As nearly every article on the topic of cannabis in the United States compulsively emphasizes, the Controlled Substances Act classifies marijuana as a Schedule I substance. The federal government considers it to be highly addictive, extremely dangerous, and possessed of no known medical uses or benefits. As a result, personal possession and consumption as well as commercial sale and distribution of marijuana are all very much against the (presumably) overarching law of the land.
Despite this categorization, over half the states in the union have established legislation that allows for the cultivation, sale, possession, and use of marijuana for medicinal purposes. Several more, plus the District of Columbia—the very seat of federal law and governance—have legalized the recreational use of marijuana. Perhaps not unexpectedly, their state revenues have boomed thanks to prolific sales of marijuana, products derived from the plant (such as THC-infused edibles), and other goods related to marijuana (such as cannabis cookbooks and videos teaching about cultivation).
To call the marijuana industry an emerging market is a misnomer; it is an explosive area of economic growth from one end of North America to the other. Many an entrepreneur has seen his or her ship come in on this high tide, and many more are scanning the horizon. Their successes, however, have proven to be an extremely mixed bag. They have made a lot of money—that much is true.
Unfortunately, no one’s yet figured out a good way to handle all of it.
The Hidden Dilemma of Hard Cash
Think about how pizza delivery restaurants, on their advertisements and their websites, specifically note that their drivers carry only a certain, small amount of cash. Plenty of people still pay hard currency for their pizzas, and so delivery drivers must be able to make change for them. However, conspicuously carrying cash around makes you a prime target for muggers and thieves. Thus, pizza places minimize their risk (not to mention their drivers’) by capping the amount of cash these employees keep on hand.
Now, imagine that customers were prohibited by federal law from paying for their pizzas with credit cards. All pizza-related transactions would have to be conducted with cash. Drivers tasked with delivering large orders—one going to, say, a business that’s throwing a pizza party for its employees—would walk back to their cars carrying substantial amounts of money, making them attractive marks for criminals.
Delivering pizzas would quickly become an extremely high-risk profession (a la the high-octane opening chapters of Neil Stephenson’s Snowcrash). Business and personal insurance, if even available to restaurateurs and their drivers, would shoot through the roof. Anyone tasked with making a delivery would have no choice but to arm themselves, at the very least, if not drive armored vehicles or even engage the services of paramilitary bodyguards.
Luckily, pizza is not regulated by the federal government.
Unluckily, marijuana is. And as of now, the cannabis trade is primarily a cash-only industry.
The Conflict Between State Choice and Federal Law
The federal government has not yet brought direct regulatory power to bear in states where marijuana has been legalized, whether medically or recreationally. In fact, the ability of this highest level of government to intervene in CSA violations is relatively limited. Instead, it has traditionally relied on state-controlled enforcement agencies. Obviously, these government organs won’t be contravening their own state’s legislation anytime soon.
Banking in the United States, however, is very much under the scrutinizing thumb of federal regulation. And because federal law promises heavy penalties for any organization that deals in, and especially profits from, illicit substances, banks are extremely hesitant to entertain business dealings with any business entity that smell of the herb. And in this instance, “hesitant” actually means completely unwilling.
As such, pretty much anyone earning a profit in the marijuana industry cannot engage the services of banks and credit unions. The most public face of this problem is the beleaguered dispensaries, which cannot open business accounts with most banks and credit unions. This traditional means of storing and safeguarding their money is, quite simply, unavailable to them. The same is true even of businesses and enterprises related to marijuana but that refrain from actual involvement with the plant itself.
Likewise, they cannot access or accept lines of credit. Whereas credit card networks like Visa or Mastercard control and facilitate transactions made using credit, the actual credit itself is provided by groups like Citibank, Bank of America, Wells Fargo—yes, the same banks who won’t deal with money tainted by marijuana. American Express and Discover, which act as networks as well as issuers, seem as reluctant as the banks to engage the marijuana industry; the risk inherent in dealing with federal offenders is quite simply too great for them to even test the waters.
This means that the burgeoning green sector has had no choice but to explore alternatives for the care and feeding of capital.
How Not to Handle Marijuana Finance
The oldest solution to any problem, financial or otherwise, is simple: lie about it.
Please note well that this is a terrible idea.
But that hasn’t stopped some people and groups from misrepresenting the nature of their business. For example, they may disguise their dispensary on paper as a tobacco shop, which is a perfectly legal endeavor. This sort of cover allows them to establish those much-coveted lines of credit and bank accounts.
Other organizations employ firms called independent sales organizations (ISOs) that do the dirty work on the businesses’ behalf. The dispensary itself may not even be aware that their business is being misrepresented to their financial institution. Marijuana purchases made with credit may even be processed using the account of separate, legitimate business, a practice known as factoring: using merchant services for other than the explicitly stated purposes of the business.
Needless to say, all of the above constitutes fraud and come with heavy consequences.
Big Risk, Small Banks
Many marijuana and marijuana-related businesses have simply accepted the “cash and carry” nature of the industry and resolved to live with it, at least for the time being.
