Is California starting a government-run bank for marijuana businesses?

What happened

Last November, California joined the growing number of states to enact legislation legalizing the use of recreational marijuana. Proposition 64 set the launch date for commercial cannabis sales to adults as Jan. 1, 2018. But the new law presents a recurring problem found in other states with similar measures: how to provide banking services when federal law still prohibits the drug.

Because the Controlled Substances Act (CSA) bans the possession and sale of marijuana, the majority of cannabis businesses are run on cash. Some efforts have been made to alleviate the problem—most notably, Denver-based The Fourth Corner Credit Union’s attempt to apply for a master account with the Federal Reserve Bank of Kansas City to access the Federal Reserve System’s services—but the CSA remains a solid obstacle.

One possible solution: a state-run public bank. At a recent meeting of California’s Cannabis Banking Working Group, the 17 members took part in a panel discussion about the idea.

In addition to alleviating the dangers of operating a cash-only business, the state wants to ensure accurate taxation of what is estimated will be a $7 billion industry by 2020 (which translates to $1 billion in tax revenue for state coffers).

The Working Group heard from representatives of other states that have previously legalized marijuana and considered operating their own banks. Colorado allowed recreational pot use in 2012, and after toying with the idea of a state-run bank, decided the best solution was to lobby the federal government to create an exemption for legal state marijuana businesses.

“We are anxious to resolve the state and federal tug-of-war that has us in this predicament,” Don Childears, chief executive officer of the Colorado Bankers Association, told the California group. “Only an act of Congress can resolve this issue.”

If California elects to pursue the state-run bank option, Childears suggested the Working Group undertake a study and obtain legal opinions on its viability.

A speaker from Massachusetts—where recreational marijuana was legalized in 2016—said the commonwealth similarly concluded the risks of a public bank outweighed the benefit. As co-chair of a commission that considered a public bank in the state, former commissioner of the Massachusetts Division of Banks David Cotney led an examination of the only publicly owned bank in the country.

Founded in 1919, The Bank of North Dakota remained in the red for decades before it became profitable, Cotney said. In today’s economy, it would cost $3.6 billion in startup capital to create a public bank comparable to the North Dakota bank, he added, which led Massachusetts to veto the idea of a public-run bank due to the financial risk.

Other speakers had a more positive outlook. California should at least try to run its own bank, Matt Stannard of Commonomics USA told the Working Group, as there is a “strong moral case” for launching the bank, despite the risks. “Some critics of public banking from the financial sector have a phrase they like to use, when they say, ‘Well, public banking seems like a solution in search of a problem,’” he said. “I would say ordinary people don’t see it that way.”

For more information about the Cannabis Banking Working Group or to watch the meeting, click here.

Why it matters

Led by California Treasurer John Chiang, the Cannabis Banking Working Group has met six times and continues to struggle with a financial services solution to the new marijuana industry in the state. Chiang has previously expressed concern about the federal-state conflict, writing a letter to President Donald Trump in December. “Of primary concern to my office are the limits federal rules place on the cannabis industry’s ability to effectively participate in the state and nation’s banking system,” he wrote. “This conflict between federal and state rules creates a number of difficulties for states that have legalized cannabis use, including collecting taxes, increased risk of serious crime and the inability of a legal industry under state law to engage in banking and commerce.” At some point, a traditional financial solution for marijuana banking will develop. When that will occur and when the federal government will provide at least tacit support for such an endeavor remain large open questions.