It looks like the California cannabis industry will remain largely a cash enterprise for the foreseeable future.
The 18-member Cannabis Banking Working Group chaired by State Treasurer John Chiang issued a 151-page report detailing why creating a public banking system to accommodate the legal weed industry would be so expensive, difficult and legally iffy that it's unfeasible.
Although cannabis is legal in two-thirds of the nation's states, it remains federally illegal, classified as a Schedule 1 drug under the Controlled Substances Act. This means federally insured banks risk their licenses and — potentially — prosecution for money laundering and "aiding and abetting" a federal crime if they knowingly do business with the cannabis industry.
While there are some credit unions and local banks throughout the state that have been willing to take on the risk, the vast majority of California's multi-billion-dollar industry is left to do business in cash and doesn't have access to the types of financing typically available to small businesses in the state. Not only does this limit industry growth and effectively take large amounts of money out of circulation, but it also brings a host of risks, like robbery and theft, and challenges, like making payroll and paying vendors.
"It is not only unfair, but a public safety risk to require a legal industry to haul duffel bags of cash to pay taxes, employees and utility bills," Chiang wrote in the report. "The reliance on cash has painted a target on the backs of cannabis operators."
So the industry put a lot of hope in the public bank basket and responded enthusiastically when Chiang vowed to look into the possibility of a public California cannabis bank earlier this year.
The basic idea works like this: The state bank would take deposits from city and state tax revenues, giving it a firm capital base stretching well into the billions of dollars. It could then leverage those deposits by making loans to local public works improvements, small businesses and affordable housing projects, growing the initial capital while also spurring economic growth and community improvements. With a steady stream of tax revenue, the bank could also guarantee deposits from cannabis businesses and business owners without federally insuring them, theoretically sidestepping federal regulation and the risk of prosecutions or asset forfeitures.
That was the idea, anyway.
But the report from Chiang's committee is blistering, saying such a bank would require a $1 billion investment of state funds and would need at least six years to get up and running. Further, the report warned that the bank would have a high-risk portfolio because it would serve only one industry — a fledgling one, at that — which could leave state taxpayers holding a very expensive bag in the case of a sharp economic downturn. Additionally, the report warned state employees involved in banking relationships with cannabis businesses would not be immune from federal prosecution and that federal banking regulators could step in and shutter such an effort.
The report also notes that public banks historically have not fared well, pointing out that 29 were formed in the United States between 1917 and 2017, only two of which have survived.
Chiang wrote that the report reinforces "the inconvenient reality that a definitive solution will remain elusive until the federal government takes action. They must either remove cannabis from its official list of banned narcotics or approve safe harbor legislation that protects banks serving cannabis businesses from prosecution."
On its face, it seems there should be a lot of support for such safe-harbor legislation. After all, 84 percent of states have now legalized cannabis in some form, making banking a problem throughout the country. Plus, polls show a majority of Americans now oppose prohibition.
It warrants noting, however, that a majority of Americans also oppose the government shutdown, which affects every state in the union. Yet here we are.
Thadeus Greenson is the Journal's news editor. Reach him at 442-1400, extension 321, or [email protected]. Follow him on Twitter @thadeusgreenson.