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Report thumbs down a California-owned bank for cannabis commerce

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Report thumbs down a California-owned bank for cannabis commerce

A report by the Cannabis Banking Working Group outlined multiple financial and regulatory hurdles that suggest that creating a California-owned bank exclusively catering to cannabis commerce would not work out.

California State Treasurer John Chiang formed the group after the passage of Proposition 64, which legalizes recreational cannabis, to address marijuana-related conflicts between California and the federal government. Marijuana is currently classified as a Schedule One illegal drug under the Controlled Substances Act at the federal level. This classification subjects all marijuana-related activities to federal prosecution.

The report stated that challenges facing the banking industry in entering the cannabis market include the current setup of federal and banking laws, unique business risks that come with an evolving industry, significant administrative burden in filing federal reports for cannabis banking transactions and more significant Know Your Customer requirements.

The report stated that California could spend $35 million over a six-year period to cover startup costs for the proposed bank. California would also need to raise slightly below $1 billion in capital and would lose money for 12 years on the investment. The state would not receive any net dividend until 25 years to 30 years after the opening of such a bank.

The above-mentioned scenarios assume an event wherein the federal government would allow the bank to open. However, it is highly unlikely that the federal goverment would issue a master account to the proposed state-owned bank, according to the report. Even if federal regulations were to favor the cannabis industry in the future, it would likely end up being closed down due to decreased business demand activity.

Other solutions, such as a public credit union, nationalizing a private California bank or employing financial technology solutions, would also not likely be feasible, as they would face the same regulatory hurdles imposed by federal law.

The report instead calls on the California government to create a lead agency that would work to improve banking access for the cannabis industry. The suggested mandates are to support research for short-term solutions to manage cash payments; to encourage financial institutions to improve cannabis banking access; and to lobby for state and federal reform to benefit cannabis-related banking.