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Cannabis Revenues still a banking quandary

 

Is that a Bong?

 

There is still no solution in sight for Californian cannabis companies inability to bank their cash earnings. Federal law conflicts with State law o this point and banks have to obey Federal law and therefore cannot touch drug money.

After much study, a consulting firm has concluded that a state-backed bank created specifically to serve pot growers, manufacturers and distributors is not financially feasible because its capital requirements would be too high and it would likely not start returning profits to the state for at least 30 years.

Instead, the state should consider setting up a new group with a mission of improving pot companies’ access to banking services. That would include reaching out to California’s banks and credit unions and lobbying for either a federal exemption for financial institutions to bank pot companies or full legalization of marijuana, the report’s author, Level 4 Ventures, said Thursday.

“In the end we were not able to find any approach to doing this that makes any sense whatsoever,” William Roetzheim, the CEO of Level 4, said at a hearing before the state’s Cannabis Banking Working Group.

Pot has been legal for recreational use in California since the start of 2018, and public banking proponents and legal marijuana firms had hoped that California might establish a state-owned bank to handle the business of the thousands of firms that now have licenses to grow, test and sell marijuana.

Because pot remains illegal at the federal level, many banks and credit unions are reluctant to bank those businesses for fear of running afoul of regulators. As a result, many legal pot firms have nowhere to deposit their funds or can’t accept credit cards because banks won’t process their payments. Many also have to pay employees and vendors in cash.

Dealing entirely in cash isn’t merely inconvenient, but also a public safety hazard, California State Treasurer John Chiang said last year when he suggested the state consider a public bank as one potential solution.

“The reliance on cash has painted a target on the backs of cannabis operators, and has made them and the general public vulnerable to violence and organized crime,” he said.

Outside consultants considered several ways the state might establish a public bank for this purpose, but ultimately concluded all would be too impractical or expensive.

Capital requirements emerged as one major snag.

Even setting aside pot’s federally illegal status, regulators tend to consider it fairly risky for a bank to be concentrated entirely in one industry, Roetzheim said.

Adding to concentration risk, legal pot is still a fairly nascent industry. Some pot businesses will ultimately thrive and others will fail, and that uncertainty introduces another level of risk.

“You have an industry with a lot of growth, a lot of uncertainty and a lot of money involved, so regulators are saying, ‘this is a high risk industry even if it was legal’ just because of the nature of the industry,” he said.

Taken altogether, Roetzheim estimated that a public bank created to serve just the marijuana industry would need to maintain a capital buffer equal to about 40% of assets, or about $1 billion.

By way of comparison, the Bank of North Dakota, the only state-owned bank in the country, maintains a capital ratio of about 21%, while at healthy private-sector banks the ratio can be as low as 10%.

Then, there’s the matter of timing.

Roetzheim estimated it would take the state about three years to put together a complete application, from working through legislative issues, to determining its structure, to figuring out how to fund the bank. Based on how long regulators have taken to approve other de novo applications, the state could expect a decision in another three years, he said.

“We’re not even going to know whether they’ll approve it or not for six years. In the meantime, we’re spending money, burning through the money to put this in place,” he said. “If they say yes, then that’s great. … If they say no, then it’s wasted money.”

Assuming all went according to plan, however, the state could not expect to start receiving dividends from the venture until 2050 or 2055, the report concluded.

Instead, California should consider making a “relatively small investment” to set up a temporary group with the mission of improving access to banking services for pot businesses, Roetzheim said. That group could lobby for state and federal legislative changes, offer data sharing and access to interested firms, and work on short-term solutions for cash handling.

Importantly, such a group could also reach out to private-sector banks and credit unions to encourage them to bank the legal pot industry, he said.

Roetzheim pointed to Washington state as an example that California could emulate. There, he said, state banking regulators’ aggressive efforts to promote the pot industry to banks and credit unions have paid off and the state now receives about 96% of tax payments from those businesses electronically.

He also suggested that more time may ultimately be the solution.

“We are convinced,” he said, “that even if we don’t do anything at all, banks will gradually enter this industry in California and the problem will gradually go away.”

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