Bank Regulation

Pro-Pot SAFE Banking Act Hits Roadblock In US Senate

marijuana leaf with money

Among the main stories in payments in recent months has been the increasing push to reform federal banking laws so that legal cannabis retailers can move away from their cash-based businesses and move further into the world of the digital payments.

On Tuesday (July 23), that push lost some steam, at least temporarily.

At issue was the latest round of consideration for the Secure and Fair Enforcement (SAFE) Banking Act. The proposal, currently before the U.S. Congress, would protect financial institutions from punishment for providing financial services to legal marijuana companies. The problem arises because even though states may legalize legal sales of pot, federal law still treats marijuana as an illegal drug despite those changes, which in turn presents legal risks for financial institutions and payment services providers eager to serve this new and growing industry. That results in cash dominating legal pot transactions, which then increases the chances of theft and tax evasion, at least according to supporters of the SAFE Banking Act (not all of whom are necessarily 100 percent behind the idea of legalized recreational marijuana).

In April, Treasury Secretary Steven Mnuchin told policymakers he supports the initiative. And according to a CNBC report late Tuesday, the proposed law, introduced in the U.S. House of Representatives in March, has 206 co-sponsors there (the House has 435 members in total).

Senate Situation

But the more deliberative U.S. Senate, as shown on Tuesday, is another story. The SAFE Banking Act was before the Senate Committee on Banking, Housing and Urban Affairs, where industry and payment professionals talked about those banking and payment challenges. The bill would prevent federal regulators from targeting banks that accept deposits from legal cannabis operators. Such prohibition could involve limiting FDIC protections for those deposits, for example, or trying to prevent loans to those businesses.

According to that CNBC story, “Tuesday’s hearing showed just how hard getting the bill through the Senate would be. Aside from committee chairman Mike Crapo, R-Idaho, none of the Republican committee members attended the hearing.” Crapo, according to the account, “attributed the absences to conflicting hearings, including a Senate Finance Committee hearing and a Senate Judiciary Committee. Some Democratic committee members also skipped the hearing, including Democratic presidential hopeful Elizabeth Warren.”

Next Steps

The next steps for the SAFE Banking Act were not entirely clear on Tuesday afternoon, but there was no solid indication that it was dead in the water — all signs pointed to this being more about the fact that federal legislation often moves at its own pace, something that can be especially true as politicians gear up for an election season.

No matter what, legal retail sales of recreational marijuana are commanding increasing attention from players in the payments world, even with the challenges presented by the conflict of federal and state laws. In some case, state lawmakers — typically sensitive to the possibility of more tax revenue and the wishes of their local constituents — are trying to take matters into their own hands and find solutions that can work around that payments knot.

Take California as one example.

There, two Democratic members of the state assembly, Kevin McCarty and Phil Ting, earlier this year filed a bill that would enable operators of legal cannabis businesses to pay their city, county and state taxes and fees in stablecoin — that is, cryptocurrency with value tied to traditional currency, commodities or other assets.

“Existing law imposes a state excise tax on the purchase of cannabis and cannabis products, as defined, at the rate of 15 percent of the average market price of any retail sale by a cannabis retailer,” the bill reads. “Existing law also imposes a state cultivation tax upon all cultivators on all harvested cannabis that enters the commercial market, at specified rates per dry-weight ounce of cannabis flowers and leaves. The California Department of Tax and Fee Administration administers the cannabis excise tax and the cannabis cultivation tax.”

The motivations are more than a bit obvious, at least from a financial point of view. According to California State Treasurer Fiona Ma, the legal pot industry in that state will be worth at least $5.1 billion by 2020.

For now, though, the payments issue for legal pot remains unresolved, but you can be sure that more energy will be applied by proponents to untangling that knot.

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