The Cannabis Industry’s Cash Problem

The latest attempt to address the ongoing banking issue for the recreational marijuana industry has failed in committee.

A proposed amendment to the Financial Services and General Government Appropriations Act, 2019, 115 H.R. 6258, was tabled by the Senate Appropriations Committee 21 - 10 on June 21. A week earlier, the House Appropriations Committee defeated their version of the amendment on a voice note. With this year's appropriations bill off the table, marijuana businesses continue to face a cash problem.

The Issue

Marijuana is still federally classified as a Schedule 1 drug under the Controlled Substances Act, on a level with heroin and above cocaine and methamphetamines. (Medical marijuana enjoys some protection under the Rohrabacher-Blumenauer Amendment, but recreational use is excluded.) Therefore, banks that knowingly service accounts for marijuana businesses must follow strict reporting practices under guidance issued by the Financial Crimes Enforcement Network (FinCEN), which so far remains in place despite Department of Justice (DOJ) rescission of the Cole Memo. Failure to comply means financial institutions can be charged with money laundering under the Bank Secrecy Act, risking their FDIC or NCUA backing and exposing them to the possibility of asset forfeiture.

In practice, very few depository institutions in the United States - 334 banks and 107 credit unions as of June 30, according to FinCEN reports elect to provide banking services to marijuana-related businesses. And growers and dispensaries generally can't get merchant identification to take credit and debit cards. So, most businesses deal exclusively in cash.

This leads to complications, of course. States where marijuana is legal must provide ways for businesses to pay taxes in cash. Marijuana businesses and state agencies alike then become targets for robberies, necessitating investment in increased security measures, from guards to armored couriers.

The amendment, known as the Secure and Fair Enforcement Banking Act or SAFE Banking Act, would have established safe harbor for depository institutions, specifically protecting FDIC and NCUA insurance, limiting liability and restricting forfeiture. Similar language was approved in committee in 2014 but failed to make it into the final appropriations bill that year. The amendment would not affect the legality of marijuana. (The DEA recently declined to reclassify marijuana as a Schedule II drug based on its purported medical properties; but such a measure also would not have affected the legality of the substance.)

The Alternatives

In the absence of Congressional action, efforts to address the issue have so far been piecemeal. One possible solution is cryptocurrency. Boutique services dedicated to the cannabis industry have already sprung up, allowing customers to securely and anonymously purchase Bitcoin and dispensaries to accept it as payment. But there's a catch - or several. Cryptocurrency works more like stock than cash; according to the IRS, it's not a true currency but property, meaning even small transactions trigger capital gains and losses that customers are required to keep track of and report for tax purposes. But FinCEN still treats cryptocurrency like money. Cannabis cryptocurrency exchanges are considered Money Services Businesses, or MSBs, which must register with the agency and comply with the Bank Secrecy Act. And financial institutions that service cannabis-related cryptocurrency exchanges may be subject to additional due diligence requirements.

More traditional alternatives exist. A Colorado-based mobile app promises some relief, acting as a trusted partner for debit and eCommerce cannabis transactions in 14 states. Additional cannabis banking solutions are being offered directly to credit unions who want assistance rolling out their own programs.

But perhaps the most intriguing solution comes from California. Senate Bill 930 was introduced to create a mechanism for the state to issue limited-charter licenses specific to the cannabis industry, allowing banks and credit unions to offer a variety of banking services under tight state regulation. The most immediate effect may be relieving the state of its cash burden by allowing banking transactions for tax payments. After clearing the state Senate, the bill was referred from the California Assembly back to committee for further study.

The Outlook

The future for marijuana-related banking is hazy. While 41 bills addressing cannabis have been introduced in this session, so far none has succeeded. The STATES Act, introduced by Sen. Elizabeth Warren, addresses the loss of Cole Memo protections against federal interference (along with a companion bill in the House) however, that bill has not cleared committee. If the bill fails, Congress seems unlikely to take up the issue again until after midterm elections. And the DOJ rescission of the Cole Memo leaves states in further legal limbo, even as additional states prepare to vote on legalization measures. So marijuana businesses continue to explore their options and await new guidance from the current administration - or a more permanent legislative cure.