Banking Issues for the Marijuana Industry in California: Unlikely to be Solved Any Time Soon

The state legalization of marijuana in many states, including California, has spurred the development of a relatively new multi-billion dollar business sector.  One of the issues arguably holding back the speed of development of the market is the illegality of marijuana sale, distribution and possession at the federal level.  And, one of the problems arising from that illegality is the lack of the availability of banking services for many marijuana businesses.  Because many banks will not deal with marijuana businesses, it remains a mostly cash business.  Former California Treasurer John Chiang created a working group to analyze and propose potential solutions to the banking issue and also commissioned an external expert report.  The expert report was recently released and basically recommends that California not adopt a state-backed bank for marijuana businesses.  The risk of either federal prosecution or the federal government making marijuana sale, distribution and possession (including aiding and abetting) legal and regulatory issues, in part, makes it unlikely to be successful and financially feasible.  The expert report states:

For each of the three options the state can expect to spend $35 million on start-up costs incurred over a six year start-up period.  There is a high probability that federal regulators will not issue a master account to the bank, which is necessary for the bank to open and conduct basic banking functions such as wiring funds. In that eventuality any start-up funds expended to that point and during the subsequent wind-down would be wasted. If approved to open, the bank will then require just under $1 billion in capital, will lose money for 12 years before the bank is able to pay dividends sufficient to fully provide a return on the invested capital and begin repaying that capital, and the state of California will not begin receiving net dividends until 25 to 30 years after the bank opens, or sometime between 2050 and 2055.  If federal regulations change during this time and cannabis banking becomes legal, the bank would most likely be closed at that point due to a decreased business demand for the bank and thereby incur a significant loss. If federal regulators begin to aggressively enforce federal laws the bank would be closed and deposits subject to confiscation. Under this scenario the losses would be substantial and liabilities impossible to determine. Even if federal regulators maintain the current ambiguous situation, commercial banks will offer competing services to the industry by the time a public bank could open. Our conclusion is that no option for a public bank focused on the cannabis industry is feasible.

Other solutions examined include a public credit union, the state purchase of an existing private bank, and various FinTech (financial technology) solutions that attempt to solve the problem using payment technology such as cryptocurrency. Each of these options is ultimately dependent on access to national banking and payment processing networks, so each encounters the same difficulties overcoming the federal laws that are holding back access to banking now. We conclude that none of these alternate solutions is feasible. 

The expert report does propose that a state agency take up continued work on a strategy to address the issues related to marijuana banking.  BNA has a nice overview of problems with IP and marijuana business in the United States, here.  
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