Financial services for the cannabis industry have been a complicated issue for the 20 years that there has been a legal - or at least quasi-legal - cannabis industry in the United States.
In the two decades since California passed Proposition 215 and legalized marijuana for medical purposes, 28 states have also legalized marijuana for medical use. More than half of those semi-legalizations have gone on the books within the last ten years. Seven years ago the situation became even more complicated when Colorado voters approved Amendment 64 and legalized the recreational consumption of marijuana for adults over 21. Seven other states have followed suit within the last five years, including the District of Columbia. On January 1st, the largest state (and world’s sixth-largest economy) of California officially went online with legalized recreational cannabis.
But while the legal status of marijuana within some states has been modified and varied greatly over the last 20 years, its federal status has not changed an iota. It’s a Schedule 1 narcotic — and illegal to buy, sell or possess.
As a result, banking services for cannabis-related businesses have also not varied much over the last two decades, as federally chartered institutions have made it very clear they want nothing to do with any funds generated directly or even tangentially by the industry. That’s not bias; any federally chartered institution servicing the cannabis industry risks losing its license and possible RICO prosecution.
Smaller, state chartered institutions had stepped in to fill that gap — operating under the 2013 guidance of The Cole Memo(s), issued by the Obama-era Department of Justice. One of the memos lays out the guidelines under which financial institutions can offer compliant financial services (like bank accounts) to businesses operating dispensaries in states where it is legal to sell medicinal and/or recreational marijuana.
There were not a lot of Cole-compliant financial institutions as of the end of 2017 — though official counts can vary, depending on what definition of “providing financial service” one wants to use. As of a late 2017 conversation between Karen Webster and CEO of CanPay Dustin Eide, the number of fully Cole-compliant institutions offering full financial services to dispensaries and other direct players in the cannabis industry is extremely low.
But there were signs that that situation was changing, particularly as California going online was estimated to grow the amount of revenue being generated by cannabis by over a third in the next six months.
But then the Justice Department got a January surprise out early — it revoked the Cole Memo and offered local U.S. Attorneys broader reign to prosecute the cannabis industry. And while most experts don’t believe that this change will lead to a spike in dispensaries or growers being prosecuted — it may be the case that the mainstream financial services for cannabusiness have just suffered the regulatory equivalent of a bucket of ice water. And it remains to be seen if the freeze that follows will drive cannabis back onto cash — or into the arms of more exotic solutions.
Relieving Pressure In A Cash Based System
Cash has, in many cases, been the go-to method of paying for cannabis — as it has been in the United States for the last several decades. However, while cash “worked” well enough for the black market, it does not work for an emerging legal retail industry that experts estimate will be worth $10 billion in 2018.
Because the cash in the new, heavily-regulated cannabusiness isn’t just about retail sales of products to consumers — marijuana businesses have all the same uses for money every other business has: employees, security, distributors, utilities, rent and taxes all need to be paid and are paid in cash surprisingly often because it is what is most abundant in the industry.
One California-based distributor, speaking on the condition of anonymity, noted that he has already started the process of gathering the several hundred thousand dollars he will have to count, stack, secure and hand-deliver to the IRS — because that is the only certainly legal method to pay his federal taxes under IRS code 280E (the same category covers medical marijuana dispensaries and cocaine traffickers).
Banking services are available for cannabis industry players — but not widely available — and are often described as more aspirational than attainable in the industry because of the relative dearth of players willing to take the risk, even in an environment when the Cole memo was in effect. A report released in late 2017 by the Financial Crimes Enforcement Network (FinCEN) estimated that 340 financial services providers were banking marijuana businesses in some capacity. The same report estimated that that number was on the increase — up 18 percent in 2017 to 400 by the close of the year.
And some institutions were showing signs they were increasingly willing to come out of the cannabis closet. The Washington Post opened 2018 with a lengthy feature profiling Severn Savings Bank, an Annapolis-based community bank owned by the publicly-traded Severn Bancorp that is banking the growers, dispensaries and other players in Maryland’s recently created medical marijuana market.
