One of the biggest problems facing California cannabis businesses, regulators and law enforcement officials once recreational marijuana sales become legal on Jan. 1 is what to do about all the cash that is expected to change hands.
With marijuana still illegal under federal law, most marijuana businesses can’t open bank accounts or accept credit card transactions — financial services companies refuse to serve them for fear being penalized by federal regulators for handling money from drug sales. That means marijuana transactions are typically done in cash.
It's not unusual for existing medical marijuana business owners to pay their state and local taxes with duffel bags full of money. Once recreational sales begin, experts estimate marijuana will be a multibillion-dollar business, and California’s cannabis industry will be swimming in cash.
That’s a serious concern for several reasons. The cash hoards make marijuana businesses and their employees a target for robberies and other crimes. It’s harder for regulators to track cash transactions to ensure businesses are following the laws and paying their taxes. And the cash economy makes it difficult for state officials and marijuana businesses to prove they are complying with the Justice Department’s demand for strict regulations on commercial marijuana businesses, including rules to ensure marijuana isn’t sent to states where it’s still illegal and to block criminal enterprises from participating in the industry.
Banks aren’t flatly barred from serving cannabis businesses. Federal regulators issued guidance on how banks could serve state-sanctioned marijuana enterprises, and now nearly 400 banks and credit unions across the nation do so, according to the Treasury Department. But that’s less than 5% of federally charted institutions. Many banks refuse to deal with marijuana businesses because of the risk and complexities of complying with the federal guidance, as well as concerns that the Trump administration will take a harder line on marijuana.
Hoping to reduce the threat to public safety and the risk of a federal crackdown, California officials are trying to develop a new cannabis banking system — one that enables regulators to track pot transactions and gives financial institutions confidence that they won’t get in trouble for working with marijuana businesses.
The goal of the Brown administration’s proposal is to encourage a network of smaller banks to open accounts for pot shops, growers and other cannabis businesses. Those banks would be given access to state databases of cannabis businesses to make sure the ones they are serving are licensed and remain in compliance. Marijuana-related transactions handled by these smaller banks would pass through a larger “correspondent bank” that would hold accounts from banks that are doing business with marijuana firms. Special state inspectors would be based at the correspondent bank to monitor the movement of money and detect suspicious behavior.
The idea is to give banks some assurance that they can serve marijuana customers without running afoul of federal banking guidelines. As more banks serve cannabis businesses, more of the transactions will shift from cash to credit cards and electronic funds transfers. That makes the industry safer and easier to regulate, which is good for California.
In Los Angeles, City Councilman Bob Blumenfield wants marijuana businesses to go cashless for the same reasons. He has proposed requiring that any business that receives a permanent cannabis license from the city be prohibited from accepting cash payments and barred from paying taxes in cash. He argues that because cashless systems are complicated and cost more upfront than cash, retailers won’t make the leap to a cashless system voluntarily.
Blumenfield is right to push the industry toward a mostly cashless cannabis system. (No other jurisdiction in the country prohibits cash completely.) But first, Los Angeles and California need more banks and financial services companies willing to handle those cashless transactions.
Ideally, city and state officials wouldn’t be left to solve the cash dilemma on their own. More than 40 states have legalized some form of cannabis for medical or recreational use; clearly, other jurisdictions are struggling with the same problem. Members of Congress have repeatedly introduced legislation to protect banks that serve legitimate marijuana businesses, but they’ve failed to get traction in the House and Senate.