When your business is built on the sale and manufacture of a federally prohibited substance, finding a financial institution that's willing to handle your accounts poses a major challenge. Over the past decade, the rapid growth of the multibillion-dollar legalized cannabis industry has left thousands of enterprises seeking a way to bank their profits. As I spoke with a variety of small businesses in this industry and conducted some research, I came to understand the issues they’re facing.
According to industry research firm New Frontier Data (registration required), revenues for the legal cannabis market reached almost $8 billion in 2017 and are projected to exceed $24 billion by 2025. At that scale, it's critical for businesses to maintain bank accounts that allow them to manage their transactions within the electronic banking system. However, the continuing federal ban on marijuana has left the industry tangled in a patchwork of conflicting financial rules.
The regulatory uncertainty around legalized cannabis is at odds with the strict culture of compliance and risk aversion that dominates much of the financial services sector. Few members of the federally-regulated banking industry are willing to risk doing business with cannabis growers and retailers. Out of more than 16,000 FDIC and NCUA depository institutions registered in the country, a 2017 federal report on marijuana banking noted that just 400 such institutions currently work with marijuana-related businesses in the U.S. Even financial institutions that do work with such businesses reported that more than one in five of them were eventually turned away.
Businesses in the legalized cannabis industry have responded to the lack of banking services in several ways, such as sustaining cash-only operations, partnering with local banks and even experimenting with cryptocurrency transactions. However, each of these alternatives come with limitations that serve to highlight the critical role of the modern banking system in running almost any business.
Unbanked Cash Complicates Accounting And Operations
Currently, most legalized marijuana businesses work mainly in cash, which poses several major problems. Without bank accounts, deposits and electronic transfers are impossible. So cannabis businesses pay their employees and suppliers in cash, complicating bookkeeping and slowing down the pace of operations. In order to meet their federal payroll tax obligations, these businesses must hand-deliver cash payments to a local IRS office. In at least one case, the agency has also fined such cash-only businesses for not using its electronic payment system.
Operational risks abound as well. Keeping large amounts of cash on site increases the risk of theft or embezzlement, requiring business owners to invest in additional security measures. To provide customers with convenient access to cash, unbanked businesses would also have to consider purchasing or renting ATMs to keep on their premises. However, no major bank would risk its national standing with federal regulators by installing branded ATMs in or near the offices of a legalized cannabis retailer. This means that most machines are provided by third-party operators, who charge users substantial non-network ATM withdrawal fees of up to $3.50 per transaction.
Local Banks And Credit Unions Limit Growth
While the legalized marijuana industry isn't completely cut off from banking services, the federal ban means that their financial service providers mostly comprise smaller banks that are located within states where legalization programs are in place. While these banks provide marijuana-related businesses with valuable local expertise in dealing with their state's specific rules on cannabis, they don't provide a ready platform for those businesses to expand into other legalized states. Banking regulations differ by jurisdiction, and few local banks operate branches in more than one state.
A number of businesses in the legalized marijuana industry have also turned to forming their own credit unions. Credit unions are not-for-profit entities providing financial services to the members that own them, which makes them seem like the ideal solution to business owners who are shut out of the larger banking system. But like banks, credit unions require access to the national financial system by keeping their own "master accounts" with the Federal Reserve. Recently, one Denver-based marijuana credit union filed suit as the Federal Reserve Bank of Kansas City continued to delay opening the credit union's master account.
Cryptocurrencies Complicate Compliance
The rise of cryptocurrencies has provided unbanked cannabis businesses with another alternative by which to sidestep federal banking restrictions. Alongside well-established names like Bitcoin and Ethereum, there’s been a rise in marijuana-centric cryptocurrencies, bearing such names as Potcoin and Hempcoin. These currencies purport to provide an easy cash alternative for businesses and consumers by allowing them to purchase coins with credit cards and then exchanging the cryptocurrency for marijuana products.
However, the obfuscating nature of cryptocurrency transactions runs counter to the rigorous accounting standards of state legalization programs. The cash-only nature of the legal cannabis industry, with its potential for hiding transactions and income, has persuaded most states to require strict record-keeping. This also helps ensure that the businesses aren't connected to criminal interests that might provoke federal intervention in state legalization programs. For all these reasons, there’s been limited acceptance of cryptocurrencies that cater to the legalized marijuana industry.
Recent Politics May Prolong The Unbanked Status Of Legal Cannabis
Finally, recent political developments have made it even less likely that legal marijuana businesses will be able to easily bank their profits anytime soon. In early January, Attorney General Jeff Sessions revoked a previous policy that narrowed the focus of federal enforcement in states with legalization in place. The only remaining legislative safeguard for legal cannabis businesses is an amendment within the federal appropriations bill, which prohibits the use of federal funds to prosecute legal medical marijuana programs.
Given the current debate around the appropriations bill and the attorney general's apparent opposition to legalized cannabis, it's unclear whether that protection will remain intact. Although recreational cannabis is legal in eight states and medical marijuana is approved in another 21 jurisdictions, the clash of local and federal authorities means that most businesses involved in legal cannabis will probably have to continue operating without the benefits and safeguards of modern banking.