Incidentally, the bank accounts open to cannabis business do not allow them to write checks from their accounts, accept checks for deposits from customers, accept credit cards for purchases or use wire transfers — because all of those services might entail touching a federally regulated system. They can’t seek small-business loans, and account holders must email the bank detailed daily financial and inventory logs from Metric, the software system that regulators use to track marijuana from seed to sale. The accounts are also expensive — with monthly fees around $1,750.
But it seems that even services that limited are now likely in jeopardy.
An Even More Tenuous Position
The Cole Memo did not directly address financial services for the Cannabis industry — those direct guidelines were later issued the Treasury Department.
Those guidelines, however, were built entirely on the Cole memo guidance — minus the Cole Memo, those guidelines remain technically in effect, but extremely uncertain and likely facing a rewrite.
And that, according to experts, will push banks that are even thinking about sticking a toe in the market to retreat — and quickly.
“I’ve talked to institutions in California looking to get into the industry, and I don’t think they’re going to move forward at this point,” said Joshua Schneiderman, a partner in the Los Angeles office of law firm Snell & Wilmer. “Banks are notoriously conservative, and the Cole Memo was a critical underpinning of their decision to get into the cannabis space.”
The good news — according to the team at CanPay — is that banks already involved in the marketplace will likely stay put, for now, and see what their State U.S. Attorneys do with the recent guidance. Some early indications from Colorado and California indicate that at least some officially intend to act as though the Cole Memo is still in effect.
But banks that were thinking about making the jump say they'll not and wait and see, according to Ken Berke, president of PayQwick, a rival service to CanPay that also works with Cole-compliant banks to offer payment-processing services for marijuana business.
And that, the distributor PYMNTS spoke to, will effectively halt a lot of the potential growth in the cannabis business — which cannot expand without more professional financial services more widely available. He noted that while most of the focus has been on the difficulties in retail sales — and the inability to use cards — retail customers are accustomed to paying in cash. The much bigger problem, he noted, is on the backend where the purchases are for far more than $50 a gram — and where managing in cash is “a tragedy waiting to happen somewhere in the supply chain.”
While the future remains hazy for the legal pot industry, the consensus — even in the wake of the Cole Memo walk-back — hasn’t changed much in the year or so since the Justice Department officially changed hands. The bird is out of the cage when it comes to cannabis — and returning to the full prohibition of 20 years ago is not an option. Colorado’s Republican Senator Cory Gardner, who opposed marijuana legalization when it was on the ballot, publicly and angrily responded to the decision. He called sitting Attorney General Sessions a liar before threatening to hold all Justice Department appointments until the reversal is, well, reversed.
Don’t mess with Colorado, or their $200 million in cannabis revenue.
Other players have sought to step off the rails and find workarounds — with cryptocurrency tokens being a popular option.
“Where we come at it from, is there are not a whole lot of solutions available to the cannabis industry. There is a stigma, and people just don’t want to touch it, so the typical types of solutions for inventory management and payments just aren’t there. It just so happens that the technology for blockchain is really a great fit” noted SinglePoint CEO Wil Ralston in a recent PYMNTS interview.
SinglePoint is one of a few innovators hoping to use blockchain technology to build a closed loop payment system that essentially can substitute cryptocurrency tokens for cash in the cannabis industry.
Critics note that this doesn’t solve the problem nearly so well as it attempts to side-step it — and in a manner likely to be shut down if it is discovered.
There is also an outside chance — reported on by Politico — that the move by the Justice Department might have an accidental consequence of seeing the federal prohibition of marijuana go up in smoke, so to speak.
While once an issue for “stoners, hippies and felons” cannabis has become a mainstream concern with a caucus of senators to call its own (yes, they are the cannabis caucus) and the bi-partisan group has been loud and forceful on this issue.
That eight-senator block, combined with a handful of hardcore Senate republican libertarians and most of the Democratic party, could push such a bill through the Senate — though the House is more of an unknown commodity, and it is considered unlikely that President Trump would sign such legislation.
Which means, going into 2018, the fate of the cannabis industry is unknown — but seems extremely unlikely to have much of an immediate future with mainstream financial services. Whether that means the industry slows down — or starts issuing a lot of crypto-currency tokens — remains to be seen.