California deems cannabis public bank unfeasible, seeks federal law changes
A public bank has been floated at North Bay and Sacramento levels as a way to meet the needs of the still largely cash-based cannabis industry, because conventional banks have been leery of involvement with something that's still high on the federal list of controlled substances. But California officials Thursday noted such a plan was too big of a legal and financial risk.
At a public hearing at the California Capitol, the Cannabis Banking Working Group, chaired by California State Treasurer John Chiang, was presented with the results of an independent study, his office said Thursday.
“While today's announcement may not lay out the path some of us had hoped, it did reinforce the inconvenient reality that a definitive solution will remain elusive until the federal government takes action - they must either remove cannabis from its official list of banned narcotics or approve safe harbor legislation that protects banks serving cannabis businesses from prosecution,” Chiang said at today's hearing. “Red, blue, and purple states - 33 so far - have legalized the adult use of recreational or medicinal cannabis. So it's finally time that the slow, clunky machinery of the federal government work, in a bipartisan fashion, to change federal law to reflect the values and growing consensus of the people it serves.”
Following the passage of Proposition 64 in 2016 and the subsequent legalization of the sale and distribution of recreational cannabis that began on Jan. 1, 2018, many of California's cannabis businesses were left in a legal limbo, where they were classified as legal by the state of California, but still illegal by the federal government, since federal law categorizes cannabis as a schedule 1 drug.
This stalemate created numerous banking issues for these businesses: by putting banks that might accept deposits from cannabis businesses at risk of losing the federal authority to operate, as well as forcing cannabis businesses to deal in large amounts of cash - making them targets for violent crimes and putting the general public in danger. Security and procedural concerns about dealing with a cash-only industry also created a nightmare for state and local government revenue-collecting agencies.
“It is not only unfair, but a public safety risk to require a legal industry to haul duffle bags of cash to pay taxes, employees, and utility bills," Chiang said at the hearing. "The reliance on cash has painted a target on the backs of cannabis operators, and has made them and the general public vulnerable to violence and organized crime.”
Chiang subsequently created the working group - made up of 18 representatives that included law enforcement, regulators, banks, taxing authorities, local governments, and the cannabis industry - to find practical and timely ways to address the state-federal conflict.
Based on one of the recommendations from a 2017 working group report, the treasurer's office commissioned San Diego-based Level 4 Ventures and the state Attorney General's Office this past August to settle the lingering critical questions about whether a public cannabis bank would be possible.
The 151-page feasibility report - prepared by Level 4 and released Thursday - detailed virtually insurmountable “legal, schedule, mission and financial” risks California would face if it were to move forward to create a public cannabis bank.
Instead, Level 4 recommended the state establish a state project office to work towards improving access to banking by the cannabis industry through greater facilitation, communication, and coordination.
The cannabis bank feasibility study also examined alternative approaches to creating a state-backed bank to handle the billions in annual revenues California's year-old recreational cannabis industry is expected to generate.
The alternatives included versions of a public bank that would provide services exclusively and primarily to the industry, but also it would serve other individuals and businesses and work with other commercial banks through a state-run “correspondent bank.”
The feasibility report noted that there is “a high probability” federal regulators will not issue the necessary master account for a public bank to operate, and if that happens after the state begins spending an anticipated $35 million on start-up costs for any of the three alternatives examined, all taxpayer funds expended to that date “would be wasted.”
Similarly, the report finds that a public cannabis bank would require approximately $1 billion in initial capital investment, and that the bank could lose money for 12 years before it is able to begin repaying that capital. Furthermore, California may not be able to begin receiving net dividends for 25 to 30 years after the bank opens, meaning the initial investment may go decades without producing any kind of return on investment.
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