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The recent 2016 U.S. election saw a number of new states advance forward in legalizing cannabis. California, Nevada, Massachusetts, and Maine joined the ranks of those allowing recreational marijuana – in effect doubling the number that have elected to. In addition Florida, Arkansas, and North Dakota took the leap into the legalized medical cannabis space. Today half of all U.S. states now recognize it as legal for select ailments with physician oversight.
While cannabis has become a booming industry throughout the U.S., dispensary business owners in fully-legalized, early adopter states such as Colorado and Washington have been prohibited from establishing banking relationships due to restrictive federal laws.
In 2014 the State of Colorado became one of the nation’s first to legalize marijuana for recreational use. Nevertheless most banks will not open accounts for dispensaries — leaving these businesses with large amounts of cash to house. Laments one Colorado dispensary owner: “How pathetic to have to regularly take large stashes of cash to the IRS for tax payments. This simply doesn’t make sense.”
Credit card services and payment intermediaries like PayPal are off limits as well. There are, in fact, tons of stories of accounts being frozen or shut down when cannabis-related sales are detected. As a result many cannabis merchants have been left scrambling for arrangements to house the significant amounts of money they take in.
For dispensary owners, the cumulative impact of all of this is quite daunting. Stories abound in this community about the need for high priced security personnel to mitigate risks associated with potential cash heists. And for those owners lucky to have a banking relationship, deposits have to be done discreetly by staff amid ongoing fears and safety concerns.
So what ultimately is the major factor hindering the free flow of banking options for the industry? In short, it stems from the Federal Reserve’s lack of support for banking reform due to marijuana being deemed illegal at the federal level. With this the potential exists for dispensaries to be pushed underground with money flows in some cases being kept anonymous through new technologies emerging on the market.
In the absence of viable options, some dispensaries are rumored to be seeking digital currency and other blockchain-based alternatives. The fact that cryptocurrencies require no bank accounts and third party intermediaries in addition to providing inexpensive processing fees, is bound to gain traction in the absence of other options. Another possibility being pursued by some dispensaries is offering prepaid cards that can be used for cannabis purchase, although the legal landscape here is sure to be fraught with uncertainties.
This lack of viable solutions has opened the door for a new disruptive innovation called Tokken, a regulatory compliant and a secure digital banking platform for the cannabis industry. Founder Lamine Zarrad, formerly of the Office of the Comptroller of the Currency, a division of the Treasury Department, says that the idea ensued from a recognition that cannabis businesses desperately need access to banking in order to grow, amid the challenging landscape of federal laws and regulations.
Says Zarrad: “It was evident that a new solution was needed for consumer payments and to track transactions. So what we decided to do is to use the blockchain as a redundancy mechanism with actual value transfers occurring via a token system.”
He notes that while he’s a big fan of bitcoin and other cryptocurrencies, their use within the Tokken system would carry too much regulatory and public opinion baggage at this time to justify it. “We presented our concept to FinCen a month and a half ago and they liked this idea better than using bitcoin, the fact that we use traditional EFT rails to transfer actual fiat. When fiat is transferred and recorded on the blockchain, it creates peace of mind for those providing oversight.”
He says that the current plan is to continue capitalizing off of the blockchain in a way that keeps banks and their regulators happy. Nevertheless, he notes, as soon as bitcoin and cryptocurrencies become a bit more mainstream, he would like to replace out the backend of Tokken with one that’s crypto based. “I think that is a much more efficient way to operate and I certainly believe that crypto is the way of the future. In the meantime we’re going to use our current model that uses traditional practices while at the same time leverages the amazing technology of the blockchain.”
Despite these advancements, questions remain about the main barrier to dispensary business bank access, namely, the fact that marijuana is still considered a schedule 1 drug by federal authorities. In other words, if the federal government chooses to enforce superseding federal law, states would be compelled to comply. This would no doubt be a crushing blow to state codified marijuana commerce across the nation.
Another element of this conversation are uncertainties tied to the new Trump presidency in 2017. While the President-elect has gone on record saying that he’s “in favor of medical marijuana 100%,” in addition to states’ rights when it comes to regulating recreational marijuana, his nominee for U.S. Attorney General, Alabama’s Republican Senator Jeff Sessions, is considered by many to be one of the most ardent opponents of marijuana legalization in the entire Senate.
Concludes one Colorado dispensary owner who respectfully asked that his name not be used: “The problem with banking with respect to the medical marijuana industry is that the federal government still has us classified in a way that places cannabis in the same category as heroin, opium and cocaine. Until that gets reclassified, none of the banks are going to accept us because federally, its illegal. That’s just the long and short of it. So until the feds reclassify it, to where we can have some reasonable legislation at the federal level, which I’m pretty sure is not going to be a priority of this new administration, it’s just going to be just like it is. Our dispensary has been fortunate enough to find a banking institution who will work with us. But a lot of dispensaries haven’t been so lucky.”