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Exclusion from federally regulated banks is a big problem for the cannabis industry that California is considering how to solve.
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Opinions expressed by Entrepreneur contributors are their own.
The idea of circumventing federal law and creating a state-held bank in California to serve the marijuana industry moved from words into action this month, but whether it’s viable remains to be seen.
That’s the purpose of a new feasibility study launched by state Treasurer John Chiang and state Attorney General Xavier Becerra. Chiang’s department will focus on the financial and operational issues, Becerra’s on the legal. Both have their potential roadblocks.
Even Chiang voiced caution about the idea in remarks made at a recent news conference, evoking, of all things, the potato chip: “Today we are taking the next steps in determining the practical considerations that could lead to the creation of a public bank. Is there a solution there? Maybe. Or is it like a potato chip? It tastes good going down but is ultimately of no nutritional value.”
Related: The Opioid Crisis Is Forcing Open Minds About the Lifesaving Potential of Medical Marijuana
Why a public bank?
The idea for a public bank arose because of the growing marijuana industry in California. Medical marijuana has been available there since the mid-1990s, and recreational pot went on sale at the start of this year.
However, just like everywhere else in the United States where marijuana is legal, cannabis business owners are stuck dealing in cash only. Ironically, despite being involved with a multi-billion-dollar industry, they are in a similar position as the black-market marijuana dealers were before legalization.
That’s because marijuana remains a Schedule I illegal drug at the federal level. Banks, fearing entanglements in federal law, will not extend banking services to marijuana businesses. No credit, no accounts, no vault. Marijuana businesses face added security issues dealing with cash, as well as potential penalties for paying state taxes and fees in cash.
A state-owned bank that deals with the marijuana industry could solve the problem. In an opinion piece for the Los Angeles Times, David Dayen wrote, “It's certainly worth fighting this battle on behalf of thousands of California residents who want to thrive in a state-approved industry.”
Related: Cannabis Industry Heads to Washington to Tell Congress What It Needs to Thrive
Big obstacles
In announcing the study, Chiang gave a brief history lesson on the creation of public banks in the past. One that is still going is the Bank of North Dakota, founded in 1919 when private banks failed to support local farmers.
Chiang said that public banks are needed when the people decide that private banks no longer have their interests at heart. He pointed to the Wall Street meltdown of last decade and the more recent banking scandals at Wells Fargo as incidents that have robbed people of their faith in private banks.
He also pointed out that Attorney General Jeff Sessions, in rescinding the Cole Memo that gave states protection from federal government interference in the legal marijuana trade, is another sign that the current administration in Washington is “out of step with the will of the people … not only those in California, but the 29 states that have legalized either or both medicinal and recreational-use cannabis.”
The new feasibility study will focus on potential roadblocks that face creation of a state-run bank. One of those is determining how the bank would be funded. A huge challenges to overcome would be getting federal deposit insurance and access to federally controlled networks for the interbank transfer of funds. The attorney general’s office will determine regulatory issues and whether the bank could provide the sort of protections from federal interference that the state is seeking.
Despite the obstacles, Chiang -- a candidate for governor -- said the effort is worthwhile: “Until the slow, clunking machinery of the federal government catches up with the values and will of the people it purportedly serves, states like California will continue to both resist, and more importantly, to lead.”
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