Colorado's pot industry is a cash business. A small credit union wants to change that.

Calling itself the "littlest David" battling the "biggest Goliath," a fledgling Colorado credit union took the Federal Reserve to court Monday in a case that may determine whether the cannabis industry will bank openly or continue to operate almost entirely in cash.

Denver's Fourth Corner Credit Union is looking to be the first financial institution in the nation that caters openly to the cannabis industry. But the Federal Reserve Bank of Kansas City, which oversees the Denver district, has denied it a master account needed to do business.

"We are asking for a level playing field, but they own the team and they own the field," Mark Mason, an attorney for the credit union, told U.S. District Judge R. Brooke Jackson. "We are simply asking for the right to be born."

The request has pit state law against federal law. Marijuana is legal in Colorado but still considered a Schedule 1 controlled substance by the federal government. So any bank or credit union doing business with the pot industry potentially faces prosecution and closure.

As a result, Colorado's $700-million-a-year cannabis industry runs almost entirely on cash, with money stashed in safes, boxes and paper bags offering tempting targets for criminals. A number of remedies have been proposed, including bipartisan legislation in Congress that would allow banks to legally work with state-authorized weed dealers, but so far nothing has changed.

From the bench, Jackson said that if he were in Congress, he'd vote for the legislation. He sympathized with the plight of Fourth Corner and recognized the real dangers posed by the all-cash economy. Still, he seemed reluctant to require the Federal Reserve to grant the credit union a master account.

"Would I be forcing them to give this to someone who will then engage in illegal activity?" he asked.

Mason pointed out that several large banks quietly served the marijuana industry and that they had master accounts. Jackson agreed that it seemed unfair, but said requiring the Federal Reserve to give Fourth Corner a master account would be forcing it to violate federal law.

"The sovereign state of Colorado determined that this was a qualified credit union and gave us a charter," Mason responded. "Who is the Federal Reserve Bank of Kansas City to second-guess Colorado? Does the Federal Reserve set national drug policy now?"

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After grilling Mason, Jackson turned his attention to the Federal Reserve and said he was unimpressed with the reasons it gave for denying the account.

Representing the Federal Reserve, Scott Barker said that Fourth Corner was rejected in part because it had little upfront capital and that it was practically unheard of for a new credit union to get a master account.

Yet when Jackson asked how many had been denied, Barker couldn't name any institutions. "It's not a risk the Federal Reserve wants to take," he said.

Returning to Mason, Jackson asked whether the Federal Reserve should be forced to give his credit union a master account if Colorado legalized trade with North Korea, or if it legalized heroin or methamphetamine.

"You just happen to think that marijuana is a better illegal thing to manufacture than methamphetamine," Jackson said.

The question was unfair, Mason replied. "I think the state of Colorado carried out the will of the people. You can't compare it to those other things."

Jackson, who urged the two sides to find a compromise that didn't break any laws, said he would issue a written decision in the days ahead.

The case is being watched closely in the 23 states where some use of marijuana is legal.

"The current situation is untenable," said Aaron Smith, executive director of the National Cannabis Industry Assn. "It's a public health hazard. We have people taking duffel bags full of cash to pay the IRS. It's not just a Colorado problem. It's a huge problem in California, where the medical marijuana industry is bigger than Colorado's medical and retail business combined."

Colorado's banking community has opened some accounts with cannabis businesses but does so rarely because the penalties if caught are severe.

The Justice and Treasury departments have outlined ways for banks to deal with the industry, but the judge said they offered little guidance and called their memos "namby pamby" and "nothing-burgers."

"It seems to me the Department of Justice is saying, 'Well, maybe if we put our head in the sand this will all go away,'" Jackson said.

After the hearing, Mark Goldfogel, executive vice president of Fourth Corner, said he knew exactly when the laws would change.

"In 2016, $1.2 billion in cash will be transacted by the cannabis industry in Colorado," he said. "That's all in $20 bills. At some point, someone is going to die. And then we will be allowed to bank."

Kelly is a special correspondent.


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A version of this article appeared in print on December 29, 2015, in the News section of the Los Angeles Times with the headline "Marijuana, banking and federal law - Colorado credit union seeks to do business with the pot industry." — Today's paperToday's paper | Subscribe