Bank Regulation

New Allies Aim To Solve Cannabis Payments Problem

New Allies In Solving Cannabis Payments Problem

It really wasn’t supposed to be this way, not as cannabis steadily became legal across the United States.

Read the old pro-legalization magazines, or revisit or recall all those legalization fantasy stories from members of the Baby Boomer and Generation X consumer segments, and you might remember that the prospect of selling and buying pot out in the open – in brightly lit stores, even! – was not only talked about with a utopian tone, but in a way that assumed all other problems with pot would disappear once legalization was fully or mostly achieved.

This isn’t meant to be a trip down memory lane, or interpreted as any type of stance on the wisdom of legalizing recreational cannabis. Rather, it’s a commentary about how the unexpected always crops up. In other words, the biggest, largely unforeseen problem with legal pot is the problem of payments.

Fresh Push for Payments Clarity

Now, though, there is a new and significant push to bring clarity to cannabis payments, and perhaps even move closer to solving that problem. This is happening against the backdrop of a new and rapidly expanding area of commerce – one that, if history is any guide, could also spark significant and lasting retail and payments innovations down the line.

Let’s not get too far into that possible future just yet. The present is interesting and newsworthy enough. This week, a big political push from a majority of state attorneys general in the U.S. is pushing the federal government to bring new clarity to the issue of cannabis payments – clarity that could lead to new revenues and new entrepreneurial activities in that area of retail, at least according to many observers.

News emerged this week that active attorneys general from 38 states and territories have put their names on a May 8 letter sent to members of the U.S. Congress to, in the words of one report, “please, let us bank the money generated by the country’s booming cannabis business.”

The letter, which comes from the National Association of Attorneys General, is addressed to congressional leaders of both parties and takes no position on the pros and cons of legal pot. The signers of the letter come from both major political parties. It notes that 33 states and several U.S. territories have legalized some medical marijuana use, which is often the tactic used in calling for cooperation with cannabis sales, given its association with relieving pain instead of, say, jamming out at a Phish concert.

By the last count from PYMNTS, 47 states have some form of legalized marijuana for sale. Collectively, those states are home to nearly 319 million people, or 98 percent of the U.S. population.

Federal Restrictions

But the putative power of that majority has run headfirst into the brick wall of federal restrictions against legal marijuana sales, no matter the reason – a payments knot that served as the main motivation for this new letter from the attorneys general.

As PYMNTS readers most likely know, federal law still classifies pot as a harmful drug, and federal law still views it as an illegal substance, which in turn makes most banks and credit unions reluctant to accept deposits from or offer other banking services to legal cannabis operations. The risks of running afoul of anti-money laundering laws and other provisions are simply too great for most FIs to take on – a reluctance that can also prevent banks and credit unions from dealing with utilities and other vendors that, on their own, serve legal pot retail dispensaries.

In the May 8 letter, the attorneys general write that “the marijuana industry continues to grow rapidly. Industry analysts estimate 2017 sales at $8.3 billion, and expect those totals to exceed $25 billion by 2025. Yet those revenues are handled outside of the regulated banking system.”

Not only that, but the lack of a clear banking and payments regime for the legal cannabis means this emerging area of retail exists in a state of potentially dangerous uncertainty when it comes to financial services, according to the letter. Cash – pretty much on the decline in nearly all other areas of retail – takes on increased importance in the legal cannabis industry. That, in turn, presents major security and tax evasion issues.

Payments Remedy?

So what’s the remedy, at least according to these attorneys general?

The same one being pursued by certain members of Congress – that is, a bill called the Secure and Fair Enforcement (SAFE) Banking Act, which would essentially offer safe harbor to financial institutions doing business with legal pot operations.

A revised version of that proposed law, one that emerged in April, is now before U.S. senators, according to the latest reports. Treasury Secretary Steven Mnuchin recently told policymakers he supports the initiative. In the U.S. House, a bill called the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, currently has backing from more than one-third of the chamber. That bill exempts legal activity in the sector from the Controlled Substances Act. Attorney General William Barr has signaled his support for the STATES Act over the SAFE Banking Act.

In a separate move, some state lawmakers have been considering what could amount to an end to those federal restrictions on cannabis payments. Oregon is one example. Earlier this year, two Democratic state representatives introduced House Bill 3169, which would, in the words of one local report, “create a self-contained, state-chartered banking system for the cannabis industry in Oregon. Passage of HB3169 would bypass the federal banking system and create a limited banking alternative for the marijuana industry in Oregon.”

As of Thursday (May 9), prospects for the passage of that bill were more than a little uncertain, as a state legislative website showed that the last activity around that proposed law was a public hearing on March 25.

Even so, cannabis retail is on the ascendency – that much is certain. Luxury brands are trying to get into this game, and various entrepreneurs are trying to figure out what works, even as small-scale payment services operations try to craft their own solutions under current federal law. But payments is the key. Cash will only go so far in a growing area of retail – digital services are necessary to go further.

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Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The July 2019 Pay Advances: The Gig Economy’s New Normal, a PYMNTS and Mastercard collaboration, examines pay advances – full or partial payments received before an ad hoc job is completed – including how gig workers currently use them and their potential for future adoption.

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