A lot is being written and debated about the Office of the Comptroller of the Currency’s plan to provide limited national charters for fintech firms. On its face, the proposed policy is sensible — offering a solution to regulatory uncertainty for a promising new sector.
But the OCC’s determination to craft a fintech charter raises similar questions about the plight of other burgeoning industries that could benefit from a federal license. Here, I am going to make a heretical suggestion: the OCC or some other regulator could advance the cause of cannabis banking — which despite questions over its federal legality has not spurred outrage from policymakers — by offering similar chartering options for financial institutions that want to serve the legal pot industry.
I propose the creation of a Bank Charter of Cannabis Services, or BCCS for short.
Let’s take a step back to explore why a cannabis banking charter is necessary.
Cannabis and its derivatives are considered a Class I drug alongside heroin and LSD by the Drug Enforcement Agency. Per the DEA’s website: “Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse.” Despite ballot initiatives legalizing pot in nearly 30 states, this federal definition means businesses serving the cannabis industry have had a hard time obtaining financing, accepting credit cards or establishing a basic banking relationship with a depository institution.
According to an article in Hortidaily.com, two-thirds or more of the U.S. lives in a state that has some form of legal cannabis. Public acceptance of cannabis is running at 60% nationally. Regardless of anyone’s personal beliefs, the momentum has been building for years to establish cannabis as a legal industry and the time has passed for any turning back of the clock.
There is also an active venture capital market in the startup world of cannabis. According to CBInsights, $560.7 million was invested in 273 private cannabis-focused startup transactions globally since 2012.
To be sure, Obama administration officials had tried to provide guidance saying banks could, on a very limited basis, service marijuana-related businesses — through the Justice Department’s “Cole Memo” (and prior memos) as well as guidance put out by the Department of the Treasury Financial Crimes Enforcement Network.
But of the more than 11,000 depository institutions in the U.S., a little more than 300 serve marijuana-related businesses. In most instances, banks that do allow marijuana-related businesses to open accounts take a “don’t ask, don’t tell” approach to servicing the account. The hoops that these 300-plus depositories have to jump through to serve marijuana-related businesses are onerous and expensive for their clients.
It shouldn’t be that way.
Cannabis is a $50 billion industry and growing in the U.S., with about 12% considered legal (which includes medicinal sales and recreational sales). According to Arcview Market Research, the U.S. legal market alone may top $21 billion by the end of 2021. Today, the majority of this business is transacted in cash, and approximately 50% of the industry is located within California. With that much cash sloshing around, it is in everyone’s interest to control not only the growing and selling, but also the financial aspects around cannabis—from proper recording of sales, remittance of sales taxes and the paying of state and federal income taxes.
Although the OCC has no real power to unilaterally implement a charter for financial institutions that service legal pot businesses, the agency could take the lead on getting Congress involved in changing the licensing rules. With the fintech charter, we know the OCC is willing to take the lead on controversial and sensible policy and not concern itself about the blowback as long as the policy moves forward (regardless of how the final implementation looks or who is responsible). The OCC should take a leadership role and kick-start the process of mainstreaming cannabis businesses.
A Bank Charter of Cannabis Services should grant financial institutions the abilities to take cash deposits from marijuana-related businesses; process credit card transactions for marijuana-related businesses; lend on real estate that houses grow facilities, processing plants and retail locations selling cannabis products; and integrate with each state’s regulatory and compliance software.
A charter could also ease the anti-money-laundering responsibilities for banks serving the marijuana industry. Right now, any transaction involving a pot business requires a bank to file a “suspicious activity report.” This is excessive.
If the OCC were to champion a cannabis banking charter, then the states could move on to more important issues such as regulating product purity, keeping cannabis out of the hands of children, studying the long-term health effects of usage, and numerous other public policy issues that will need good data and good policy in the years to come. Not allowing a dispensary to deposit their sales receipts is very shortsighted.
Sure, the BCCS idea could be made redundant if the DEA rescheduled the drug to Schedule III or higher. But given the DEA’s recent review of cannabis, it will probably not act to reschedule the drug for at least a few more years. Meanwhile, President Donald Trump’s nominee for attorney general, Jeff Sessions, has not been a fan of cannabis. The industry is receiving mixed messages, at best, and can make its wishes known by lobbying representatives directly on this issue.
The growth of the legal cannabis industry is undeniable. To put it in perspective, Arcview Market Research likens the growth curve of a $5 billion and more cannabis industry (currently the legal revenue side of cannabis) to having greater follow-on five-year growth rates than basic cable (starting in 1986) and home video (starting in 1988). Only broadband access (starting in 2002) had a higher growth rate than anticipated for cannabis over the next five years. Big tobacco, big pharma and big alcohol are all watching and studying this industry.
The government’s withholding a workable legal solution for financing the cannabis industry borders on negligence. It is conceivable that cannabis will become a national $100 billion industry within 10 to 15 years. The U.S. has a choice: Responsibly regulate cannabis or allow cannabis to become a narco-state unto itself.