Some proprietors have settled on the direct method of safeguarding a large sum of money: sit on top of it holding a gun. Armored cars, private security agencies, envelopes stuffed with bills—all the tropes of cloak-and-dagger heist films are a daily reality for some people working in the marijuana industry.
Of course, none of that would be necessary if there was a bank or a credit union that would just deal with marijuana money. And that notion is the impetus behind Fourth Corner, a Denver-based credit union that seeks to cater specifically to the needs of the marijuana industry. Although it has been granted a charter by the state of Colorado, Fourth Corner was denied a master account by the Federal Reserve Bank of Kansas City. Without this account, Fourth Corner is unable to conduct any business whatsoever. Although the federal reserve’s denial is currently under appeal, Fourth Corner would also still need to acquire deposit insurance from the National Credit Union Association, which has previously denied the would-be credit union.
Just because the Federal Reserve and various large banks are gun shy about marijuana doesn’t mean that other, smaller institutions haven’t stepped in to pick up the slack. Some local banks and credit unions are willing to take the opportunity of dealing with marijuana businesses even though it incurs a great deal of risk.
These institutions are relying heavily on a pair of documents. One is a guide issued by the Financial Crimes Enforcement Network (FinCEN), which says that banks and credit unions will not be charged for dealing in marijuana-related money so long as the organizations involved were following the dictates of a previous document, typically called the Cole Memo, that emerged from the Department of Justice. Together, these documents claim that as long as banks and the businesses they serve keep their marijuana dealings on the up-and-up, they will not be prosecuted.
However, the burden of proof is placed squarely upon the banks. For many institutions, this risk is too great. Others see it as a duty, if not an opportunity.
Getting Around the Banking Barrier
And so, in the relative vacuum left by traditional financial means and methods, yet more room for entrepreneurship and innovation has emerged in the marijuana industry.
One option is the point of banking system. This is a PIN based, card-swipe technology similar to a credit or debit card reader. Point of banking, though, is functionally a moneyless ATM. Rather than bills, it spits out a receipt for the transaction, which can only be conducted in certain increments (say, $20, $50, $70, etc.). The customer gives this receipt to his or her cashier, who provides the customer’s change in cash. The funds are then transferred electronically to the vendor.
The only things necessary for a point of banking system are some counter space, an electrical outlet, and an Ethernet connection. The customer foots a small service fee, just as he or she would at a traditional ATM. The advantage here is that there is no large quantity of money on hand, thereby reducing the dispensary’s risk (in lieu of accepting credit cards) and eliminating the need for costly insurance and security.
Another step further into the digital realm is CanPay, which provides electronic debiting services. CanPay has partnered with the cannabis-compliant financial institutions discussed above as well as a number of marijuana retailers based in several states. After being approved for an account, users can use the mobile app to purchase marijuana through a debit system rather than a direct exchange of cash or electronic transfer from bank account to business.
For the financial institutions prepared to deal with the marijuana industry, Kind Financial offers software and services under the guise of Link to Banking. The stated goal here is to help banks and credit unions—such as the ones CanPay works with—understand the process of establishing and maintaining compliance with FinCEN’s requirements. To this end, Kind Financial boasts a team of experienced bankers, anti-money-laundering experts, and a former bank regulator who worked under the auspices of FinCEN itself.
The Money Alternative: Crypto-economics
Finally, individuals and businesses that deal in marijuana can just stop using money altogether—well, traditional money anyway. Instead, they may switch over to the relatively recent innovation known as cryptocurrency.
To use a cryptocurrency, consumers and suppliers must employ apps called wallets. These wallets are able to engage in direct, peer-to-peer transactions with one another. There is no need for a bank or for a line of credit. All a consumer needs is to open their wallet, purchase units of currency, and then make a transaction with a retailer who accepts that currency. It’s as simple as that.
The downside to using these currencies is their extreme volatility. Their values are dictated by supply and demand, and they are not subject to adjustment or control by a centralized authority. As a result, the actual value of cryptocurrencies can vary drastically from day to day.
The Good, the Bad, and the Ugly
All of these options have their peculiar benefits. But as things stand, there is no overwhelmingly good choice for anyone involved in the marijuana industry.
Cash is cumbersome, risky, and, in the realm of modern technology, outdated. On the other hand, the limited networks encompassed by apps and services like CanPay restricts their growth and acceptance, and therefore their ability to establish a weighty presence in the marijuana economy. And the extreme volatility of cryptocurrencies’ values, capable of heart-palpitating rises and drops in extremely short order, makes dealing in them a risky proposition for consumers and businesses.
Whether some digital alternative or traditional financial means will ultimately prevail in this arena depends largely on one factor. That is how long the federal government waits to relax restrictions on marijuana, which will in turn contribute to the length of time credit card networks and banks must wait before finally becoming heavily involved in the marijuana economy.
As such, the future of commerce and finance in the marijuana industry is very open.
Ed is a writer and marketer who has been involved with the cannabis industry since 2017. He is particularly passionate about helping small businesses succeed in the increasingly corporate-takeover environment of the cannabis industry, as well as helping people get started working with cannabis.