Pot banking solution: A publicly chartered bank?

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California should explore the feasibility of a state-backed bank to serve the cannabis industry to address the lack of banking services available to marijuana businesses, the state’s treasurer said Tuesday.

That recommendation was one of several in a report from Treasurer John Chiang and his office’s Cannabis Banking Working Group. The release of the report coincides with California policymakers’ efforts to prepare for the legalization of marijuana sales in the state in less than two months.

“It is unfair and a public safety risk to require a legal industry to haul duffel bags of cash to pay taxes, employees and utility bills,” Chiang said in a news release. “The reliance on cash paints a target on the back of cannabis operators and makes them and the general public vulnerable to violence and organized crime.”

Per a 2016 voter referendum, California will legalize recreational marijuana on Jan. 1, making it the eighth — and the largest — state to permit commercial sales. Chiang’s office estimated that legalized adult cannabis use would generate annual sales of more than $7 billion and annual tax revenues exceeding $1 billion. But the federal prohibition of marijuana means banks are still wary of working with pot businesses, however profitable they may be. The problem for pot sellers is that cash-based businesses tend to be magnets for violent crime.

A state-backed financial institution could be part of the solution, the report said. That institution could broadly support underserved groups, including the marijuana industry, or it could narrowly focus just on that industry.

Of course, the hurdles to establishing a state-backed financial institution are substantial, the group conceded. Those include the difficulty of obtaining deposit insurance, regulatory approvals and access to Federal Reserve money transfer systems.

The report’s authors also floated the idea of the state backing a privately owned bankers’ bank or corporate credit union focused on serving pot businesses.

Additionally, the report suggested that state and local agencies could contract with armored car services to collect taxes and licensing fees. The state could also create an online portal that would better help financial institutions fulfill their “know your customer” duties before accepting deposits from those businesses. And finally,
California could organize a multistate consortium that would aim to educate, share information and advocate for policy changes at the congressional and corporate levels.

Of course, the ideal solution would be the removal of federal roadblocks to banking the pot industry. Yet as Chiang seemed to suggest in his remarks, that remains a long shot.

“The reality is that a definitive, bullet-proof solution will remain elusive until the federal government removes cannabis from its official list of banned narcotics, or Congress approves safe harbor legislation protecting banks that serve cannabis businesses from prosecution,” he said.

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Marijuana banking Marijuana industry Policymaking Commercial banking California