Would a ‘Public Cannabis Bank’ Really Work in California?

Most cannabis business owners eventually confront the stresses of working in an all-cash environment. If you’re lucky, you’ve found one of the 368 reported banks or credit unions providing limited services to the industry under FinCEN guidelines. You might be experimenting with more exotic solutions like cryptocurrencies or pre-paid services like Tommy Chong’s Green Card. In the past few months, a bold new financial project has re-emerged from Occupy-inspired economic circles to captivate city councils, state treasurers and weary cannabis industry entrepreneurs: the public bank.

‘A multi-billion dollar cannabis industry could be the catalyst that propels public banking into becoming a reality.’

John Chiang, California State Treasurer

A public bank is a bank fully owned and operated by the state or municipal government within which it operates. Instead of depositing its money in a third-party bank owned by private interests and insured by the FDIC, the state or city deposits and insures the public bank’s money and builds up its own assets. A public bank can choose whether or not to engage with the Federal Reserve system, which means it could possibly provide a suitable home for the cannabis industry’s cash.

A lot of the action around public banking and cannabis right now is happening in California. The state’s Cannabis Banking Working Group, chaired by State Treasurer and gubernatorial candidate John Chiang, devoted an entire session to the public banking option on August 10th.

“The emergence of a multi-billion dollar cannabis industry could well be the catalyst that propels public banking into becoming a reality,” Chiang said to open that session. “We are here to test the idea and see if it’s truly workable.” His comments have been prefaced by similar considerations of the concept in San Francisco, Oakland, and most recently in Los Angeles.

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Public banks are nothing new, either in the United States or internationally. Beginning in rudimentary fashion with the rise of colonial “land banks,” public banks were developed within the states of Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee and South Carolina, and countries such as Argentina, Malaysia and China currently maintain their own state-run banks. However, the only US public bank currently in existence is the Bank of North Dakota.

Founded in 1919 as a populist alternative to national banks that had reduced their willingness to lend to local farmers, the Bank of North Dakota now controls over $7 billion in assets and $876 million in capital, returning 46% of its earnings to the state every year. It famously occupied the financial high ground during the 2008 meltdown, which kickstarted the current public bank revival.

The Bank of North Dakota refused comment on both the current resurgence of interest or its own relationship to North Dakota’s imminent medical marijuana program. Because the Bank of North Dakota maintains a master account with the Federal Reserve, it probably won’t accept cannabis deposits unless expressly mandated by the state of North Dakota.

Other states have studied the Bank of North Dakota model. Not all have come away impressed. At the Working Group session, former commissioner of the Massachusetts Division of Banks David Cotney cited his state’s 2011 feasibility study, which determined that BND’s model was inapplicable for a state as large and economically and financially diverse as Massachusetts, to say nothing of a state the size of California, which contains the world’s sixth largest economy.

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What Would It Take?

Creating a public bank, even one that would be constructed to accept cannabis business deposits as well as provide merchant services, would be an extremely heavy lift. Banking experts have commented on the extraordinary levels of capitalization needed for such an effort. For the Los Angeles bank alone, initial capitalization costs are estimated between $125 million to $250 million for a bank with $1-2 billion in assets, for starters.

Before founding the cannabis legislation database CannaRegs, Amanda Ostrowski worked as a bank examiner for the Federal Reserve, which informs her perspective on the road ahead. “The number of different things a bank has to pass through, it’s not just simple stress tests,” she said recently. “It’s safety and soundness exams, consumer lending compliance, there’s so many different factors that go in… There’s a reason why the federal reserve is still refining the systems and equations to this day and why these examiners go through at least two years of training before they’re certified examiners. And to put that kind of infrastructure into place from the ground up is going to be extremely costly.”

Using that logic, Ostrowski believes getting a cannabis bank up and running would take more time and effort than the industry can spare. As several speakers at the Working Group noted, absent a master account from the Federal Reserve and access to the fedwire, a cannabis bank would merely serve as a vault that couldn’t even complete intrastate transactions with other banks.

Adam Johnson, author of the investment newsletter Bullseye Brief, elaborates: “There are very few banks that are chartered solely within state lines, which means that they’re by definition unable to handle transactions across a state line where it would certainly become illegal transfer.”

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Harborside Is Interested

But some in the industry think well enough of the project to occupy a seat at the table, most notably Harborside Medical Center co-founder Dress Wedding. In addition to serving as Harborside’s Director of Holistic Services, he also volunteers at the advocacy group Friends of the Public Bank in Oakland.

Harborside has not officially endorsed the public bank initiative. But Wedding supports the social and economic justice elements of the public bank, and argues for a bank business plan that would apply for a master account and commingle municipal and cannabis funds.

He is seconded by Matt Stannard, Policy Director of Commonomics USA, who told the Working Group: “What a public bank can do is really  stare in the face of whatever existing guidelines, however ambiguous or however contingent those federal guidelines might be… and say, ‘We are going to do everything and beyond that these non-regulatory guidelines [such as the Cole Memo and the FinCEN guidelines] ask of us.’”

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The possibility that the Federal Reserve would grant an account to such an application is remote. But so was the idea of a legal cannabis industry 20 years ago. The current cannabis-based public banking initiatives are stuck in feasibility study mode, but Ostrowski feels that the acceptance of some potential variation of this perennial economic moonshot could be catalyzed out of necessity. Its impact could extend well beyond cannabis.

“There’s a lot of these things in history,” said Ostrowski. “They were built to solve one problem [and they] balloon and become the new way. If it works and it makes sense, then who knows? Maybe this is a model that goes all the way through, but we’ve got to look at the costs and the general impacts on society.”

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