California considering creating a state-run bank for cannabis businesses

Published: Aug 16, 2017, 8:39 am • Updated: Aug 16, 2017, 1:39 pm

By Brooke Edwards Staggs, The Cannifornian

California government, financial and marijuana business leaders met last week in a far-from-resolved debate over whether a state-run bank could be the solution to the cannabis industry’s banking problem.

Supporters argued during a Los Angeles gathering of California’s Cannabis Banking Working Group that a public bank would give the state autonomy, serve communities that struggle with bank access and send a message that could shift the nation’s financial paradigm away from Wall Street.

Critics insisted a public bank would be too pricey, too risky and do little to overcome banking problems triggered by the conflict between state and federal marijuana laws.

Though eight states have legalized recreational marijuana and 30 permit medical cannabis, the federal government still classifies cannabis as a Schedule I narcotic on par with heroin. That means major banks and credit card companies won’t do business with growers, manufacturers and dispensaries out of fear they’ll be penalized for money laundering.

While some smaller banks and credit unions are filling that gap, surveys show a majority of marijuana businesses are still forced to operate in cash. That makes them targets for crime, with tales of dispensaries being robbed and workers harmed. That also makes it tough for business owners to get loans and pay their taxes, which are expected to total around $1 billion each year after recreational marijuana sales start Jan. 2.

Related stories

• This economist has a strategy to kill the marijuana black market
• Colorado lawmaker calls Sessions’ marijuana policy letters a “political ploy”
• State lawmakers group endorses descheduling of cannabis with eye on banking
• Riding along on a nail-biting trip to pay cannabis taxes
• Los Angeles might create its own bank for the cannabis industry (among others)

With that date in mind, State Treasurer John Chiang in December formed a working group to explore options and come up with recommendations for addressing the banking issue.

The 17-member group includes representatives from state agencies such as the Bureau of Cannabis Control, financial groups such as the California Bankers Association and industry groups like the California Growers Association. They’ve been meeting throughout the state, with Thursday’s session in Los Angeles the last before they turn their attention to preparing a report on their findings and suggestions.

“We all agree the best and most effective step would be for the federal government to remove cannabis from the list of Schedule I drugs,” Chiang said.

But given Attorney General Jeff Sessions’ staunch opposition to cannabis and threats of a crackdown on state marijuana programs, he acknowledged that change doesn’t seem likely anytime soon.

The working group briefly discussed allowing marijuana businesses to pay taxes using a digital currency similar to Bitcoin, lobbying for federal changes and encouraging small banks to expand service to the industry. But the majority of Thursday’s meeting focused on the idea of creating a state-run bank.

While public banks are fairly common in developing nations, the United States has just one: the Bank of North Dakota, created in 1919 to serve farmers and other residents struggling to get access at commercial banks. Transactions there are backed by the state rather than the Federal Deposit Insurance Corporation, which means they’re not subject to all of the same federal regulations.

A push for public banks picked up in 2008, when the collapse of major financial institutions triggered the Great Recession. Chiang said the idea has gained steam in recent months, as the scandal over claims that Wells Fargo created fraudulent accounts and forced customers to pay for service they didn’t need continues to grow.

“There is widespread support for exploring public banking in California,” Matt Stannard, policy director for the advocacy organization Commonomics USA, told the group gathered in a Sheraton hotel conference room.

Members of the cannabis industry shared stories of how the lack of banking access has forced them to carry around duffel bags full of cash and held back their businesses.

Residents also voiced their support for a public bank, sharing tales about how they lost their homes during the recession and how they’ve suffered through the federal government’s war on drugs.

Both Oakland and Los Angeles are studying the idea of creating city-run banks. While these talks were triggered by the growth of the cannabis industry, both cities have expressed interest in being able to use marijuana funds to build public infrastructure and make low-interest loans to folks in need.

But Kevin Klowden, executive director of the California Center and Managing Economist at the Milken Institute nonpartisan think tank, told the group a public bank could most safely serve both the cannabis industry and the general public if it created a “firewall” between the two systems. He said it would also be risky for California to try to move funds between other legal cannabis states, since federal regulators still control interstate commerce.

Other government and finance experts threw cold water on the idea of a public bank.

Massachusetts created a commission to study the idea of a state-run bank in 2010. But David Cotney, who served on the commission, told members of California’s working group that they ultimately decided the costs would outweigh the benefits.

Don Childears, president and CEO of the Colorado Bankers Association, said they’ve been trying to address the “federal and state tug-of-war” ever since Colorado was first to legalize recreational cannabis alongside Washington in 2012. But he said there are still only 12 small banks serving the state’s massive industry today, after federal regulators shut down plans for a dedicated credit union and lawmakers showed no appetite for the risk involved in forming a public bank despite the “curb appeal” of the idea.

“I would suggest you really do not underestimate the challenges, complexity and time requirements of these sorts of issues,” he said. “They are enormous for a normal bank. They are absolutely onerous for the kind of first-time-ever decisions that would need to be made in a public bank.”

Even if a California-run bank stuck closely to federal guidelines, Klowden said there’s no guarantee that federal regulators wouldn’t seize weed money.

“As long as the federal law says marijuana is illegal, they can go after it,” he said.

The only thing holding them back now, he pointed out, is an amendment to the national spending bill that blocks federal funds from being used to go after state-legal marijuana programs. That amendment was extended through September, but Sessions has encouraged Congress to drop it.

Then there’s the cost and time involved in creating a public bank. Jon Lunsford, president of California First Financial, a private commercial lender based in Los Angeles, predicted it could cost California $2 billion and take “a long time to a very long time” to get a state bank up and running.

Khurshid Khoja, an attorney who serves on the working group, said such doubts may not have been what they hoped for, but it’s what they “needed to hear” as they get ready to make recommendations for the future of the industry.

Chiang said they’ll craft those recommendations during the final Cannabis Banking Working Group meeting in Sacramento this fall.

This story was first published on TheCannifornian.com

Topics: banking, California, John Chiang, marijuana cash