Eight states in the nation have legalized recreational cannabis, and 29 of them (in addition to Washington, D.C.) now allow the use of the plant for medical purposes. To meet the demands of this ever-growing market, a sprawling cannabis industry is taking root across the nation – but not without difficulty. Cannabis remains a Schedule I narcotic under federal law, joining the ranks of dangerous and addictive substances such as heroin, LSD, and cocaine.
Most California Cannabis Companies Usually Operate on Cash Alone
The federal prohibition of cannabis threatens the industry in more ways than meets the eye. Beyond the obvious dangers of Drug Enforcement Administration (DEA) raids lies a more subtle problem: financing. Major banks and credit card companies won’t consider forming relationships with cannabis manufacturing, cultivating, and retail businesses out of fear of facing drug-related charges from federal agents.
Although some local banks and credit unions will work with the industry, a large percentage of cannabis businesses do not have bank accounts. Many businesses have mountains of cash, which makes them vulnerable to theft and violent crime. Beyond the problems of maintaining security at a cash-only business, not having a bank account makes it extremely difficult to open lines of credit and pay taxes. As a result, the cannabis industry is unable to reach its full potential.
A State Bank for Cannabis Is an Unworkable Solution–For Now
In December of 2016, California State Treasurer John Chiang formed a 17-member working group to determine how to provide the state’s cannabis business industry with banking and financing services. The group is comprised of representatives from a variety of government and industry agencies, including the Bureau of Cannabis Control, the California Bankers Association, and the California Growers Association.
In August of 2017, the group met in Los Angeles to discuss whether a state bank would be the right solution for California. Despite enthusiasm from state officials and cannabis business representatives, banking experts revealed that creating a state cannabis bank would be nearly impossible.
Supporters of the state bank idea were attracted to the possibility of cementing the autonomy of California, breaking business reliance on Wall Street firms and providing true support to the state’s cannabis community. The only state bank in the nation, the Bank of North Dakota – which provides banking and credit to that state’s agricultural sector – was cited as a prime example.
Don Childears, president and CEO of the Colorado Bankers Association, addressed the flaws of applying the North Dakota model to California:
- The prohibitive cost of financing the bank– The City of Los Angeles has considered starting its own bank for its cannabis businesses, but the capitalization requirements were enormous, at an estimated $125 million to $250 million. A state bank would require an even greater investment, which is far beyond the reach of California’s cash-strapped government.
- The need for the cooperation of the federal government– Unless the bank handles only transactions within California’s borders (a crippling requirement in today’s interconnected economy), the cannabis bank would need to obtain a federal charter. As long as marijuana remains a Schedule 1 drug under federal law, it is almost certain that federal banking regulators would refuse to approve the California cannabis bank. Even if the bank operated within federal banking regulations, the drug enforcement agency could seize its assets and prosecute its employees.
The Federal Government Must End the War on Cannabis
As with most issues facing California cannabis businesses, the best solution is for federal policy to change. Some California legislators are joining their colleagues from other states in pushing for change at a federal level. All of the bills proposed so far to reschedule cannabis have died in committee, but momentum is clearly growing in favor of the cannabis industry.
A California Marijuana Business Lawyer Can Help
At McElfresh Law, we are committed to providing San Diego cannabis businesses with the tools they need to prosper. Whether you are a prospective cannabis entrepreneur or an established marijuana business owner, a California marijuana lawyer is an essential aspect to your success.
Call us today at (858) 756-7107 to schedule your consultation.