The cannabis legalization movement has created a new, regulated industry that hadn’t existed since 1937. Just like any other business, these enterprises require access to banking and payment processing services. Unfortunately, decades of Prohibition put the cannabis industry’s financial services options far behind fast-paced industry growth, but we have come far since those early days of legalization.
The Wild West: 1996 to 2014
When California legalized medical cannabis in 1996, there was no such thing as cannabis banking. To bank money derived from this industry in those early days was considered money laundering, a Class B felony under federal law.
Bankers regarded the new California medical cannabis industry as an anomaly or an extension of the state’s thriving black market. A grand total of zero banks were willing to work with the cannabis industry.
And yet, the medical cannabis industry was generating revenue. Other states followed suit: Alaska, Oregon, and Washington in 1998, Maine in 1999, and Colorado, Hawaii, and Nevada in 2000. These states generated millions with no banking solutions. This left cannabis businesses with two options: work entirely in cash or hide cannabis operations from the bank.
Neither of these options were effective. Those that chose cash were susceptible to robbery and accounting fiascos. As business grew, finding a place to store the cash became an ever-pressing problem.
For those that chose to lie to their banks, there was the looming threat of sudden account termination and the disruption to business that brings with it. They also could not advertise to their customers for fear of their bank discovering the truth.
This continued as the industry grew. By 2014, there were 24 states with a legal medical cannabis program and 5 states, led by Colorado, with adult use cannabis programs. It was that same year that Sundie Seefried, now-former CEO and president of Partner Colorado Credit Union, developed one of the first cannabis banking programs in the nation.
Building the Cannabis Banking Infrastructure: 2014 to 2018
Seefried didn’t take a position on whether cannabis should be legal. Instead, she felt she had a responsibility as a banker in her community to support legal businesses, which in Colorado included the cannabis industry. She wrote the book on how to bank cannabis in a legally compliant manner and helped educate others on how to do so.
Despite the achievements of Seefried and other pioneers, a myth persisted that banks could suffer grave consequences for working with the industry. Of course, that’s patently false. Federal bank examiners, including those from the FDIC itself, have explicitly stated time and again that banks working with state-legal cannabis businesses should abide by a standard used across other high-risk industries: prioritize anti-money laundering (AML) monitoring.
Since a robust black market formed during cannabis prohibition (and persists to this day), AML monitoring ensured that licensed cannabis businesses only bank money earned through the scope of their licensed operations. If revenue far exceeds the total value of inventory in a given period, that’s a red flag that outside cash is being comingled with legitimate funds.
Of course, finding cannabis-friendly banks can still be difficult. As of March 2021, there were fewer than 200 federally insured banks working with the cannabis industry. However, that’s enough to offer banking services to all sectors of the industry in all 50 states.
In other words, banking is available today for every business in the legal cannabis industry. You just have to know where to look.
Descheduling Hemp and Parallel Cannabis Banking Systems: 2018 to Present Day
It wouldn’t be the legal cannabis industry if there weren’t a major complication just as things seemed to work out. Hemp was descheduled from the CSA four years after Seefried developed her plan.
With the signing of the 2018 Farm Bill, hemp (defined as Cannabis sativa L. containing 0.3% THC or less) became a legal agricultural product. Oversight of hemp would be transferred from the Drug Enforcement Agency (DEA) to the U.S. Department of Agriculture (USDA) and the Food and Drug Administration (FDA). The other result of the Farm Bill was the creation of two parallel cannabis banking systems: one for high-THC cannabis and one for hemp-derived phytocannabinoids.
Today, hemp products not intended for human or animal consumption like paper or textiles face fewer banking challenges. CBD products, however, find themselves in a different situation. To date, the FDA has issued scant guidance on CBD products, leaving banks uncertain as to what compliant CBD banking looks like. So, even though CBD products are federally legal, retailers might find themselves more hard-pressed to secure banking than THC licensees.
The focus on CBD banking is not AML monitoring, but on the cultivator’s ability to consistently produce a crop that contains less than 0.3% THC across the board. Failure to do so constitutes trafficking a federally illegal product and could implicate a banking partner in money laundering – even if the threshold violation were an unintentional result of the natural fluctuations of THC levels in a hemp crop.
What Comes Next?
As the prospect of federal cannabis legalization looms large, more change could be coming for cannabis banking.
Cannabis banking firms like Fincann have spent years building relationships with cannabis-friendly banks and can help introduce cannabis businesses to bankers who not only know what they do, but want them to succeed.
That type of relationship is more important than ever. If cannabis with greater than 0.3% THC content is legalized federally, the work put into the CBD banking system and its focus on product integrity goes out the window – the 0.3% THC limit would no longer be relevant. At that point, the two separate banking systems would need to be merged into one in what is sure to be a messy process.
Cannabis businesses with a solid banking relationship founded upon transparency and compliance will be better positioned to weather that storm without disruption to their banking or payment processing capabilities. Federal legalization will signal the final set of growing pains until the industry will finally receive banking and payment processing services in full like any other legal industry operating in the U.S. economy.
That day is coming soon.