California Committee Approves Measure to Create Banking Alternative for Cannabis Industry, Bypass Federal Reserve

By Michael Maharrey

Last week, a second California Assembly committee unanimously passed a bill that would establish limited state-chartered banks to serve the cannabis industry. Final passage of this legislation would remove a major federal roadblock in front of the developing industry in the state and further nullify federal prohibition in practice.

Sen. Bob Hertzberg, (D-Van Nuys), along with a bipartisan coalition of eight cosponsors, filed Senate Bill 51 (SB51) on Dec. 4.  The legislation would create a self-contained banking system for the cannabis industry in California.

Because marijuana remains illegal under federal law, cannabis businesses in states that have legalized marijuana remain effectively locked out of the banking system. If a federally chartered or insured financial institution touches marijuana money, it takes on significant legal risk. The federal government insures or charters virtually every bank in the U.S. As a result, cannabis businesses have been forced to transact almost exclusively in cash. Passage of SB51 would completely bypass the federal banking system and create a limited banking alternative for the marijuana industry in California.

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On July 9, the Assembly Committee on Business and Professions passed SB51 by an 18-0 vote. It previously passed the Assembly Committee on Banking and Finance 10-0. It has already cleared the Senate by a 36-1 vote.

Under the proposed law, the state would license “cannabis limited charter banks and credit unions.” Cannabis businesses would be able to deposit funds in these institutions and write “special purpose checks” on their accounts for limited purposes, including paying state or local fees and taxes, paying rent on property associated with a cannabis business, paying vendors, or buying state or local bonds or warrants. These checks could only be deposited or cashed at the issuing cannabis limited charter bank or credit union, or another cannabis limited charter bank or credit union that agrees to accept the check. This would keep the entire process outside of the federal checking system known as the automatic clearing house (ACH).

Cannabis limited charter banks and credit unions would be allowed to form banking networks, but they could not engage in banking activity with any other bank or credit union. They would also be able to provide accounts to people and entities other than cannabis businesses, pursuant to rules adopted by the commissioner of the Department of Business Oversight.

A similar bill passed the California Senate during the last legislative session, but it died during the Assembly committee process.

“The status quo for our growing legal cannabis industry is unsustainable,” Hertzberg said in a press release last year. “It’s not only impractical from an accounting perspective, but it also presents a tremendous public safety problem. This bill takes a limited approach to provide all parties with a safe and reliable way to move forward on this urgent issue.”

The Assembly committees have made some technical amendments to the bill, but have not made significant changes in its substance.

FEDERAL BANKING LAWS

The Federal government has used banking laws as a weapon in its unconstitutional war on cannabis by making it impossible for marijuana businesses to access the banking system – even in states where marijuana has been legalized. The feds can prosecute bankers for knowingly engaging with cannabis businesses under the Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act.

The Federal Reserve has gotten into the act, denying its services to state banks chartered to serve the marijuana industry.

For instance, in 2015, the Federal Reserve Bank of Kansas City denied  Fourth Corner Credit Union’s application for a master account. The Denver based credit union was formed by Colorado’s state-licensed cannabis manufacturers as a non-profit cooperative. By denying its application, the Fed prevented the institution from access to the Fed’s payment facilities, including its check clearing, wire transfer, and ACH facilities. This made it virtually impossible for Fourth Corner to do business.

In February 2018, the Federal Reserve Bank of Kansas City finally gave conditional approval for Fourth Corner’s master account. But according to the Marijuana Business Daily, the credit union will not serve plant-touching business. It will cater to “advocacy groups, charities and ancillary companies such as accountants.”

State-chartered banks do not have to be members of the Federal Reserve system. But as it did with Fourth Corners, the Fed can deny any non-member bank or credit union access to its services. In other words, the Federal Reserve can lock any bank attempting to operate in the cannabis industry out of the broader banking system, making it impossible for them to do business with any other bank or merchant. With the passage of SB51, California could just bypass the entire federal banking system and its regulations, and create a self-contained banking network for the marijuana industry.

