“Most experts agree the ultimate legalization of marijuana at the federal level is a foregone conclusion—at this point it’s a matter of when, not if. Taking action to clarify banking rules for the legal cannabis industry now, rather than standing by while states construct an ad hoc system of conflicting banking rules, will go a long way toward easing that transition.”
By Rodney E. Hood, National Credit Union Administration
The evolution of a legal marijuana industry over the last decade is among the most striking social and cultural changes in recent memory. After decades of prohibition, today 36 states have legalized marijuana use for medical purposes, with 18 states permitting recreational use for adults. BDSA, a leading industry research firm, reports that in 2020 legal cannabis sales in the United States topped $17.5 billion, a 46 percent increase over the previous year.
Yet at the same time, many marijuana-related businesses (MRB) and their employees lack access to financial services, owing to the fact that the federal government has not acted to update banking laws to accommodate this burgeoning industry. As a result, many MRBs are unable to secure commercial loans on reasonable terms or access electronic payment systems, which forces them to conduct transactions on a cash basis. This untenable situation is creating confusion and uncertainty while stymieing the industry’s growth.
Many people are surprised to learn that credit union and bank financial services providers can do business with the marijuana industry, so long as they observe anti-money laundering laws under the Bank Secrecy Act, practice due diligence and meet other basic requirements. Furthermore, the Treasury Department’s Financial Crimes Enforcement Network (FINCEN) published guidance on marijuana businesses to help guide financial institutions that seek to conduct business with state licensed MRBs.
Unfortunately, that guidance tends to be vague and fragmentary, as well as outdated (the FINCEN guidance was issued in 2014). As a result, financial institutions, wary of potential risks, have been hesitant to step into the breach and start working with MRBs. As of December 2020, only 515 U.S. banks and 169 credit unions were providing banking services to MRBs, according to FINCEN.
To put that into clearer context: the National Credit Union Administration (NCUA), where I serve as a Board Member, provides regulatory oversight of more than 5,000 federally insured credit unions. The fact that only 169 of those—less than 3 percent—are comfortable working with legal cannabis enterprises suggests a serious market failure.
Read my op-Ed on Marijuana Banking https://t.co/I1QLH9q4NC
— Rodney E. Hood (@Rodney_e_hood) October 8, 2021
The fault does not lie with the financial services providers. Many industry leaders tell me they would like to work with MRBs, but they’re hesitant owing to the uncertainty and stigma surrounding the industry in the absence of federal action.
Until Congressional action happens, we can take some regulatory steps to help things along at the federal level. As a member of the NCUA Board, I have formally requested the establishment of a working group under the auspices of the Federal Financial Institutions Examination Council (FFIEC), the interagency body that develops uniform principles and standards for federal financial institution examinations. This will create an accountable governmental entity that can focus on developing a preliminary regulatory framework we can share with other regulators and members of Congress who share our concern about addressing these problems.
Meanwhile, I encourage financial industry leaders who care about this issue to make their voices heard.
Regularizing and harmonizing federal law and regulations to expand access to the banking system for MRBs is a necessary step. To be sure, there are other regulatory issues that will need to be resolved at the federal level related to consumer protection, environmental implications and other areas. Those issues will require additional work from lawmakers and regulators in those areas.
In fact, compared to some of these issues, addressing the financial side should be relatively straightforward. At the most fundamental level, if we can create the legal and regulatory structure that gives MRBs the ability to make deposits; access options for commercial lending at competitive market rates (as other legitimate businesses enjoy); and secure access to electronic payment processing so they can reduce reliance on cash transactions, we’ll have addressed several of the most pressing problems.
Most experts agree the ultimate legalization of marijuana at the federal level is a foregone conclusion—at this point it’s a matter of when, not if. Taking action to clarify banking rules for the legal cannabis industry now, rather than standing by while states construct an ad hoc system of conflicting banking rules, will go a long way toward easing that transition.
Rodney E. Hood serves on the Board of the National Credit Union Administration, and is the agency’s former chairman.