California Passes SB 51 to Create a Non-Federal Banking Alternative for the Cannabis Industry


    On May 23, 2019, the California Senate passed Senate Bill 51 (“SB 51”) on a 35-1 vote to establish limited state-chartered banks and credit unions to serve the cannabis industry. The bill, which was introduced by state Senator Bob Hertzberg (D-Van Nuys), along with eight other bipartisan cosponsors, allows cannabis businesses to create accounts with certain chartered banks and credit unions for specific cannabis business-related purposes. For instance, cannabis businesses will now be able to deposit funds into these accounts and write “special purpose checks.” These checks can be used to pay for state and local fees and taxes, pay rental property costs associated with a cannabis business, pay cannabis vendors, and even buy state and local bonds.

    SB 51 is important for two major reasons. First, allowing businesses to use chartered bank and credit union accounts provides businesses the opportunity to bypass the federal banking system. Currently, most cannabis businesses are forced to transact exclusively in cash because the federal government still treats cannabis as a controlled substance and the Federal Reserve has denied its services to state banks that serve the cannabis industry. Second, according to the Department of Tax and Fee Administration, California has failed to collect the promised windfall in tax revenue stemming from cannabis sales. California has collected only half the tax revenue that Governor Jerry Brown’s administration had predicted for cannabis-related transactions. While we have previously noted the tax revenue deficiency could be traced to the high marginal tax rates (here and here), the existing regulatory and financial framework is difficult to navigate and could be resulting in underpayments. SB 51 seeks to remedy this problem.

    The million-dollar question, however, is whether SB 51 will successfully spawn a viable alternative banking system. We are skeptical. Some banks will continue to shun cannabis businesses because of the risk of federal crackdown, which SB 51 cannot obviate. And banks that are keen on entering the cannabis market may be hesitant because of recent progress on the federal SAFE Banking Act (we have written about that here, here, here, and here). If the federal SAFE Banking Act passes, the national banks that have thus far not serviced the cannabis industry will jump in, swamping the small players operating under SB 51. These “SB 51 banks” may not want to invest the significant resources necessary to enter the cannabis space without further assurances that they will control the market for the foreseeable future.

    At the very least SB 51 is another indicator of the overwhelming support for allowing state-legal cannabis companies to access critical financial services. The bill now heads to the California State Assembly for consideration. We will continue to monitor its progress and, if passed, its implementation.

    The post California Passes SB 51 to Create a Non-Federal Banking Alternative for the Cannabis Industry appeared first on Cannabis Blog.

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