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State's New Pot-Banking Initiative Might Pressure Feds to Act

Incremental reform is designed to give the industry greater access to basic financial services, but it's not the real solution.

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California continues to chip away at the edges to make banking services more accessible to the cannabis industry. The latest effort, SB 51, the Cannabis Limited Charter Banking and Credit Union Law, passed overwhelmingly in the Senate last week. It would set up a closed payments system that would at least enable cannabis businesses to pay their taxes and, perhaps, pay vendors and employees, with relative ease.

That is at least a start, business owners and cannabis advocates say. But it comes nowhere close to solving the fundamental problem, which is that most banks — many of which actually want to work with pot businesses — are at least hesitant to do so, when they don't outright refuse (as most of the big banks still do). Federal law still treats cannabis possession and sale as major crimes, and the legal exposure is just too big a risk for banks to take. As noted by Chronic Town earlier this month, while many businesses continue to work exclusively with cash, others in California have found ways around the problem: some get a few services through credit unions, others use personal bank accounts, or otherwise obfuscate the true nature of their enterprises.

But that's no way for a mature industry to behave. Unfortunately for business owners, suppliers, employees, and customers, whatever California might do will be inadequate. The only solution, advocates say, is for the Congress to legalize recreational marijuana or remove it from its Schedule I designation (which puts it in the same category as heroin and LSD) or at least pass legislation to protect banks from legal liability. That will likely happen — eventually. In the meantime, cannabis entrepreneurs are relegated to working in a de facto gray market: not only unable to pay bills, but also unable to get loans that are available to vintners, craft brewers, and bar and restaurant operators. And because they are without such financial services, they often find it difficult to buy land and capital equipment.

Senate Bill 51 offers "slight relief for the industry," said Josh Drayton, communications and outreach director for the California Cannabis Business Association, which supports the bill. "But it's a Band-Aid solution at best."

The bill — which is headed for a vote in the Assembly and, if it passes there, to the governor's desk — would enable the creation of state-chartered banks and credit unions that would create a sort of a specialized, mini-financial network that would operate outside the financial system. Participants in the system could write checks to each other, but that's about it. Ultimately, cannabis would still be a cash business, though the measure might forestall the need for owners and managers to keep piles of cash on hand (attracting burglars) and transport huge wads of cash around (attracting stick-up artists) to pay bills.

Even beyond its inadequacy, there are other problems with the bill. It would create a whole new level of bureaucracy, and it could be expensive. Assuming that 12 institutions are created (a big assumption) it would cost about $2 million, according to a briefing document accompanying the bill. "Implementation is a continuing concern," Drayton said. "There's a question as to whether it could even get off the ground."

Even in the best-case scenario, the bill represents "an incremental change" in a practical sense, said Robert Selna, a cannabis lawyer with the Oakland firm Wendel Rosen Black & Dean. "It's helpful for businesses that are still stuck in an all-cash situation, but that's about it."

But Selna sees more to it than that. For one thing, the bill, along with efforts by governments and business groups across the country, will help "put pressure on the feds to act." He cited California's experience with cannabis as an example. "First, medical marijuana was allowed, then patient collectives, then dispensaries, and finally recreational was legalized. It's always small steps that lead to big changes."

Meanwhile, Congress is debating a bill, the Secure And Fair Enforcement (SAFE) Banking Act, which would remove many of the major legal liabilities for banks that work with cannabis businesses in states where pot is legal. Banks see huge opportunities in cannabis, which is often a capital-intensive business (and could be much more of one if capital were easier to obtain), and are all for it. Last week, the bankers' associations of all 50 states signed a letter to Senate Banking Committee Chair Michael Crapo (R-Idaho) and ranking member Sherrod Brown (D-Ohio) urging passage of the bill, which passed the House last March.

President Trump might be an unpredictable lunatic, but most observers believe that if the bill were to hit his desk, he'd sign it. The Senate remains the biggest obstacle, with Crapo having expressed doubts about the bill, and with Mitch McConnell, a longtime drug warrior, leading the chamber as majority leader.

But with new pressure from various groups, passage seems a bit more likely than it did a few weeks ago. Also last week, the National Association of State Treasurers issued a resolution supporting the SAFE Act. Before that, most state attorneys general had indicated their support.

Ideally, pot advocates say, the SAFE Act, and measures like California's SB 51, will be obviated by full federal legalization. That would enable cannabis businesses to not only get loans and avoid being mugged on their way to the tax office, it would also allow them to work across state lines, vastly expanding business opportunities. And it would allow much-needed research into the benefits and drawbacks of cannabis, an endeavor that has been stymied by the lack of federal funding.

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