The California Senate passed a bill that would create a self-contained banking system for the cannabis industry. This is in response to the fact that the Federal Reserve has been denying charters to banks serving that industry. Cannabis businesses have been forced to transact almost exclusively in cash, because chartered banks are afraid to do business with them lest they, too, lose their charters. Passage of the new California legislation could bypass the federal banking system – at least within the state. Meanwhile, the industry is experimenting with the use of cryptocurrencies as a more flexible and dependable solution. -GEG
On Tuesday, the California Senate passed a bill that would establish
limited state-chartered banks to serve the cannabis industry. Final
passage of this legislation would remove a major federal roadblock in
front of the developing industry in the state and further nullify
federal prohibition in practice.
Sen. Bob Hertzberg, (D-Van Nuys), along with a bipartisan coalition of eight cosponsors, filed Senate Bill 51 (SB51) on Dec. 4. The legislation would create a self-contained banking system for the cannabis industry in California.
Because marijuana remains illegal under federal law, cannabis
businesses in states that have legalized marijuana remain effectively
locked out of the banking system. If a federally chartered or insured
financial institution touches marijuana money, it takes on significant
legal risk. The federal government insures or charters virtually every
bank in the U.S. As a result, cannabis businesses have been forced to
transact almost exclusively in cash. Passage of SB51 would completely
bypass the federal banking system and create a limited banking
alternative for the marijuana industry in California.
On May 21, the Senate passed SB51 by a 36-1 vote.
Under the proposed law, the state would license “cannabis limited
charter banks and credit unions.” Cannabis businesses would be able to
deposit funds in these institutions and write “special purpose checks”
on their accounts for limited purposes, including paying state or local
fees and taxes, paying rent on property associated with a cannabis
business, paying vendors, or buying state or local bonds or warrants.
These checks could only be deposited or cashed at the issuing cannabis
limited charter bank or credit union, or another cannabis limited
charter bank or credit union that agrees to accept the check. This would
keep the entire process outside of the federal checking system known as
the automatic clearing house (ACH).
Cannabis limited charter banks and credit unions would be allowed to
form banking networks, but they could not engage in banking activity
with any other bank or credit union. They would also be able to provide
accounts to people and entities other than cannabis businesses, pursuant
to rules adopted by the commissioner of the Department of Business
Oversight.
A similar bill passed the California Senate during the last
legislative session, but it died during the Assembly committee process.
“The status quo for our growing legal cannabis industry is
unsustainable,” Hertzberg said in a press release last year. “It’s not
only impractical from an accounting perspective, but it also presents a
tremendous public safety problem. This bill takes a limited approach to
provide all parties with a safe and reliable way to move forward on this
urgent issue.”
FEDERAL BANKING LAWS
The Federal government has used banking laws as a weapon in
its unconstitutional war on cannabis by making it impossible for
marijuana businesses to access the banking system – even in states where
marijuana has been legalized. The feds can prosecute bankers for
knowingly engaging with cannabis businesses under the Bank Secrecy Act,
the USA Patriot Act, and the Racketeer Influenced and Corrupt
Organizations (RICO) Act.
The Federal Reserve has gotten into the act, denying its services to state banks chartered to serve the marijuana industry.
For instance, in 2015, the Federal Reserve Bank of Kansas City
denied Fourth Corner Credit Union’s application for a master account.
The Denver based credit union was formed by Colorado’s state-licensed
cannabis manufacturers as a non-profit cooperative. By denying its
application, the Fed prevented the institution from access to the Fed’s
payment facilities, including its check clearing, wire transfer, and ACH
facilities. This made it virtually impossible for Fourth Corner to do
business.
In February 2018, the Federal Reserve Bank of Kansas City finally
gave conditional approval for Fourth Corner’s master account. But
according to the Marijuana Business Daily, the credit union
will not serve plant-touching business. It will cater to “advocacy
groups, charities and ancillary companies such as accountants.”
State-chartered banks do not have to be members of the Federal
Reserve system. But as it did with Fourth Corners, the Fed can deny any
non-member bank or credit union access to its services. In other words,
the Federal Reserve can lock any bank attempting to operate in the
cannabis industry out of the broader banking system, making it
impossible for them to do business with any other bank or merchant. With
the passage of SB51, California could just bypass the entire federal
banking system and its regulations, and create a self-contained banking
network for the marijuana industry.
THE CRYPTO ALTERNATIVE
Some marijuana businesses have circumvented the banking system by
transacting in bitcoin or other cryptocurrencies. Technology companies
like SinglePoint and POSaBIT have been working to generate a payment method for medical marijuana dispensaries and consumers using bitcoin.
In 2014, SinglePoint placed terminals in some medical marijuana
dispensaries that allowed patients to make payments with their debit
cards, but the banking system quickly shut it down.
“They were going great,” SinglePoint president Wil Ralston told CNBC.
“Then overnight the banks shut them all down. There were no guidelines
about how banks were supposed to interact with the cannabis industry.
They didn’t want to risk it.”
Ralston started looking into cryptocurrencies. Now, SingleSeed allows dispensaries to accept bitcoin and consumers to pay with it.
Other services like BHCPLS.io are in
open beta, but promise to bring Bitcoin Cash (BCH) point-of-sale
systems to brick and mortar merchants, something cannabis businesses
could find useful.
Some analysts believe the marijuana industry could pave the way for
the wider use of cryptos. Leslie Bocskor, president of cannabis advisory
and services firm Electrum Partners, told CNBC the cannabis industry
may well lead the way in using bitcoin or other cryptocurrencies.
“If it finds a way to avoid the traditional banking system, other businesses would follow suit,” Bocskor said.
FEDERAL PROHIBITION
Under the Controlled Substances Act (CSA) passed in 1970, the federal
government maintains complete prohibition of marijuana. Of course, the
federal government lacks any constitutional authority to ban or regulate
marijuana within the borders of a state, despite the opinion of the
politically connected lawyers on the Supreme Court. If you doubt this,
ask yourself why it took a constitutional amendment to institute federal
alcohol prohibition.
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