August 9, 2017    6 minute read

Why Banking Is a Problem for Cannabis Businesses

Killing the High    August 9, 2017    6 minute read

Why Banking Is a Problem for Cannabis Businesses

While cannabis or marijuana is still illegal throughout most of the world, at least at the federal level, the trend seems to be towards decriminalization of small amounts, legalization for medical use, and recreational legalization by at least some local governments within a nation’s borders. Those federal restrictions, however, make it difficult for marijuana dispensaries to conduct normal business activities, such as accept credit cards, pay bills and taxes and even open a bank account.

This dichotomy is because 29 states in the US have now passed laws (usually by voter referendum – the will of the people directly voted, not through their elected officials) permitting use of medical marijuana for some conditions, and eight have passed laws for recreational marijuana, but federal law does not recognize or accept these state laws.

In general, federal law trumps local law, but there is some constitutional and ideological confusion. Many of the most conservative elements of the judicial, legislative and executive branches also strongly endorse the principle of state rights, that the federal government shouldn’t interfere with the laws of the states except under certain prescribed circumstances.

Former president Barack Obama directed his attorney general not to enforce federal marijuana laws in states where it was legalised, and as a candidate current President Donald Trump also said he would leave it to the states. Since then Trump has appointed an attorney general and a secretary of Health and Human Services who both see marijuana as only slightly less bad than illegal opioids such as heroin, and even implied that marijuana use and opioid use and abuse are somehow related. Thus far the Congress has acted to block any actions on cannabis on his part, but the threat remains.

Cannabis and Banking

One consequence of having disparate state and federal regulations on cannabis legality is banking. For the most part, legal marijuana dispensaries in the US cannot avail themselves of banking services – including savings and checking deposits – because the banks are afraid to be found in violation of money laundering laws. Even dispensary employees might have trouble finding a bank to accept their wage deposits.

The Obama administration tried to reassure banks that they would not enforce these laws either, so long as the businesses operated within their state’s laws, but many were still reluctant. The Trump administration has made no similar guarantees. In June Florida Congressmen Matt Gaetz (Republican) Darren Soto (Democrat) attempted to add an amendment providing federal banking protections for legal marijuana businesses to the Financial CHOICE Act of 2017, but it was rejected.

According to an analysis in Forbes, in 2016 legal marijuana sales totalled $6.7bn in North America (the US and Canada), with $20.2bn projected by 2021. That’s money the banking industry would love to handle, and in some cases does, despite the risk.

One source said in 2016 that just 301 US banks and credit unions – fewer than 3% – were willing to deal with the pot business, up from just 51 two years before. That same year 75% of all cannabis businesses reportedly paid state taxes with checks or electronically. Even that level of access seems to be the result of banks either not looking too carefully at the businesses or the dispensaries either obscuring or outright lying about the nature of their business.

The situation is virtually the same in Canada, with federally regulated banks unwilling to deal in cannabis cash, although recreational use is expected to be legalized in 2018. Some Canadian credit unions, under the purview of the provinces instead of the feds, are more willing.

What information there is on Europe suggests it is having similar problems, at least in the Netherlands. Most of Europe has been even more reticent to legalise cannabis than the US.

Problem of Crime

One argument opponents of legalization make is that legal marijuana means more marijuana and more crime, when the opposite should be true. If cannabis can be grown, sold and distributed legally, then the black market and the illegal drug dealers should dry up, unless the cost of legal cannabis is prohibitively expensive.

By not allowing banks to handle legal marijuana money, the risk of crime increases. Certainly dispensaries are put in a bind: either lie about their business to the banks or keep large amounts of cash on hand. That makes theft easier and more attractive. The business must pay its bills with cash, its employees have to accept wages in cash. Long term profits have to be stored in less secure locations than banks, too. Some businesses have resorted to burying it, which is not the best or safest way to store paper-silk currency (not only is it hard to retrieve, but it can decompose).

Theft isn’t the only risk. According to a 2015 Nasdaq Stock Market report, at least one dispensary owner endured kidnap, torture and mutilation by those looking for easy money.

Altcoin and Other Solutions

Nasdaq agrees that cannabis entrepreneurs needs some safer, non-physical way to store its cash. One solution is cryptocurrencies such as bitcoin. (There’s even a cannabis-specific form of altcoin called PotCoin.) But with bitcoin’s own slightly shady reputation (warranted or not) as the currency of choice for illegal activities, using it so extensively might attract more federal attention and harassment to dispensaries.

Still, the problem with bitcoin isn’t inherent in the cryptocurrency but in what you do with it. In addition to buying marijuana and other, darker drugs, it also can buy addiction rehab. One doctor who accepts Bitcoin at drug rehab centres in California said it’s no different than taking hundred-dollar bills.

Other tech solution workarounds have been proffered. Some turn cash into a digital token that uses the same blockchain ledger as Bitcoin to record transactions. Some use software and regulatory technology – last year Microsoft partnered with one – to ensure compliance with federal and local laws. And others enable debit payments for cannabis purchases with an app.

With this much money at stake, and eventual cannabis legalization seemingly inevitable, it should continue to become still easier to purchase weed in the near future.

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