Operating a marijuana business is risky. The all-cash environment is inconvenient and a target for criminals and the whole fiasco is the direct result of federal prohibition. Some banks and credit unions provide the industry with limited transactions under FinCEN guidelines, but most will not allow marijuana companies to access any of their services.
In desperation, many canna-business owners experiment with crypto currencies and pre-paid options, such as Tommy Chong’s Green Card, but over the last months, a bold new initiative is gaining popularity: A public bank. More and more people are advocating for a public cannabis bank in the face of federal stubbornness over legalization, including state treasurers, city council members, and pot entrepreneurs.
According to California State Treasurer, John Chiang, “A multi-billion dollar cannabis industry could be the catalyst that propels public banking into becoming a reality.” Public banks are under full control of state or municipal governments, according to their jurisdictions. It would transfer financial oversight and authority from the Federal Reserve and give it to local government.
Instead of depositing cash into a third-party bank, which has FDIC insurance and influenced by private interests, local governments deposit and insure any money in the public bank, and it uses it to build assets of its own. Public banks have the choice between working within the Federal Reserve System or outside of it, which is why it has potential to offer the cannabis industry crucial financial services.
California is leading the call for public cannabis banking. It already has a Cannabis Banking Working Group, which on August 10 devoted an entire session to discussing the option of public banking. It has a chair in John Chiang, gubernatorial candidate and State Treasurer, who had this to say when opening that session, “We are here to test the idea and see if it is truly workable.”
The concept is not new, and his words come on the back of similar debates occurring in Los Angeles, Oakland and San Francisco. Public banks are not a new idea, either domestically or internationally. With rudimentary beginnings in colonial “land banks,” they were once widespread in the states of South Carolina, Tennessee, Georgia, Vermont, Illinois, Kentucky, and Alabama.
Countries, such as China, Malaysia, and Argentina, currently run their own state-banking systems. However, the Bank of North Dakota is the only public bank in existence on United States soil today. Founded in 1919, the Bank of North Dakota began as a populist alternative for frustrated farmers unable to get loans from national banks.
It now controls assets worth well over $7 billion and has $876 million in the capital. Every year, it injects state coffers with 46 percent of its total earnings. During the 2008 financial crisis, which triggered the current public bank uprising, the Bank of North Dakota famously held the financial high ground over national banks in the Federal Reserve System.
The public does not know for sure where the Bank of North Dakota stands on the medical marijuana issue. North Dakota’s medical cannabis program is imminent and there is huge interest in its success among voters. Despite its refusal to comment, it uses a Federal Reserve master account. This makes it unlikely that it accepts marijuana deposits unless the state of North Dakota specifically mandates it.
Other states are studying its business model with intense interest. Not all leave impressed with it. Former Massachusetts Division of Banks commissioner, David Cotney, did a feasibility study back in 2011. It showed the Bank of North Dakota’s model inapplicable for such a large, financially and economically diverse state as Massachusetts, let alone one the size of California.
Financial Services for Marijuana in California
Developing a public bank, even one able to accept marijuana deposits and offer services to merchants would not be an easy undertaking. It would require extraordinary amounts of capital for the effort to have any success. Estimates for early capitalization costs for just the Los Angeles bank range from $125 million to $250 million, with $1 billion or $2 billion in assets, and that is just to start with.
Prior to founding CannaRegs, a database of marijuana legislation, Amanda Ostrowitz worked for the Federal Reserve as a bank examiner. She said, “The number of different things a bank has to pass through, it is not just simple stress tests. It is safety and soundness exams, consumer lending compliance, there are so many factors that go into it.”
Ostrowitz continued her explanation, “There is a reason why the Federal Reserve is still refining the systems and equations to this day, and why these examiners go through at least two years of training before they are certified examiners. To put that kind of infrastructure into place from the ground up is going to be extremely costly.”
With those thoughts, Ostrowitz thinks the industry unable to spare the effort, time, and resources to start a cannabis bank and maintain its operations. As several Working Group speakers noted, without a Federal Reserve master account and Fedwire access, marijuana banks would simply serve as storage vaults, unable to complete even intrastate banking transactions.
Author of Bullseye Brief, an investment newsletter, Adam Johnson elaborates on this, “There are very few banks that are chartered solely within state lines, which means that they are by definition unable to handle transactions across a state line, where it would certainly become illegal transfer.” Despite these hurdles, there are many who think the idea worth discussing at length.
Interest for a Public Cannabis Bank in California
Dress Wedding, co-founder of Harborside Medical Center, is just one of many in the industry who believes a public bank possible for marijuana businesses. Besides being Director of Holistic Services at Harborside, Wedding also volunteers at Oakland’s Friends of the Public Bank, an advocacy group initiative. Officially, Harborside is yet to endorse public banking.
However, Wedding and other prominent business people support the economic and social justice benefits of having a public bank. He argues for a proper banking model, with master accounts, which merge municipal and marijuana funds. Matt Stannard, Policy Director of Commonomics USA, seconds Wedding, and told the Working Group:
“What a public bank can do is really stare in the face of whatever existing guidelines, however ambiguous or however contingent those federal guidelines may be, and say, ‘we are going to do everything and beyond that these non-regulatory guidelines, such as FinCEN and the Cole Memorandum, ask of us.’”
The likelihood of such an application receiving a Federal Reserve account is remote at best. However, the same was true of the cannabis industry itself a mere 20 years ago. Currently, public cannabis banking is in feasibility study mode, but Ostrowitz believes acceptance of some variation a likely possibility out of sheer necessity. The impact of a public bank would extend well beyond marijuana.
“There are a lot of these things in history,” Ostrowitz explained. “They were built to solve one problem, and they balloon and become the new way. If it works and it makes sense, then who knows? Maybe this is a model that goes all the way through, but we have got to look at the costs and the general impact it will have on society.”