Forget rates, the Fed needs to weigh in on pot

Commercial marijuana is spreading as states throughout the country adopt more permissive marijuana policies. This trend started on the West Coast with California, Oregon, Washington and Alaskaand moved east to Colorado. Currently, a total of 25 states allow some form of legal marijuana. Though Ohio just defeated a controversial initiative that had opposition within the marijuana community, Montana andNevada will have expanded marijuana access on the ballot in 2016.

Yet banks face a growing discrepancy in serving marijuana businesses. Some bank regulators are trying to cut off access to the payment system for banks that have marijuana businesses as customers, while others are allowing it. That means bank regulators affect whether marijuana can be a viable commercial business.

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Access to the banking system is critical for a business. To accept credit and debit cards, the business needs a relationship with a bank or payment processing company that ultimately uses a bank. Without such access, the business must pay employees, purchase equipment, and pay taxes all in cash. This means that many marijuana business owners must personally drive tens and sometimes hundreds of thousands of dollars in cash to state capitals to pay their taxes, which is unwieldy and dangerous.

As state and federal law diverges on marijuana policy, banks are caught in the middle. Federal law does not prevent banks from processing marijuana related transactions or having marijuana businesses as customers. However, because selling marijuana is illegal under federal law, all commercial marijuana transactions necessitate certain reporting requirements like suspicious activity reports, which are expensive and one reason many banks have opted to stay away from accepting those businesses as customers.

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A growing player in this field is the Federal Reserve System. The Fed is comprised of a Board of Governors in Washington, D.C. and 12 regional Federal Reserve banks that split the country by region. Each regional Fed bank may pursue its own policy regarding which financial institutions have access to the payment system. The San Francisco Fed and the Kansas City Fed have made different choices related to marijuana.

San Francisco has issued guidance to its member banks which can be found easily on its website. As a result of this clarity more than 100 financial institutions are serving marijuana businesses in the San Francisco region. By contrast, Kansas City has released no guidance or advisory outreach despite the fact that its district includes Colorado, which legalized marijuana in 2012. The Kansas City doesn't have a single mention of the word marijuana on its entire website (San Francisco has 11). Kansas City recently denied a Colorado state-chartered credit union access to the federal payment system on the basis of the credit union trying to serve marijuana related businesses.

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Each regional Fed bank is independently deciding whether to go along with state marijuana initiatives or resist them. That raises the important question of whether it is the role of a regional Fed bank to effectively raise or reduce hurdles to states liberalizing marijuana policies.

Congress is realizing that things are changing. Recent calls from both sides of the political spectrum to change marijuana policy by a bipartisan group of lawmakers, including presidential candidates Sen.Bernie Sanders (I-Vt.) and Sen. Rand Paul (R-Ky.), make clear that there is some support within both political parties for a more comprehensive rethink of marijuana.

However, until Congress makes a final determination, the reality on the ground is that banks are caught in the middle. On the one hand they have businesses legally operating under state law that need their services. On the other hand they have federal bank regulators who are providing conflicting guidance.

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Just as the Supreme Court may intervene when regional courts disagree, the Federal Reserve Board has the authority to resolve marijuana policy divergence among its regional banks by making clear where it stands on banking and access to the payment system for marijuana related businesses. This divergence may grow as Montana is in the Minneapolis Federal Reserve Bank region.

As voters continue to demand changes to marijuana policy, government is going to have to follow with clearer and more consistent guidance. Bank regulators are adding to the confusion. The question now is when and how will the Federal Reserve Board weigh in? Until then, states may find that even if they legalize marijuana, the regional Fed may stand in the way.

Commentary by Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center and a former deputy assistant secretary at the Treasury Department. Follow him on Twitter @AaronKleinBPC.