California's burgeoning cannabis industry, already heavily reliant on cash and detached from banks, could face even more barriers to the mainstream after U.S. Attorney General Jeff Sessions rescinded the Obama era guidelines, known as the Cole memo, which eased federal regulation of marijuana.
Sessions' decision has left California's state government and the legal pot industry scrambling for ways to handle all the cash that will come flowing in.
Moving to a more regulated market should, in theory, encourage financial institutions to bank cannabis businesses, but Sessions' actions on Jan. 4 — just days after recreational adult marijuana use became legal in California — put a freeze on bank activities, leaving businesses and the financial institutions that look to support them in an even murkier state of affairs.
"The withdrawal of the Cole memo really couldn't have come at a worse time, because now is the time that the types of banks and credit unions that are willing to take on more risk would have been entering the market," said Robert McVay, partner at Harris Bricken, a Seattle-based law firm with a practice group dedicated to cannabis law.
"If you weren't already involved, this doesn't seem like the right time to start," he added.
During Barack Obama's second term as president, then-deputy Attorney General James Cole published memos which transferred marijuana industry regulation to states and directed federal law enforcement to allow businesses compliant to the memo's requirements to operate. A 2014 memo, which complemented guidance from the Financial Crimes Enforcement Network, or FinCEN offered guidance specific to financial institutions looking to do business with compliant cannabis companies.
Since cannabis is still considered illegal by federal law, providing banking services to those businesses was risky even with the tenuous protections provided by the now-defunct Cole memo.
Now, California's already cash-heavy marijuana market faces a major influx of money with next to nowhere to put it. The state has already issued about 675 temporary licenses for all types of businesses from grow operations and labs to retail dispensaries and food production businesses, according to a state-run database.
A market primed to surge
A 2016 study commissioned by the state and conducted by researchers at University of California Davis Agricultural Issues Center estimated that legalization and regulation of adult pot usage in California could add $5 billion to the market. At the time of the study, the medical marijuana market was estimated to have a $2.7 billion valuation.
Jonathan Barker, Professor of Agricultural Economics at UC Davis and leader of the study, said most would likely come from a redistribution of pre-existing revenue from medical patients or the black market.
Others argue the new market will also attract those Californians who, previously, were interested neither in getting a medical recommendation nor in breaking the law.
Purveyors of legal weed in California will have to get even more creative. Cannabis businesses without access to banks often come up with unconventional ways to cope with the large quantities of cash. In the absence of organized banking, a number of startups offering alternative solutions to banking, or bank-adjacent services, have cropped up to tackle the cash problem.
One of the most widely known services, CanPay, boasts an app that offers debiting services via a customer's digital wallet at the point of sale.
At the core of CanPay's business are banks or credit unions willing to bank cannabis businesses, which enables cannabis businesses to post transactions in their own names. In some cases, CanPay can help connect dispensaries with banking services. The state of Hawaii in September 2017 turned to CanPay in an unprecedented move to take the entire market cashless.
CanPay's business model, however, relies on protections granted under the Cole memo. Since Sessions' move, CEO and founder Dustin Eide said, some banks have paused services or backed out entirely, although he would not specify which.
"Some have stopped taking on new accounts. We do know of one institution that was getting ready to launch cannabis banking program that has decided to suspend their launch indefinitely," Eide said.
With financial institutions at the core of his business, CanPay could stand to lose a lot should banks decide the risk is too great. But Eide is less concerned about losing existing partnerships than bringing new banks online to tackle the cash problem in California, a market he said is widely under-served.
"People that are heavily invested in the industry are continuing to move forward. I think the bigger issue is bringing new institutions into new markets," he said. "It is concerning to the point that creates additional uncertainty, but this industry has thrived despite uncertainty."
Time to get creative
Some in the industry are turning to blockchain and cryptocurrencies to circumvent banks altogether. Companies like SinglePoint and POSaBIT aim to provide bitcoin payment systems for dispensaries. Recent years have also given rise to cannabis-specific cryptocurrencies, like PotCoin and HempCoin.
In November, Treasurer John Chiang created a task force that attempted to tackle cannabis banking problems. A report published by the group outlines recommendations that the government create a bank to serve cannabis businesses.
Then, in December, officials from California Gov. Jerry Brown's administration met with representatives of 65 banks and credit unions. The goal, according to Business, Consumer Services and Housing Agency spokesman Russ Heimerich, was to galvanize a network of banks to support cannabis businesses and cut down on cash. The network would lend credibility, if only from the state level, to financial institutions banking cannabis businesses.
"It is a public safety issue, cannabis businesses doing their business in cash," Heimerich said. "There are businesses carting around duffel bags full of cash, paying taxes in cash. It is only a matter of time until something happens."
Brown's system, Heimerich said, would have worked to connect one or more "central correspondent banks" with a larger network of member banks. The system would provide increased transparency to the federal government, and two levels of review.
"What we are trying to do is work with guidance we have to reduce the cash flow on the street," Heimerich said, during an interview prior to Sessions' decision. The system represented a blueprint for what could have been one of the first state-orchestrated attempts to tackle the cannabis banking problem.
In light of the news, the Business, Consumer Services and Housing Agency is frozen, like those banks and financial institutions awaiting new guidance from FinCEN. Heimerich said the BCSH is evaluating its options.
"The only immediate solution is the unrealistic one: the Feds deregulating cannabis as schedule 1," Heimerich said.