colorado credit unions are following guidelines promulgated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The FinCEN guidance on cannabis provided information for financial institutions to bank cannabis businesses while still complying with the Bank Secrecy Act and the USA Patriot Act. The Report suggests creating an online portal to assist financial institutions to comply with FinCEN rules. The online portal would gather information from all 11 California state agencies with cannabis regulation or data collection responsibilities.

3) A State-Backed Financial Institution. The Report also looked at the feasibility of creating a state-owned or state-backed financial institution with either a broad mission to expand banking services to underserved groups or to narrowly focus on the cannabis industry. The prospects of a state-owned bank look dim because of the inability to obtain deposit insurance, the possibility of federal asset forfeiture, and the high (pun not intended) start-up costs. The Report also looked into the feasibility of a “bankers’ bank”: a private institution whose customers are other banks. Under this model, the bankers’ bank would help financial institutions comply with the Cole Memorandum and FinCEN guidelines. The biggest roadblock to the bankers’ bank is that it would do little to nothing to reduce financial institution fear of federal enforcement.

4) Full Access to Banking Services: The Federal Solution. In its final option, the Report relies on lobbying with the goal of bringing the federal government to its senses. One piece of legislation worth calling your representative about is the Secure and Fair Enforcement Banking Act (“SAFE Banking Act”), which aims to provide a safe harbor for banks that service cannabis businesses. Another focus is achieving the holy grail of the cannabis industry: removing cannabis from the federal government’s list of Schedule 1 controlled substances.

The report does a good job highlighting the unnecessary difficulties imposed on cannabis businesses by the federal government’s listing cannabis as Schedule 1 drug. As more states continue to legalize, regulate, and receive tax revenue from cannabis businesses there is reason for optimism. With staunch conservatives such as Utah Senator Orrin Hatch starting to see the light, it is fair to say that the federal legalization option is increasingly becoming less far-fetched – especially if we continue seeing the sort of election results we saw last Tuesday.

Now is not the time to rest on our precarious laurels. We all need to keep up the intensity, educate our local legislators, and most importantly, vote!