THE CRYPTO ALTERNATIVE

Some marijuana businesses have circumvented the banking system by transacting in bitcoin or other cryptocurrencies. Technology companies like SinglePoint and POSaBIT have been working to generate a payment method for medical marijuana dispensaries and consumers using bitcoin.

In 2014, SinglePoint placed terminals in some medical marijuana dispensaries that allowed patients to make payments with their debit cards, but the banking system quickly shut it down.

“They were going great,” SinglePoint president Wil Ralston told CNBC. “Then overnight the banks shut them all down. There were no guidelines about how banks were supposed to interact with the cannabis industry. They didn’t want to risk it.”

Ralston started looking into cryptocurrencies. Now, SingleSeed allows dispensaries to accept bitcoin and consumers to pay with it.

Other services like BHCPLS.io are in open beta, but promise to bring Bitcoin Cash (BCH) point-of-sale systems to brick and mortar merchants, something cannabis businesses could find useful.

Some analysts believe the marijuana industry could pave the way for the wider use of cryptos. Leslie Bocskor, president of cannabis advisory and services firm Electrum Partners, told CNBC the cannabis industry may well lead the way in using bitcoin or other cryptocurrencies.

“If it finds a way to avoid the traditional banking system, other businesses would follow suit,” Bocskor said.

FEDERAL PROHIBITION

Under the Controlled Substances Act (CSA) passed in 1970, the federal government maintains complete prohibition of marijuana. Of course, the federal government lacks any constitutional authority to ban or regulate marijuana within the borders of a state, despite the opinion of the politically connected lawyers on the Supreme Court. If you doubt this, ask yourself why it took a constitutional amendment to institute federal alcohol prohibition.

Legalization of marijuana in California removed a huge layer of laws prohibiting the possession and use of marijuana in the world’s sixth largest economy, something that will be extremely difficult for federal prohibitionists to overcome. FBI statistics show that law enforcement makes approximately 99 of 100 marijuana arrests under state, not federal law. By legalizing cannabis, California essentially sweeps away the basis for 99 percent of marijuana arrests.

Furthermore, figures indicate it would take 40 percent of the DEA’s yearly-budget just to investigate and raid all of the dispensaries in Los Angeles – a single city in a single state. That doesn’t include the cost of prosecution. The lesson? The feds lack the resources to enforce marijuana prohibition without state assistance.

A GROWING MOVEMENT

California is among a growing number of states simply ignoring federal prohibition, and nullifying it in practice.

Colorado, Washington state, Oregon and Alaska were the first states to legalize recreational cannabis, and California, Nevada, Maine and Massachusetts joined them after ballot initiatives in favor of legalization passed in November 2016. Michigan followed suit when voters legalized cannabis for general use in 2018. Vermont became the first state to legalize marijuana through a legislative act in 2018. Illinois followed suit this year.

With 33 states allowing marijuana for medical use, the feds find themselves in a position where they simply can’t enforce prohibition anymore.

“The lesson here is pretty straightforward. When enough people say, ‘No!’ to the federal government, and enough states pass laws backing those people up, there’s not much the feds can do to shove their so-called laws, regulations or mandates down our throats,” Boldin said.

Efforts to expand California’s marijuana law demonstrates another important reality. Once a state puts laws in place legalizing marijuana, it tends to eventually expand. As the state tears down some barriers, markets develop and demand expands. That creates pressure to further relax state law. These bills represent more steps forward for patients seeking alternative treatments and further erosion of unconstitutional federal marijuana prohibition.

WHAT’S NEXT

SB51 will move to the Assembly Appropriations Committee for further consideration where it must pass by a majority vote before moving to the full Assembly. The California legislature will be in summer recess until Aug. 12.

Michael Maharrey [send him email] is the Communications Director for the Tenth Amendment Center. He proudly resides in the original home of the Principles of ’98 – Kentucky. See his blog archive here and his article archive here. He is the author of the book, Our Last Hope: Rediscovering the Lost Path to Liberty. You can visit his personal website at MichaelMaharrey.com and like him on Facebook HERE

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