The road to nowhere: legal cannabis business can’t be solved by fintech

the dead end of banking marijuana businesses

Legal cannabis sales are experiencing a bull market, but retailers are forced to walk home with duffel bags filled with cash.

According to a report by Arcview Market Research, experts expect national legal sales of marijuana to top $7 billion in 2016 and to surpass $22 billion by 2020.

However, so-called “ganjapreneurs” who sell marijuana legally have bigger worries on their minds: Where to put the money they’ve made.

Legal marijuana retailers are stuck in a bit of legal limbo. Although the sale of marijuana is legal in some states, federal guidelines still define marijuana as a controlled substance. Because of this, banks are hesitant to take the earnings of marijuana dispensaries into their vaults.

Legal challenges of handling pot payments

In a nutshell, due to the differences in state and federal regulations of the U.S. banking system, a bank located in a state that accepts money from a marijuana sale would be in violation of federal laws regarding the sale of a controlled substance, which is technically considered money laundering. In turn, this violation could result in the loss of the bank’s FDIC status. So, it makes sense that many financial institutions have steered clear of banking marijuana businesses. Of the few banks that do accept money from the legal sale of marijuana, entrepreneurs have encountered enormous fees, mountains of forms, and notifications that their accounts would be closed with just a 2 week notification window.

Stuck in a difficult situation, entrepreneurs resort to doing business the old fashioned way: they use cash. Retailers have had to hire private security teams, refurbish old armor cars, and even develop systems to ensure employees are not robbed when they leave at the end of the week with their cash paychecks.

Trying to fix the problem

There aren’t many solutions to the problem of finding a home for “state-clean-but-federally-dirty” money.

Possible solutions around federal regulation, include using bitcoin or just making it easier and safer to store the mountains of cash these businesses are making. But these seem like Band-Aids for a broken dam. The bigger issue is that the federal government has done its best to stifle any technological innovations.

There have been a few companies that have tried to provide banking solutions to the fledgling industry. Hypur has been able to get banks to agree to do business with legal marijuana businesses by speeding up the time it takes to audit money coming in. Although a few banks have signed up, this solution doesn’t really solve the problem of dealing with a federally controlled substance.

Another company, Tokken, has taken the digital currency rout to get around the problem. When users pay using the Tokken app, payments are converted to digital currency and then back to cash when it reaches merchants. Similar to Hypur, this solution does not address the federal money laundering issue, and could leave businesses open to legal woes.

A bank specifically for pot

One company tried to solve both the legal and bookkeeping issues, but got shut down before it could even open its doors. In 2014, Fourth Quarter Credit Union was given a Colorado state credit union charter with the intention to provide financial services to marijuana retailers. But after applying to the regional Federal Reserve Bank in Kansas City, Fourth Quarter received the unfortunate news that its application had been rejected. Unable to secure federal insurance for its deposits, Fourth Quarter sued the Federal Reserve of Kansas City.

In January 2016, the case was dismissed in the District Court of Colorado and the presiding judge, Hon. R. Brooke Jackson, remarked in the court order that he couldn’t ask the Court to force the Federal Reserve to grant a master account because that would force the Federal Reserve to break Federal law.

Although Fourth Quarter has appealed the case, a successful appeal doesn’t look likely. The Fourth Quarter case has demonstrated that starting any type of legitimate marijuana business financing will end in failure. “I think that for the marijuana industry to gain widespread access to banking, Congress must act,” said Professor Julie A. Hill, a professor of Law at the University of Alabama and author of “Banks, Marijuana, and Federalism.”

To enable banking for the industry, Professor Hill remarked over email with Tradestreaming that one of two changes need to be made: either congress decriminalize marijuana or change the definition of money laundering to specifically exclude payments to and from marijuana businesses. There is a bill currently in Congress attempting to stop federal regulators from prosecuting banks that provide financial services to legal marijuana businesses. However, that bill looks unlikely to pass.

Until federal guidelines change, marijuana retailers will have to deal with apps and websites that resemble loan sharks, bail bonds, and pawn shops. In order for startups to create reputable systems for depositing money earned from the legal sale of marijuana, entrepreneurs need to see a solution to Federal money laundering statutes. Until that day happens, ganjapreneurs will have to be creative not only in the marketing of their product, but also in finding a safe and secure home for their profits.

Photo credit: Tadson via VisualHunt / CC BY-ND