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The State of Cannabis Banking – 2018

According to a report released by the Financial Crimes Enforcement Network (FinCEN) for the period ending June 30, 2018, there are 441 U.S. depository institutions (banks and credit unions) providing banking services to marijuana related businesses (MRBs). This number is up from the reported 340 institutions serving cannabis businesses as of January 2017.

The FinCEN report does not indicate how many cannabis business accounts are serviced by each institution, but at a minimum we know that there are 441 institutions that have serviced at least one cannabis account.

On the surface this may appear to be a significant number, especially given widespread perception that cannabis businesses cannot obtain bank accounts.

In fact, the 441 figure obscures the reality that there are actually very few financial institutions servicing what we would consider to be a significant number, 15 or more, of cannabis business accounts. Our research puts that number as low as 35.

This reflects both a supply side shortage of institutions willing and needed to service the cannabis demand, and a tremendous opportunity for those institutions that do choose to enter the cannabis banking market.

graph of banks and credit unions serving cannabis businesses

Following the limited banking guidance

Prior to 2018, there existed only two federal documents pertaining to cannabis banking:  the February 14, 2014, Cole Memorandum which set forth DOJ enforcement priorities of federal laws related to cannabis banking, and FinCEN’s same-dated “BSA Expectations Regarding Marijuana-Related Businesses” which lays out how financial institutions can permissibly service the cannabis market.

When Attorney General Jeff Sessions rescinded the Cole Memorandum on January 4, 2018, it caused considerable uncertainty about the future of state-legalized cannabis in the U.S., including cannabis banking.

Some financial institutions that had been considering taking on cannabis accounts put those plans on hold, while at least one institution that was servicing the cannabis market decided to close all their MRB accounts. But as more time has passed since the Sessions announcement, the feared federal crackdown against state-legalized cannabis has not materialized.

In fact, there has been no change whatsoever in the enforcement (or non-enforcement) of federal laws, which is now in hands of individual U.S. Attorneys who show every indication of continuing to follow the letter and spirit of the Cole Memorandum.

Critically for the banking sector, the FinCEN Guidance was unaffected by the Sessions announcement and now stands alone as the sole and definitive only piece of federal guidance on the subject of cannabis.

The result is that with each day, banks and credit unions are becoming more comfortable with the idea that cannabis banking can be done in a responsible, sustainable, and profitable manner.

The Federal Financial Institutions Examination Council (FFIEC), which sets forth the standards banks must follow, regularly publishes handbooks, guidance, and best practices for most all other banking products. To date, however, they have issued nothing on cannabis.

When it comes to their compliance obligations bankers crave certainty, so the relative dearth of federal cannabis banking guidance leaves too much uncertainty for many banks to overcome. But with little in the way of guidance from the federal government, we are seeing other industry players attempt to fill that void.  Individual institutions, banking, and credit union associations, industry experts, technology providers, and others have contributed to an emerging set of “best practices” surrounding banking.

At the same time, both federal and state bank and credit union examiners are becoming well versed in how to examine institutions banking cannabis businesses. The bottom line is that cannabis banking is too important for the industry to simply wait for Washington to act, and more and more banks are taking notice.

State-owned banking outlook

A number of states have already conducted or are in the process of conducting feasibility studies on creating a state-owned and run cannabis bank.

Based on our experience, we believe a state-run bank has little to no probability of success in meeting the immediate and growing need of banking access for the cannabis industry.

Not only would it take a significant amount of time to establish, but even then a state bank is not immune from federal law, including federal money laundering laws, which are the source of the original problem.

This also is true for de novo (newly founded) institutions that would contain a business plan to service a significant number of cannabis accounts.

Electronic payments options

There are frequently a number of questions and misconceptions regarding electronic payments involving cannabis transactions. To begin with, the debit and credit card networks prohibit cannabis transactions from utilizing their networks.

In an examination of operators currently utilizing card payments, the true nature of the business must be masked. Merchant bankcard applications are commonly opened as a nursery, flower shop, or consulting company.

ATMs and cashless ATMs may be a stop-gap measure but add additional regulatory concerns and oversight.

Hypur’s network enables electronic cannabis payments, for consumers and B2B transactions, to be done in complete transparency with all parties involved.

The outlook for cannabis banking

Although cannabis banking is moving in a positive direction, the pace is too slow and the scope too limited to meet the needs of this rapidly growing industry.

The initial reluctance of financial institutions to service cannabis businesses was entirely understandable given the ongoing disparity between state and federal law. But beginning with the issuance of the FinCEN Guidance we now have a four and a half page long sample size to draw from.

And what we have learned is that during that time there has been no know federal enforcement action against a financial institution solely for banking cannabis businesses.

The banks and credit unions that have entered this market are doing so extremely profitably, and in the process are performing a valuable public service but getting this money off the street and into accounts where it can be monitored and tracked.

In short, the cannabis banking system in the U.S., imperfect though it may be, is working.

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