This is the first in a series of monthly columns by Leslie Bocskor about financial issues in the cannabis industry.
So here’s a head scratcher. Even with fully regulated, legal cannabis in several markets, the black market persists. Why is that? Simply put: price. The cost for a gram of cannabis sold in a dispensary is generally 20-30 percent more than for the same quantity sold on the black market.
We could assume dispensaries are being greedy and taking advantage of their position in a now regulated market. And yet it turns out that a significant portion of the expense passed on by dispensaries to consumers relates to federal taxes and the abnormally high fees associated with banking services in the cannabis industry.
FinCEN (an agency of the United States Department of Treasury’s called the Financial Crimes Enforcement Division) has provided guidance since 2014 for banks that wished to enter the legal cannabis space (that is, in states where cannabis is legal). These guidelines outlined a clear path to work with legal cannabis businesses, and should have (in theory anyway) alleviated the industry’s need for reliable banking.
Washington makes it hard for banks to serve cannabis companies
The problem is, the FinCEN guidelines have not provided enough banks with enough confidence to adequately serve the country’s most rapidly growing industry. And what legislators and regulators have been failing to understand is that the difficulties of the simple act of getting a bank and checking account contribute mightily to the life of the black market. How is this the case? I sat down with several operators who were willing to share their thoughts on the subject.
“I perfectly understand the problem banks are in,” said John Poss, CFO of GrowBlox Sciences, Inc.
“The laws are conflicted. On one hand their objective is to eliminate the illegal market, but on the other hand the laws in place create an advantage for black market retail. If I’m a cannabis patient on a budget, and I have a reliable black market source that serves me well and costs two-thirds what it costs me to purchase at a dispensary, which one am I going to buy from?”
I also spoke to David Dinenberg, the CEO of KIND Financial. As many of you know, KIND recently announced a collaboration with Microsoft. As well, Dinenberg has been looking at the issues regarding banking and the legal cannabis industry for years.
When we spoke, he shared, “We’re having banks using staff to manually comply. That is burdensome, cumbersome and expensive. If those banks would be open to automation and technology, we can bring all the costs down to a realistic pricing structure. The banks we deal with don’t charge those revenue fees.”
Jesse McConnell, the President of Rubicon Organics from Vancouver, British Colombia, who is one of the only operators that has crossed the border and done business in the legal cannabis industry in both the U.S. and Canada, said the qualification process is onerous for getting an account with a credit union.
“I only know a limited number of credit unions willing to touch it,” said McConnell. “What you end up seeing is extraordinarily high levels of compliance, so high banking fees, very thorough vetting – meaning that only a few, very qualified organizations are able to find banking solutions, and at that it’s only a partial solution.”
When I asked the same group how they would approach fixing the banking problem, their answers were as varied as their business approach.
Treat the cannabis industry like any other industry
Poss and Dinenberg recommend a focus on legislation to empower banks to deal with cannabis companies like they are any other business.
“Generally speaking, if a bank uses sophisticated software and automation, the banking fees could come down to around $500 per month. That’s not free, or $10, but it’s not 3 percent of several hundred thousand a month either,” explained Dinenberg.
Jesse McConnell suggested crypto-currency solutions such as Bitcoin, using encryption techniques to verify fund transfers and providing the option of operating independently of a central bank, But financial institutions would still need to clear those transactions.
Alternatively, McConnell imagines a private enterprise that creates hyper-vigilant compliance, that acts on behalf of banks to make sure they are compliant, which may allow smaller banks to offer services if compliance slides off their plates.
We all agreed that there will be some movement towards a trust wing where banks take that risk on with the hope that they get a large portion of that market share, with the vision that in three to five years the banking problem is gone and they can secure a large portion of cannabis players.
One possible approach would be the creation of a financial institution under a special provision that was part of Assembly Bill 480, passed by the Nevada legislature in 2015. Nevada’s assembly Bill 480 allows Nevada Thrift companies to be insured by either FDIC or a private deposit insurer.
This could potentially reduce regulatory challenges that institutions face when they provide financial services to legal marijuana companies. Even though this gets rid of the required insurance issue, it does not address federal prohibition. Another issue, and some would say the major one, is what the Fourth Corner Credit Union has run up against in Colorado, and that is getting the Federal Reserve to grant a master account number.
Without that master account number, banking institutions are unable to effect electronic transfers. In the Fourth Corner attempt we discovered what might be one of the root issues of the entire banking problem - concentration of risk. After all, the banking system abhors concentration of risk.
Washington needs to act to curb black market
While we wait for the federal laws to catch up with the progress being made in the states, Congress cannot deny that the black market is thriving still because of these access-to-banking challenges.
The solution to this riddle will ultimately lie with Congress and/or the executive branch. Until then, the few banks that choose to service cannabis businesses will comply with laborious paperwork and pass along unconscionably high fees to the consumer that keep the black market friction point and threaten our communities.
Leslie Bocskor with his advisory firm Electrum Partners is leading the evolving discussion around policy, entrepreneurship, and investment in the cannabis industry, nationally and internationally. As founding chairman of the Nevada Cannabis Industry Association, and with his far-reaching Wall Street background, he’s helping design the models for cannabis industry investment, business and regulation, as Nevada did with gaming. Whether it's big pharma’s long tail or first-mover investors taking advantage of early opportunity, Bocskor's insights and influence have made him the trusted expert and revered pundit on getting in and getting out of cannabis investments successfully.