A good way to end a conversation with someone in the marijuana trade is to ask them about their banking situation.
Wicked Local reported that some experts project the industry in Massachusetts could be worth $1.8 billion in the future, making clear the potential to earn money in the emerging market. Less clear, however, is how the money is banked, highlighting an uncomfortable reality for those involved.
“It’s a huge problem for the industry,” said Peter C. Bernard, executive director of the Massachusetts Grower Advocacy Council. “Cash is still king … and nobody operating in cash wants to talk about it.”
Banks and credit unions in Massachusetts – for the most part – have balked at the opportunity to provide services to people and businesses related to the marijuana trade. Despite the 2016 legalization of recreational marijuana in Massachusetts, the drug is still considered illegal by the federal government, which regulates and insures most banks and credit unions.
The legal ambiguity means federal regulators could theoretically seize marijuana-related bank accounts, and take legal action against those who offered the services, scaring off most financial institutions not traditionally fond of too much risk. This happens despite a clear understanding of the demand – and potential boost – the marijuana trade could provide to the financial sector.
“The growing number of states that allow its sale and use raises practical issues that must be addressed,” according to the American Banking Association.
In Massachusetts, the nascent recreational marijuana industry has already yielded millions of dollars. Since the first legal sale in November, retailers have generated more than $64 million in sales, according to the Cannabis Control Commission, and more licenses are approved each month. The spending also goes well beyond the retailers, including growers, testers and transporters. And because so much of the business is cash-based, workers are getting paid in cash, or through person-to-person payment apps, and banks struggle with the question: How long should we track marijuana-related money?
“These businesses are paying employees, they pay electricians and landscapers. They’re paying taxes to the town, so you have this cascading effect,” said Jon K. Skarin, executive vice president of the Massachusetts Bankers Association.
Wicked Local reached out to seven marijuana-related businesses for comment, but they either did not respond or declined to speak on the record.
A spokesman for NETA Brookline, which opened the first recreational retail shop in Greater Boston on March 23, said the company is working with a financial institution, but had signed a non-disclosure agreement, barring it from discussing any specific details.
The unwillingness to discuss what happens to cash after sales is typical. In many ways, Bernard said, it makes sense.
“If you had six figures of cold-hard cash, would you want the public to know?” he asked.
Most marijuana-related businesses accept only cash or debit cards, as credit-card companies have made clear marijuana-related transactions are not allowed. The result is a lot of cash floating around, which is one of the biggest safety concerns surrounding the industry.
“At the end of the day, we’re talking about people’s safety here and that should always be paramount,” said Walpole Chief John F. Carmichael Jr., who has represented Bay State police chiefs on various issues related to creating marijuana regulations in the state.
Carmichael said he hasn’t heard of any suspected criminal activity directly related to the volume of cash in the marijuana industry, but he says the concern is born from other states, including Colorado, where there have been several reports of marijuana-related robberies and assaults involving suspects looking for cash.
These reports are also why Tina Sbrega, president and CEO of GFA Federal Credit Union, made the decision last year to provide banking services to the marijuana industry.
“Public safety is our number one motive,” Sbrega said. “When we looked at the projections of how this industry will grow in the first five years, we started thinking about the volume of cash that would be walking around our streets and in our communities, and it was then we said, ‘Someone has to bank this industry.’”
The services bode well for marijuana-related businesses looking to deposit cash, but GFA Credit Union, based in Gardner, will not open accounts for just anyone who says they’re in the industry. One requirement is the business must sign a nondisclosure agreement. Another is that it must be licensed by the state, which makes sense for the credit union that’s already trying to toe a legal line.
But the requirement doesn’t do much for startups and burgeoning businesses that haven’t yet completed the licensing process. And no banks or credit unions are lending money because a loan requires collateral, such as buildings, cash and equipment, which could also theoretically be seized by the federal government, leaving a financial institution with no clear path to recover its investment.
“Because of the federal illegality, right now, it’s very difficult to find traditional lending channels in a financial institution,” Sbrega said.
This dynamic makes it even more difficult for aspiring entrepreneurs to enter the market without the help of investors with deep pockets.
“You can have the best business plan in the world, but if you can’t pay for a location, hire a team, get some product on consignment, then how do you open?” said David O’Brien, president and CEO of the Massachusetts Cannabis Business Association.
GFA Credit Union and BayCoast Bank based in Swansea are the only two financial institutions who have publicly committed to providing services to the recreational marijuana market in Massachusetts.
Century Bank, meanwhile, provides services for the medical-marijuana market. Barry Sloane, president and CEO of Century Bank based in Medford, declined to comment for this story. But he told the Boston Business Journal in December the bank would not provide similar services to the recreational-marijuana market until federal regulations change.
“We only bank medicinal marijuana, and we will continue in that policy until and unless the federal law changes,” he told BBJ.
The absence of traditional banking has pushed some to manage finances using online services, such as PayPal and Venmo, which don’t technically allow such transactions, but given their size and structure may not catch on.
In other instances, people and business owners are turning to cryptocurrencies and blockchain technology with the hope marijuana-related businesses might circumvent traditional financial institutions all together. But not everyone is ready to embrace the up-and-coming technology, according to O’Brien.
“For most business people, they look at that and see it as a foreign concept,” he said.
Sbrega says she believes more banks and credit unions will start providing services whenever the federal government takes some action to reduce the current risk facing financial institutions dealing with the marijuana industry. Legalizing marijuana at the federal level, of course, would be the quickest fix.
But there is other legislation, such as the Safe Banking Act of 2019, under serious consideration by U.S. Congress, which would protect banks serving marijuana-related business from legal and regulatory repercussions from the federal government. The legislation, which passed the House Financial Services Committee in March, could help transform the mostly cash-based industry.
“I think we will see some legislative changes that will remove that dichotomy between the state and federal laws, and once that happens, I do think you will see more financial institutions that will be willing to step forward,” Sbrega said.