Some form of marijuana is legal in more than half the states, but cannabis businesses -- medical and recreational -- are still running into a cash problem.
Since the drug is illegal under federal law, any bank that handles marijuana money can be charged with money laundering, which forces the industry to deal with large amounts of cash, making them targets for violent crime.
To alleviate the problem, the notion of creating a state-run public bank to handle cannabis business accounts has been floated in several states, including California, Colorado, Michigan, New Jersey and Washington.
But last month, an independent report commissioned by California panned the idea, concluding that a public pot bank would pose too great of a legal and financial risk to the state. "While today’s announcement may not lay out the path some of us had hoped, it did reinforce the inconvenient reality that a definitive solution will remain elusive until the federal government takes action,” California Treasurer John Chiang said at the report’s hearing. “[The feds] must either remove cannabis from its official list of banned narcotics or approve safe harbor legislation that protects banks serving cannabis businesses from prosecution.”
A state-run bank has some attractive qualities. For instance, rather than giving profits to shareholders, a public bank would return profits to the public. Theoretically, that means such an institution could help finance social projects like affordable housing or low-interest student loans.
But there are also plenty of pitfalls to a public bank.
According to the report by Level 4 Ventures, start-up costs for a public bank in California would cost the state $35 million over six years. And that money would be wasted unless federal regulators granted the necessary approvals for the bank to conduct wire transfers, which would be highly unlikely.
“I think what California is recognizing in the report is that all the issues come down to the movement of money,” says Alex Spelman, vice president of business development for the government security company SICPA. “No one option can stand alone and completely apart from the rest of the financial system.”
The downsides don't stop there.
If, on the improbable chance a public bank did get off the ground, it would require just under $1 billion in capital. The state itself wouldn’t see profits until “sometime between 2050 and 2055,” according to the report, because banks make a return by lending money and it would take several years to begin realizing those returns. And should the feds legalize marijuana before then, California’s public bank would likely shutter at a “significant loss.”
The report's conclusion follows a similar one by the state’s attorney general, who also determined a public bank would be too risky.
Legalization continues to spread. Most recently, voters in Missouri and Utah approved the drug for medical use, and Michiganders legalized it outright. That brings the total to 33 states that have legalized medical marijuana and 10 that have approved it for recreational use.
Only two U.S. jurisdictions have successfully created a public bank: North Dakota did it in 1919 to make loans to farmers, and the American Samoa did it more recently in 2016 after commercial banks stopped lending to the island. Still, neither of those scenarios had to deal with something the federal government considers illegal.
The report also considered and rejected the idea of creating a public credit union or developing a cannabis cryptocurrency. Neither is likely to happen without federal change.