California Report Finds Public FI Option to Serve Pot Industry a Bust

A recently released feasibility study determined that a public financial institution to serve the California marijuana industry would create unacceptable legal and financial risks for the Golden State.

However, the report recommended that California designate a lead agency to improve access to banking for cannabis companies that would, in part, encourage and assist credit unions and banks to serve the state’s multibillion-dollar marijuana market, the nation’s largest.

The 151-page feasibility study, conducted for the Cannabis Banking Working Group chaired by California State Treasurer John Chiang, was reviewed and discussed during a Dec. 27 public hearing at the California State Capitol in Sacramento.

After legalizing the medicinal use of marijuana in 1996, California also legalized the recreational use of pot last year. This left California’s cannabis businesses with a big dilemma: Even though marijuana use is legal in the state, it is illegal under federal law.

This dilemma created two main issues by placing financial institutions, which might accept deposits from cannabis businesses, at risk of losing the federal authority to operate and forcing cannabis businesses to manage large amounts of cash, making them targets for violent crimes and jeopardizing the public’s safety. Security and procedural concerns about dealing with a cash-only industry also created a nightmare for state and local government revenue-collecting agencies, according to California officials.

The feasibility study did a comprehensive review of three alternatives. The first alternative proposed opening a public credit union or bank that would exclusively serve pot business. The second proposal was to provide banking services to the cannabis industry, including individuals and other businesses. The third alternative would be to open a correspondent bank, similar to a banker’s bank, which provides banking services to other commercial banks.

Though the feasibility study found that a public credit union would offer several incremental advantages over a public bank, they would not be enough to overcome other challenges.

“The credit union could utilize the existing credit union coop network where depositors could make deposits at any participating credit union and thereby alleviate the need for statewide branches,” according to the study. “On the other hand, credit unions have very specific requirements in terms of ownership and capitalization that would complicate the process of establishing a state-backed institution.”

Most importantly, however, the study also determined that the issues raised with respect to a public bank also would apply to a public credit union, making these alternatives untenable.

The feasibility report noted that the risks of investing in a public financial institution would include a high probability that federal regulators would not approve a necessary master account for a public bank to operate, wasting the anticipated $35 million in start-up costs for any of the three alternatives examined. Similarly, the report found that a public cannabis financial institution would require a $1 billion initial capital investment, and that the FI could lose money for 12 years before it would be able to begin repaying that capital.

Nevertheless, the report recommended that the state assign a lead agency to improve access to banking services through facilitation, communication and coordination. For example, the agency would encourage credit unions and banks to serve cannabis companies via education, promotion, data sharing, legislation and advocacy.

“While we believe that these services will gradually become available even without state action, these state activities are likely to speed that process,” the report stated.