Scope of legal marijuana market propels California efforts to bank the cannabis business

California is going full throttle to find a solution to lack of access to banking for the state’s cannabis businesses.

As the state closed its first month of legal recreational marijuana sales, the governor, state treasurer, attorney general and the legislature are all working on the issue.

"We are contending with a multi-billion dollar cannabis industry that needs banking services, and a private banking industry that is stymied by federal law in meeting the needs of the new industry," said Treasurer John Chiang in a Tuesday press conference.

California State Treasurer John Chiang
MEENO

Federally insured and regulated banks have refused to handle transactions from cannabis businesses, because the federal government still considers marijuana an illegal drug, one facing increasing hostility under the Trump administration.

The lack of access to banking means that marijuana businesses keep a great deal of cash on hand making them targets for robberies.

The state attorney general’s office and treasurer’s office are both moving forward on dual, separate feasibility studies to create a state bank to provide the industry with banking services.

Recreational marijuana growing, distribution and sales became legal in the state on Jan. 1.

The treasurer's office issued a request for information Tuesday, to be followed by a six-to-eight week request for proposal stage that could lead to a study being completed as soon as this summer, Chiang said.

The state attorney general’s office study would look at the legalities while the treasurer’s study would look at operations. The studies would consider the costs, benefits, risk and legal and regulatory issues, Chiang said.

That would include considering whether an online bank or a bricks-and-mortar institution would be a better solution and potential alternatives for capital and whether bonds might be part of that, Chiang said.

In separate efforts, California Gov. Jerry Brown has proposed a correspondent bank, which would act as a wholesaler for a network of smaller banks. And, state Sen. Bob Hertzberg, D-Van Nuys, introduced a bill Thursday that would give a new state charter to financial institutions that are not federally insured to issue certified checks and handle payroll for marijuana workers licensed by the state.

Chiang compared his proposal for a government bank to what was established in North Dakota in 1919 to serve the unmet needs of the agricultural industry.

The Bank of North Dakota acts as a mini reserve bank for the state’s banking industry and serves the functions of a banker’s bank, a wholesale bank that provides participation loans made with community banks to small businesses, homebuyers, farmers and student, Eric Hardmeyer, the state bank’s chief executive and president, told The Bond Buyer in 2012.

In the years following the 2008 recession, more than a dozen states contemplated creating a state bank similar to North Dakota’s, but none were able to pass legislation. Brown vetoed legislation for a state bank in 2012.

“History shows that people support public banks when private banks fail to serve community interests,” Chiang said.

But North Dakota is currently the lone example in this country.

Chiang's businesses. The committee met for six months before coming out with recommendations in November -- one of which was to evaluate establishing a state bank.

“We had multiple banks coming forward with solutions, but they wanted clarity from the federal government and local regulators,” Chiang said. “We identified a pathway on multiple fronts, but U.S. Attorney General Jeff Sessions has taken us steps backward.”

Sessions rescinded a trio of Obama-era memos Jan. 4 that stipulated a policy of non-interference with marijuana-friendly states. The moves means federal prosecutors across the country now have to decide how to enforce federal laws regulating pot possession, distribution and cultivation of the drug in states where it is legal.

For reprint and licensing requests for this article, click here.
State tax revenues Budgets Marijuana banking State of California California
MORE FROM BOND BUYER