CNBC | Marijuana
January 15, 2018 | Chloe Aiello
California’s burgeoning cannabis industry, already heavily reliant on cash and detached from banks, could face even more barriers to the mainstream after U.S. Attorney General Jeff Sessions rescinded the Obama era guidelines, known as the Cole memo, which eased federal regulation of marijuana.
Sessions’ decision has left California’s state government and the legal pot industry scrambling for ways to handle all the cash that will come flowing in.
Moving to a more regulated market should, in theory, encourage financial institutions to bank cannabis businesses, but Sessions’ actions on Jan. 4 — just days after recreational adult marijuana use became legal in California — put a freeze on bank activities, leaving businesses and the financial institutions that look to support them in an even murkier state of affairs.
“The withdrawal of the Cole memo really couldn’t have come at a worse time, because now is the time that the types of banks and credit unions that are willing to take on more risk would have been entering the market,” said Robert McVay, partner at Harris Bricken, a Seattle-based law firm with a practice group dedicated to cannabis law.
“If you weren’t already involved, this doesn’t seem like the right time to start,” he added.
During Barack Obama‘s second term as president, then-deputy Attorney General James Cole published memos which transferred marijuana industry regulation to states and directed federal law enforcement to allow businesses compliant to the memo’s requirements to operate. A 2014 memo, which complemented guidance from the Financial Crimes Enforcement Network, or FinCEN offered guidance specific to financial institutions looking to do business with compliant cannabis companies.
Since cannabis is still considered illegal by federal law, providing banking services to those businesses was risky even with the tenuous protections provided by the now-defunct Cole memo.
Now, California’s already cash-heavy marijuana market faces a major influx of money with next to nowhere to put it. The state has already issued about 675 temporary licenses for all types of businesses from grow operations and labs to retail dispensaries and food production businesses, according to a state-run database.
A market primed to surge
A 2016 study commissioned by the state and conducted by researchers at University of California Davis Agricultural Issues Center estimated that legalization and regulation of adult pot usage in California could add $5 billion to the market. At the time of the study, the medical marijuana market was estimated to have a $2.7 billion valuation.
Jonathan Barker, Professor of Agricultural Economics at UC Davis and leader of the study, said most would likely come from a redistribution of pre-existing revenue from medical patients or the black market.
Others argue the new market will also attract those Californians who, previously, were interested neither in getting a medical recommendation nor in breaking the law.
Purveyors of legal weed in California will have to get even more creative. Cannabis businesses without access to banks often come up with unconventional ways to cope with the large quantities of cash. In the absence of organized banking, a number of startups offering alternative solutions to banking, or bank-adjacent services, have cropped up to tackle the cash problem.