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Cannabis Banking, How to Navigate the Haze of Ambiguity


Hemp is well known across the world in terms of its benefits both as an industry and as a nutritional aid. However, the grey area of cannabis banking leaves much more to be desired. Financial institutions wanting to interact with cannabis businesses have to navigate a complex highway of paperwork and obligations in order to comply with local and governmental law. What is the current status of cannabis banking? Let’s find out.


As more and more countries legalize the use of cannabis and its subsidiary products, banks are finding themselves caught between the businesses and current legislation (1).


No more can we think of cannabis being a movement. It is a fully-fledged industry making more than $50 billion in the United States alone. However, there is one major thing stopping this industry in its tracks, access to banking systems (2).


Taking the United States as an example, 486 banks and credit unions were actively operating accounts for cannabis-related businesses (3). Despite this, it is obvious that many reputable businesses in the industry are locked out of banking, either through the failure to attain a bank account or the additional fees they are subjected to. Not only that, but many businesses also leave the security of having bank accounts down to individuals and companies, with a number of registered companies being removed from a number of federal banks in the United States on the back of fears of reprimand from the Trump administration (4).


Unless legislation in national and federal laws is changed, cannabis banking remains in the grey area of the banking world. This ambiguity however does not need to remain as the status quo. But firstly, what is the current status of cannabis banking? What legislative issues are present? And, what can we do to help find an answer to help cannabis-related businesses?


Issues with Legislation

While the current climate on cannabis banking remains foggy, there have been some improvements in terms of guidance from government players. In the United States, for example, the 2013 Cole Memo, the department of justice 2014 memorandum, and the Financial Crimes Enforcement Network were created to address the conflict between the Federal Controlled SUbstances Act and states that had regulated cannabis (5).


The Cole Memo helped the federal government to regulate state cannabis licensing schemes on the back of the Justice Department to continue working to prevent major drug-tackling goals. In addition, if the state is deemed to have insufficient oversight on the businesses providing services to cannabis companies, they may be subject to penalties under federal laws (6). Unfortunately, under the second memorandum by the department of justice in 2014, this extends to institutions that provide cannabis banking services to cannabis companies. In a nutshell, this can mean that any financial institution that offers services to businesses generating revenue from cannabis can breach anti-money-laundering and money-transmitting statute (7).


This is where the Financial Crimes Enforcement Network comes in. This is an agency acting within the department of treasury to address issues surrounding cannabis banking. They essentially create guidelines for banks so they can operate cannabis financial services without violating federal regulations (8). This includes ensuring businesses are duly licensed and registered, and reviewing licence applications, financial and background documents, and other key pieces of information so the business and its owners can understand how to correctly conduct themselves commercially within this highly regulated space. What this allows financial institutions to do is generate “red-flagged” activity reports from cannabis businesses (9).


The unfortunate side to this is that, despite these legislations and attempted guidelines to help cannabis businesses and financial institutions a great number of banks are incredibly reluctant to engage in any activity related to cannabis, despite if they are operating legally within the local legislation (10). This puts pressure on these businesses to predominately deal with cash. Dealing in such large quantities of cash is able to trigger red-flags under the network’s guidance documents and results in financial institutions undertaking reporting requirements. In this sense, it is obvious that, in reality, $1 derived from cannabis businesses is not equal to $1 generated from other businesses, such as cash-only lawn mowing or beauty salons (11).


Not only does this make the current climate of cannabis banking incredibly difficult for the cannabis business themselves, but it also renders the financial institutions to undertake the never-ending battle of paperwork as well as increased management time in meeting compliance rather than the obvious needs and wants of the surrounding community. So what can we do about it?


Future Solutions for Cannabis Banking

To address the legislation head-on, policy can be changed to address such levels of ambiguity, these can range from “doing nothing” to “having broad legislation and guidance. However, more needs to be done to help cannabis businesses and the cannabis banking conundrum (12).


One potential solution is by introducing legislation that will make life easier for institutes against federal criminal prosecution when providing services to cannabis-related businesses. This is exactly what has been introduced in the “Marijuana Business Access to Banking Act (“H.R. 2652). In addition, this piece of legislation will prohibit the Department of Treasury from mandating banks to report suspicious transactions, purely based on the fact it came from a cannabis-related business (that is legal and legitimate based on the state(s) it operates in). More suggestions regarding legislation are to create “waiver” rules for states and to depend more so on credit unions, albeit strong restrictions (13).


Closed-loop payment systems are another possibility. This system allows consumers to “pre-load” funds into an account for spending that is linked to a payment device. This allows the capability to perform normal payment transactions without having to connect with other payment providers. However, the problem with this is that money will eventually have to cross the boundary at some point into a financial institution, triggering the same issues as before (14).


Alternatively, blockchain may offer some benefit for non-purely digital goods. However, technology needs to be developed to allow regulators and banks to know every facet of the cannabis business they service. In this case, many companies are beginning to develop seed-to-sale software as a service products to aid the cannabis companies to become more transparent. If cannabis products are to be represented by cryptocurrencies such as a blockchain through a token that also services as a currency for the consumers, there will be the desired transparency that gives cannabis businesses a strong standing in the eyes of financial institutions. Again, there are some disadvantages to this, this is another closed-loop system, and banks which are accepting cryptocurrencies from cannabis businesses will likely only add to their regulatory pressure (15).


The Bottom Line

Financial institutions wanting to be involved in the highly expanding cannabis world are subject to a highly complicated process of paperwork and obligations. Despite remaining in a grey area, there are a number of forward-thinking solutions that could help ease the process. Ranging from legislation changes to incorporating closed-loop payment systems and cryptocurrencies, there is light at the end of the tunnel yet for cannabis banking.



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