Las Vegas Sun

March 28, 2024

GUEST COLUMN:

Cannabis industry must be unshackled

marijuana

Richard Vogel / AP

This month, Nevada will deposit its 150 millionth dollar of tax revenue from cannabis — even more has been generated from an assortment of licenses and fees.

Nevada is part of a growing trend of states that voted to allow recreational cannabis use. Today, 1 in 5 Americans live in a state with recreational cannabis and 47 states allow medical or recreational use in some form. Similarly, a generation ago, states allowed another previously prohibited business to exist: gambling.

But the cannabis and gambling industries face very different banking laws, and those laws have proven problematic for cannabis.

Nevada’s experience in gaming was unique, but it parallels a system that exists in a multitude of states: lotteries. In 1973, only three states allowed lotteries. That number grew to 33 by 1992, and since has risen to 44 states. Nevada is one of the few without a legal lottery, because of the strength of the casino lobby.

State lottery revenue rose from $770 million in 1977 to $9 billion in 1992. Massachusetts raised $1 billion in public revenue from its lottery last year. Similarly, further expansion by states into casinos has grown from two to 24 states. This explosion filled state governments with cash, without having to raise taxes.

By and large, this influx of cash did not present fundamental banking problems. Lottery revenue grew so quickly and became so predictable that states were able to issue bonds against future lottery revenue. Access to financial markets was made easier; banks worked directly with state governments and private companies in the lottery and gaming industries. The world of cannabis banking is different, however.

Only 1 in 30 banks or credit unions report serving any cannabis businesses, and estimates are that up to two-thirds of cannabis businesses remain unbanked. Banks and credit unions have struggled to engage with this new industry, concerned with federal regulations and regulators — particularly regarding anti-money laundering rules that consider cannabis highly suspicious. The result is trucks filled with cash criss-crossing Carson City and other state capitals nationwide. These states require physical sorting, storing, and depositing of cash and attract violent crime.

Anti-money laundering laws consider large cash deposits as suspicious, triggering another round of (unnecessary) reporting by banks on businesses engaging with cannabis companies.

State and local governments are exempt from cash reporting rules, easing acceptance of lottery cash. However, states are subject to other anti-money laundering rules as bank customers. The letter of the law requires banks to “know their customer” and report when their customer is depositing funds derived from illegal activity.

As marijuana is still federally illegal, a strict reading of the law could require banks to report Nevada and other states and counties as possible money launderers. It is hard to think of a bigger waste of resources than asking banks on a daily basis to notify Uncle Sam that Nevada is allowing cannabis stores to operate.

Congress is making progress on solving this issue, with the House Financial Services Committee passing bipartisan legislation, co-authored by Rep. Denny Heck, R-Wash., on a strong 45-15 vote. But prospects for enactment are unclear, and even then, the legislation relies on financial regulators to create a more logical regime.

So far, federal bank regulators have been a mixed bag, with the Kansas City Regional Federal Reserve aggressively trying to dissuade banks and credit unions from serving cannabis companies. Legal experts think the K.C. Fed may have even overstepped its legal authority in trying to stop a new credit union from serving these businesses. Lucky for Nevada, the state is part of the San Francisco Federal Reserve district, which has provided more permissive guidance to banks and credit unions, and there has been more service of the industry.

The Federal Reserve Board of Governors has the power to overrule the K.C. Fed, or better yet to impose a national standard. Yet, the Fed board has chosen to largely ignore the problem of regional disparity, with Fed Chairman Powell punting that “It would be great if that could be clarified” by Congress.

April 20 marked one year since Canada legalized cannabis. Opinion polls show majority support for legalizing cannabis in every U.S. state.

If Nevada is indicative, cannabis will be a large new source of revenue for states and local governments throughout the country. It is time for Congress and federal banking regulators to work together to solve these banking problems and stop this new reefer madness.

Aaron Klein is the policy director for the Center on Regulation and Markets at the Brookings Institution, and is a former administrator in the U.S. Treasury Department.