Gov. Jared Polis and the Department of Regulatory Agencies on Feb. 3 unveiled a cannabis banking roadmap aimed at increasing the number of financial institutions serving the industry.
The seven-point plan includes establishing a working group, increasing transparency, working with cannabis trade associations, encouraging new technology and providing regulatory guidance to state-chartered banks. The roadmap also calls for a review of chartering and licensing requirements for financial institutions and money transmitters and, finally, puts pressure on Congress for a federal fix.
“The seven primary areas of focus are totally on point,” said Christian Sederberg, founding partner of Denver-based cannabis law firm Vicente Sederberg. He praised the plan for focusing on the positives that can come from the emerging marijuana industry, rather than treating it like a problem that requires harm reduction.
“The big picture, when I read this [roadmap], is the governor trying to create some comfort among banking clients like ours,” said Tom Downey, a director at Ireland Stapleton Pryor & Pascoe who represents marijuana businesses as well as financial institutions that serve them.
“This is the governor taking advantage of the bully pulpit and showing some leadership,” Downey said, which is “as much as the state can do” since most banking is regulated at the federal level.
The state-led strategy comes as federal legislation on banking access for cannabis companies faces an uncertain future in Congress. The SAFE Banking Act, which would prohibit federal regulators from penalizing banks for working with marijuana-related businesses, passed with bipartisan support in the U.S. House of Representatives in September but is likely to see fiercer opposition in the Senate. The Polis plan offers support for the legislation through letters to Congress and cooperation with Colorado’s federal lawmakers.
Polis’ plan targets a 20% increase in the number of financial service providers serving legal cannabis businesses by June 30, though it’s not clear what the baseline for that goal is. Greenspoon Marder partner and cannabis law practice chair Rachel Gillette said she’s only aware of a “handful” of banks and credit unions that work with marijuana-related businesses.
The Colorado Sun has reported the number could be as many as 35, citing sources with the Colorado Bankers Association.
State-chartered banks and credit unions have been more willing to take on marijuana clients than federally chartered banks, which Sederberg estimated at “maybe one or two.” A few institutions, like Partner Colorado Credit Union in Arvada, where Polis announced the roadmap, have gained a cannabis-friendly reputation. But many more handle marijuana money quietly and in limited amounts, according to the attorneys.
Downey said he advises his banking clients to keep marijuana business below 0.5% of their portfolios to avoid scrutiny. “It’s big enough that they can make money off it, but small enough so that they aren’t known as a pot bank,” he said.
Colorado banks have continued to rely on Obama-era enforcement guidance, which was rescinded under U.S. Attorney General Jeff Sessions, for their risk management programs. Although the non-enforcement memos are no longer in place, current Attorney General Bill Barr has taken a more lenient stance toward state-legal marijuana businesses than his predecessor.
Downey likens the risks of operating in the current legal environment to speeding: A driver going 56 mph on the highway is breaking the law but won’t get caught, whereas someone driving 85 mph is likely to get ticketed. Banks have had to consider how much risk they’re willing to take. “And all the national banks want to drive 55,” Downey said. “They want to have nothing to do with [marijuana] directly.”
According to the document released by Polis and DORA, Colorado’s banking and financial services regulators have reviewed state law and determined there are no major chartering or licensing requirements standing in the way of institutions that want to serve the Colorado cannabis industry.
But there are lots of other roadblocks for banks and credit unions that want to work with licensed marijuana businesses. Gillette said smaller banks often lack capacity to create the intensive compliance programs needed to handle cannabis transactions. While some marijuana-related businesses have experimented with services like Venmo and cashless ATMs, without major card networks like Visa and Mastercard on board, the industry is likely to remain cash-dominated.
Sederberg said that while more marijuana businesses have access to banks than they did five years ago, the perception that cannabis is a cash-only industry has created a public safety problem. Polis touched on this point during a Feb. 3 news conference, saying that cannabis businesses’ reliance on cash has “put a target on their back” for robberies and other crime.
The governor’s plan encourages technology like blockchain and virtual currencies to enter the market. “I like the entrepreneurial nature of … encouraging new and emerging technologies in the banking and financial services space,” Sederberg said of the strategy. He said there are “very interesting opportunities” to use blockchain technology for compliance and in tracking products from cultivation to sales.
While cryptocurrency could help cut down on cash transactions, it also comes with challenges. At some point, it still has to be converted to dollars and linked to a bank account, since most businesses don’t want to keep funds in virtual currencies. It’s also not that convenient for customers.
“The consumer wants to go in and out and make their cannabis transaction,” Gillette said. They don’t want the extra hassle of setting up an app and converting money into virtual currency every time they make a purchase.
“The banking problem doesn’t just end with the plant-touching cannabis industry,” Gillette said, adding that service providers who do marijuana-related business run into trouble—from accountants and lawyers to HVAC companies. And the country’s multibillion-dollar hemp industry still faces obstacles to banking, she said, even though it is no longer a controlled substance.
The roadmap calls for state regulator participation in the Colorado Hemp Advancement and Management Plan to address industry concerns. While the 2018 Farm Bill removed hemp from the list of controlled substances, most hemp and CBD business will remain in legal limbo until the USDA and FDA finalize regulations for the industry. Rulemaking is expected to be completed in the first half of this year.
“What we have found is that most banks are far more comfortable with hemp now, and CBD, because it’s been decriminalized,” Downey said. But, he added, some of the biggest banks are still waiting for the rulemaking to conclude before they handle hemp money.
— Jessica Folker