(Michael Maharrey) A bill filed in the Oregon House would establish limited state-chartered banks to serve the cannabis industry. Final passage of this legislation would remove a major federal roadblock in front of the developing industry in the state and further nullify federal prohibition in practice. Rep. Pam Marsh (D) and Rep. Ken Helm (D) introduced House Bill 3169 (HB3169) on Feb. 28. The legislation would create a self-contained, state chartered banking system for the cannabis industry in Oregon.
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by Michael Maharrey, March 23rd, 2019
Because marijuana remains illegal under federal law, cannabis businesses in states that have legalized marijuana remain effectively locked out of the banking system. If a federally chartered or insured financial institution touches marijuana money, it takes on significant legal risk. The federal government insures or charters virtually every bank in the U.S. As a result, cannabis businesses have been forced to transact almost exclusively in cash. Passage of HB3169 would bypass the federal banking system and create a limited banking alternative for the marijuana industry in Oregon.
HB3619 would authorize banking institutions and credit unions to organize as limited charter cannabis financial institutions. Cannabis businesses would be able to deposit funds in these institutions and write “special purpose checks” for the following:
(a) To pay fees or taxes to a public body;
(b) To pay rent on property that is leased by, or on behalf of, a cannabis business;
(c) To pay a vendor that is physically located in Oregon for goods or services associated with a cannabis business; and
(d) To purchase bonds issued by a public body.
These checks could only be deposited or cashed at the issuing cannabis limited charter bank or credit union, or another cannabis limited charter bank or credit union that agrees to accept the check. This would keep the entire process outside of the federal checking system known as the automatic clearing house (ACH).
FEDERAL BANKING LAWS
The Federal government has used banking laws as a weapon in its unconstitutional war on cannabis by making it impossible for marijuana businesses to access the banking system – even in states where marijuana has been legalized. The feds can prosecute bankers for knowingly engaging with cannabis businesses under the Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act.
The Federal Reserve has gotten into the act, denying its services to state banks chartered to serve the marijuana industry.
For instance, in 2015, the Federal Reserve Bank of Kansas City denied Fourth Corner Credit Union’s application for a master account. The Denver based credit union was formed by Colorado’s state-licensed cannabis manufacturers as a non-profit cooperative. By denying its application, the Fed prevented the institution from access to the Fed’s payment facilities, including its check clearing, wire transfer, and ACH facilities. This made it virtually impossible for Fourth Corner to do business.
In February 2018, the Federal Reserve Bank of Kansas City finally gave conditional approval for Fourth Corner’s master account. But according to the Marijuana Business Daily, the credit union will not serve plant-touching business. It will cater to “advocacy groups, charities and ancillary companies such as accountants.”
State-chartered banks do not have to be members of the Federal Reserve system. But as it did with Fourth Corners, the Fed can deny any non-member bank or credit union access to its services. In other words, the Federal Reserve can lock any bank attempting to operate in the cannabis industry out of the broader banking system, making it impossible for them to do business with any other bank or merchant. With the passage of HB3169, Oregon could bypass the entire federal banking system and its regulations, and create a self-contained banking network for the marijuana industry.
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THE CRYPTO ALTERNATIVE
Some marijuana businesses have circumvented the banking system by transacting in bitcoin or other cryptocurrencies. Technology companies like SinglePoint and POSaBIT have been working to generate a payment method for medical marijuana dispensaries and consumers using bitcoin.
In 2014, SinglePoint placed terminals in some medical marijuana dispensaries that allowed patients to make payments with their debit cards, but the banking system quickly shut it down.
“They were going great,” SinglePoint president Wil Ralston told CNBC. “Then overnight the banks shut them all down. There were no guidelines about how banks were supposed to interact with the cannabis industry. They didn’t want to risk it.”
Ralston started looking into cryptocurrencies. Now, SingleSeed allows dispensaries to accept bitcoin and consumers to pay with it.
Other services like BHCPLS.io are in open beta, but promise to bring Bitcoin Cash (BCH) point-of-sale systems to brick and mortar merchants, something cannabis businesses could find useful.
Some analysts believe the marijuana industry could pave the way for the wider use of cryptos. Leslie Bocskor, president of cannabis advisory and services firm Electrum Partners, told CNBC the cannabis industry may well lead the way in using bitcoin or other cryptocurrencies.
“If it finds a way to avoid the traditional banking system, other businesses would follow suit,” Bocskor said.
FEDERAL PROHIBITION
Under the Controlled Substances Act (CSA) passed in 1970, the federal government maintains complete prohibition of marijuana. Of course, the federal government lacks any constitutional authority to ban or regulate marijuana within the borders of a state, despite the opinion of the politically connected lawyers on the Supreme Court. If you doubt this, ask yourself why it took a constitutional amendment to institute federal alcohol prohibition.
Legalization of marijuana in Oregon removed a layer of laws prohibiting the possession and use of marijuana, something that will be extremely difficult for federal prohibitionists to overcome. FBI statistics show that law enforcement makes approximately 99 of 100 marijuana arrests under state, not federal law. By legalizing cannabis, Oregon essentially sweeps away the basis for 99 percent of marijuana arrests.
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Furthermore, figures indicate it would take 40 percent of the DEA’s yearly-budget just to investigate and raid all of the dispensaries in Los Angeles – a single city in a single state. That doesn’t include the cost of prosecution. The lesson? The feds lack the resources to enforce marijuana prohibition without state assistance.
A GROWING MOVEMENT
Oregon is among a growing number of states simply ignoring federal prohibition, and nullifying it in practice.
California, Colorado, Washington state and Alaska were the first states to legalize recreational cannabis, and California, Nevada, Maine and Massachusetts joined them after ballot initiatives in favor of legalization passed in November 2016. In January 2018, Vermont became the first state to legalize marijuana through a legislative act.
With 33 states, the feds find themselves in a position where they simply can’t enforce prohibition anymore.
“The lesson here is pretty straightforward. When enough people say, ‘No!’ to the federal government, and enough states pass laws backing those people up, there’s not much the feds can do to shove their so-called laws, regulations or mandates down our throats,” Boldin said.
Efforts to expand Oregon’s marijuana law demonstrates another important reality. Once a state puts laws in place legalizing marijuana, it tends to eventually expand. As the state tears down some barriers, markets develop and demand expands. That creates pressure to further relax state law.
WHAT’S NEXT
HB3169 was referred to the House Committee on Economic Development where it is scheduled for a hearing on March 25. It will need to pass committee by a majority vote before moving forward in the legislative process.
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– Justin
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