Marijuana money may push California into public banking

Federal law makes banking tough for a very lucrative industry.
Federal law makes banking tough for a very lucrative industry.
Image: Reuters/Rick WIlking
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Marijuana-related businesses face a funny problem: they make lots of money yet can’t securely put it in banks. The US banking system is nationally regulated and weed’s illegal under federal law, a Schedule I substance with no accepted medical use and a high potential for abuse, according to the Drug Enforcement Agency.

So cannabis-related deposits cannot be federally insured, and money is subject to seizure by the feds, making bankers and weed-related companies rightly dubious of doing business. Transactions are mostly in cash, which is stashed in pillowcases and floorboards. Now California is considering whether a state public bank could be a solution for a potentially very lucrative industry; marijuana is projected to bring the state over $6.5 billion in revenue by 2020.

State treasurer John Chiang on Aug. 10 met in Los Angeles with members of the Cannabis Banking Working Group he created in December 2016, after Californians voted to legalize recreational marijuana next year, to explore banking access for related businesses. In the state’s estimation, 70% of marijuana-related businesses don’t have bank accounts.

Chiang said a state bank would serve more than just marijuana businesses. Public banking is an increasingly popular idea since the Great Recession of 2008 among those dissatisfied by the private finance system in the US, he noted. A public institution would be beholden to state taxpayers and run by local treasury officials, able to issue low-interest loans for affordable housing or education, say.

The only public bank in the US now is the Bank of North Dakota, established in 1919 because farmers had difficulty getting loans through private banks under the federal system and the state’s main industry was agriculture. Deposits are insured by North Dakota, not the Federal Deposit Insurance Corporation, and not subject to federal regulations.

Others, like Colorado and Massachusetts, have mulled similar moves. Massachusetts, for example, considered creating a state bank in 2010, responding to the national financial crisis. The state studied the issue and concluded there was little public interest, and the process would be too complicated, risky, and duplicative of the efforts of other agencies.

A project in California would face its own unique obstacles, like the persistent problem of marijuana’s federal illegality. A public bank isn’t an easy or total financial solution, which will mean weed would remain a mostly cash business even with a state bank. For example, cannabis-related businesses still can’t legally work with credit- and debit-card companies.

Private bankers, perhaps unsurprisingly, urge caution. “I would suggest you really do not underestimate the challenges [and] complexity,” Don Childears, president of the Colorado Bankers Association, told the group gathered in LA.

Currently, states issue guidance on operating in this legal gray area between local and federal law. Still, financial institutions don’t have to open accounts for cannabis-related companies, and many don’t.

Institutions are wary of trouble with federal regulators and many banks are willing to forego cannabis profits to avoid potential problems. The few that do have cannabis divisions, dedicated to helping marijuana businesses navigate tricky financial terrain, like the private, family-owned Century Bank and Trust in Massachusetts, don’t want to talk about it.