Banking: Legalized Marijuana’s Next Frontier

Source: http://www.flickr.com/photos/prayingmantisswag/

Source: http://www.flickr.com/photos/prayingmantisswag/

“Please, Washington,” Denver Councilman Charlie Brown said at a city council meeting on January 6, “please grow up and let this business be a business and have a normal banking relationship like any other business.”

Brown, perhaps unsurprisingly, was talking about the recreational marijuana business, which effectively became legal at the state level in Colorado on January 1. The National Cannabis Industry Association reports that $5 million in sales were recorded in the first five days of business, but federal law prevents banks and credit card companies from processing financial transactions related to the production or sale of weed. This has created an environment in which pot shops are dealing almost primarily in cash, and this is a big problem for two reasons.

First, operating an all-cash business is a logistical nightmare. Financial regulations make it difficult to muster investment capital and secure loans, adding enormous friction to the industry. Despite the roadblock, Colorado businesses still managed to put in place “hundreds of millions of dollars in new facilities and equipment,” according to the Denver City Council, but even with the groundwork laid, an all-cash business creates other complications.

“Now that prohibition is gone,” a pot advocate told 7News in Denver, “the single most dangerous thing about marijuana is the lack of access to banking.”

The Denver City Council appears to agree, arguing in a proclamation it sent to Treasury Secretary Jack Lew and U.S. Attorney General Eric Holder that “forcing Colorado’s legal marijuana industry to operate on a cash-only footing creates heightened risks of crime — risks that marijuana businesses themselves will become targets of crime, risks that criminal elements will seek to become involved in the marijuana industry, and thereby risks that governments will be defrauded, employees will be victimized, and customers and nearby neighborhoods will be put in danger.”

For its part, the Department of Justice is considering the issue. However, until guidance is formalized, it will remain illegal for pot producers and retailers to use commercial banks. Meanwhile, credit card processors like Visa have issued statements saying that they are allowing the local banks that process the payments to exercise their judgement in determining which transactions are illegal, creating fuzzy sort of middle ground.

Meanwhile, Denver will continue to collect tax revenue from production and sales. Some policymakers in Colorado have proposed creating a state-level bank to handle financial issues related to marijuana, skirting around the federal issues.

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