26 September 2019 Update: The SAFE Banking Act was passed in Congress meaning that federal law can no longer apply to cannabis related business banking as long as they are in complete compliance with state law. You can read more on this in our recent blog post explaining the SAFE Banking Act in detail.
The biggest problem legal cannabis businesses face has nothing to do with the plant they sell. It’s what they do with the money they make from selling it.
However, based on today’s Senate hearing into banking in the cannabis industry, it looks like the federal government could be catching up with what cannabis businesses and banks have been waiting for a long time.
For those that don’t know what has been happening in the world of cannabis and banking, here’s the deal: for all the gains that have been made legalising cannabis at a state level in America, under federal law, cannabis remains illegal and is classified as a Schedule 1 drug. All banks and credit unions are insured by the FDIC (Federal Deposit Insurance Corporation) which makes financial institutions reluctant to deal with what the banks refer to as a MRB (Marijuana Related Business) at the risk of losing their insurance.
Currently, out of the 11,000 banks and credit unions in America, less than 500 will serve MRBs. This is despite a survey finding that 82% of banks want the Federal Government to allow them to serve MRBs.
The American Bankers Association website states plainly that the “ABA believes the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized”.
Cannabis businesses are ready. The banks are ready. And now it looks like federal regulators are just about ready too. Hopefully that means that MRB banking and compliance is something that is going to be addressed very soon.
With that in mind, we thought it was a good time to have a look at the massive challenges that banking presents in the cannabis industry and what needs to happen for them to be overcome.
So, What’s The Problem?
The bottom line? MRBs aren’t able to reach their full potential because they are left dealing with the many complications that arise from their limited access to banks and other financial institutions.
Impact on cannabis companies:
It is estimated that two-thirds of MRBs are unbanked.
This means that:
- All cannabis related businesses are forced to deal in cash and can’t accept credit or debit cards, cheques, or prepaid cards.
- It is harder for a cannabis related business to pay suppliers and employees
- MRBs are required to pay their state and local taxes in cash by the use of armoured trucks.
- More cash on the premises results in higher crime rates
It isn’t difficult to understand why businesses with more cash on hand would be more likely to be targeted by criminals. The financial regulations ensure that MRBs are earmarked to be more likely than most other industries to have a lot of cash on hand. Ryan Donovan, chief advocacy officer of the Credit Union National Association has claimed that one in every two businesses had been robbed, stating that “We wouldn’t tolerate that in any other industry, and we shouldn’t tolerate it here.”
On top of this, forcing cannabis related businesses to favour a cash-based operation works against exactly what regulatory bodies want to achieve with their track-and-trace system. A National Association of State Treasurers resolution stated, “[c]ash-based systems are inefficient, expensive and opaque, making illicit activity more difficult to track”.
The processes a legal MRB is left to adhere by when it comes to handling their finances are outdated, which is fundamentally obstructing the development of the industry.
Parsl’s solution to MRB compliance and banking
Parsl’s platform delivers value to all stages of cannabis supply-chain but no application is more critical than the solution it provides for a cannabis business’ financial compliance.
Parsl eliminates many of the difficulties facing MRBs through our stablecoin, PODs. Initially, the main function of PODs is to assist MRBs with securing an account with financial institutions through automating financial compliance. This is done by providing a full lifecycle of financial activity (which is intricately tied to verified product lifecycles). This will ultimately encourage banks to work with more MRBs, as the MRBs will be operating in a more compliant way. Simultaneously, this will lower the costs associated with a financial institution’s own compliance reporting significantly.
When a business does secure a bank account, PODs can be used for everyday business transactions allowing the industry to operate cashlessly. This means they can enjoy the relief from the theft that is currently occurring due to large amounts of cash being kept on site. POD tokens are only created when real funds enter the ecosystem and are converted by Parsl, meaning it is 100% totally liquid.
This process can remove the need for a payment gateway entirely, which will significantly reduce the costs a MRB faces for banking and financial services which can be 10% per transaction just for the payment gateway, or even higher. Utilising PODs entirely will mean that transactional costs are significantly reduced. This will ease a lot of the current financial burden being experienced and allow the industry to grow more rapidly and safely.
Financial institutions and service providers and cannabis-related businesses can together enjoy the benefits that come from using PODs.
Benefits for financial institutions dealing with MRBs
- Provides security through complete lifecycle tracking of cannabis products allowing banks to verify and demonstrate they fully comply with FinCEN guidelines.
- Simplifies compliance reporting significantly
- Reduces the risk for a bank or financial service provider to provide services to a MRB
- Economically incentivises people to operate legally and transparently within the cannabis industry which will then allow banks to capitalize on a multi-million dollar market segment that would otherwise be kept on the black market
Benefits for cannabis-related businesses
- Allows businesses to operate safely through creating a cashless industry (particularly by reducing internal theft and the risk of robbery)
- Simplifies business payments in the cannabis industry (salaries, vendor payments etc)
- Provides fully automated compliance and protection from any seizure of funds
- Instant transactions
- Borderless transactions
- Automates tax calculations/payments
- No transaction fees for users
- Minimum transaction fees for cannabis businesses (far cheaper than using any other payment processing system)
Not only does PODs make it possible for cannabis-related businesses to gain access to financial institutions, it makes the process faster and cheaper. It also opens up international markets and trade through significantly reducing international trade conversion rates and standardising compliance.
The relationship between banking and cannabis needs to change. The ability to access financial institutions is one of the fundamental necessities of running a successful and safe business in the modern day but transparency and accountability is also vital for a cannabis industry that is resistant to black market influences. Parsl is the system to provide solutions on both fronts to satisfy both sides of the equation.