The Present and Future of Blockchain and Crypto-Currency

The Present and Future of Blockchain and Crypto-Currency

The Present and Future of Blockchain and Crypto-Currency


“Fasten your seat belt. It is going to be a bumpy night” Bette Davis in “All About Eve”

I am sure one wandering trader said to another in history: can you ever imagine exchanging our goods for anything but frankincense and myrrh? We live in the circumstances that we know. Right now, those circumstances are rapidly changing. And, when anything rapidly changes, there is going to be a bumpy ride.


Indeed, the last 90 days have been bumpy for many things crypto, blockchain, stablecoin and NFT (see the definitions below). Many of the major crypto currencies have lost significant value. In fact, billions of dollars have been lost on paper. Of course, billions of those dollars had been gained only on paper. Put it in context, and it is really just par for the course for the nascent world of digital currency.


Source: https://markets.bitcoin.com/crypto/BTC as of 06/09/2021 at 12:30pm CDT


Is Cryptocurrency Currency?

To really understand where we are with cryptocurrency today, is to really understand the function that cryptocurrency serves in the markets. First and foremost, cryptocurrencies do not function as currency in the United States. In the United States, cryptocurrencies are simply speculative vehicles that are based on theoretical values. Why do I differentiate the United States from other countries? Well, because in some parts of the world cryptocurrencies are effectively serving as currency (Vietnam, Venezuela, El Salvador). Even more important than a cryptocurrency being stably pegged against a group of more stable currencies, is being able to utilize and monetize that currency in everyday society. I seem to personally offend Bitcoin Bros when I ask them if they can go buy a chicken in the corner store with their coin.


Even with the loss of billions on paper in cryptocurrencies, the epic failure that occurred from a stablecoin that broke the proverbial buck, and the collapse of Luna and various other crypto currencies and exchanges, I am a believer in digital currencies. In fact, I openly predict the demise of physical currency and the adoption and utilization of multiple digital currencies and blockchains in the U.S. economy in the next 10 years (maybe even less). 


Digital currency and blockchain is simply the technological evolution of a more efficient and secure system of exchanging goods and services. 

However, there is one important catch! In the United States, all digital currencies have to be regulated (A bill was introduced in the U.S. Senate by Senators Lummis and Gillibrand on June 7, 2022). If they are not regulated, they are doomed to failure-at least until we decide to change all of our banking laws to enable human traffickers, drug cartels, Russian Oligarchs, arms dealers, etc. to utilize our stable financial system. (Raise your hand if you are in favor of that. Ok, you are in favor. Now go find 218 members of Congress and 60 U.S. Senators to also agree. It is kind of chilling when I put it that way, isn’t it, bro?)


Despite the obscurity in the name cryptocurrency, much of the coming regulation will be focused around transparency in digital currencies. And banking regulators will be focused on their member institutions risk management and compliance control practices as those institutions intersect with cryptocurrencies, stablecoins, NFTs or, overall Blockchain technologies.  The regulation will come from law enforcement, the U.S. Treasury, and the banking regulators. Law enforcement will be particularly focused on tracking down financial crimes and preventing the use of the system by criminals. The Treasury will be focused on preventing financial crimes and systemic risk to the U.S. economy. And, banking regulators will be concerned with member financial institutions maintain proper risk and compliance controls in their inevitable intersection with cryptocurrencies. And, regulated financial institutions (including the Federal Reserve) and their regulators need to be concerned with how to stay relevant in the inevitable and approaching world that is dominated by blockchain and digital currency. 


DEFINITIONS

Blockchain: Is a digitally, distributed ledger than is immutable by any single party to the ledger. Al cryptocurrencies are based on blockchains. Information comes into the ledger in blocks and is digitally chained to the other blocks. No single user, but instead all collective users, maintain control of the chain. Thus, the description as Trustless)

Cryptocurrency: is an encrypted chain of data that is monitored and organized by a blockchain as described above. A common misnomer is that a cryptocurrency needs to disguise the transactions and parties along the particular chain. However, cryptocurrencies have been used as currencies by people conducting illegal activities.

Stablecoin: is a fixed price cryptocurrency whose market value is attached to a stable asset. Much like a money market fund, a stablecoin should not break the buck; meaning fall below the inherent value of the stable asset it is tied to. (Terra Coins recently collapsed when it was tethered to another cryptocoin, Luna, and Luna went bankrupt. This creates the question about the real definition of a stablecoin.)

NFT: a non-fungible token, is a financial security consisting of digital data stored in a blockchain. NFT’s have been used for a wide variety of purposes including purchasing portions of fine art, music, copyrighted material etc.. The stability of the value of an NFT is open to a wide degree of speculation. The long-term value and market for NFT’s is open to debate.


Click to learn more about the proven HDCompliance higher-risk compliance banking solution. 


Andy Montgomery

Founder & CEO | HDCS 

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What Does Blockchain’s Acceleration Mean for Banking?

What Does Blockchain’s Acceleration Mean for Banking?

What Does Blockchain’s Acceleration Mean for Banking?

 

“Every informed person needs to know about Bitcoin because it might be one of the world’s most important developments”. ~  Leon Louw, Nobel Peace Prize Nominee 

 

The acceleration of the pace of digital currency is remarkable.

Not a week goes by in which I am not involved in some meeting regarding decentralized finance (DeFi), blockchain, cryptocurrency, stablecoin, non-fungible tokens (NFTs) or some combination. And, keep in mind, all of those items are in essence digital currency, and they are all built on blockchain. A few years ago, I would have confidently stated that blockchain will revolutionize the way we do business in the next 20 years. I am moving that target up by a decade. 

 

Why are we seeing this acceleration in blockchain? There are a multitude of reasons, but I will boil it down to the following few: 

 

  1. Demographic Acceptance: I tell bankers all the time to talk to their under 40-year-old clients. Hint: they aren’t in your lobby. Ask them if they hold crypto. Ask them if they can conceive of a way of interacting business on a blockchain. Then ask them if you can Venmo them $20 for their time.
  2. Global crisis: Covid accelerated all things virtual: meetings, commerce, social interaction, eating (well ordering food). Cash is also inherently dirty as it changes hands and is a great way to spread germs. Add to that, it is a way to conduct commerce in regions in which the financial system is impaired (i.e. Ukraine and Russia).
  3. Politics: The far right and the far left both mistrust the centralized banking system and the power of the money center banks. Situations like when Canada blocks the bank accounts of protesting truckers adds fuel to the fire. Gens Y and Z saw their parents and families struggle through a massive financial crisis, which was caused by excessive risk taking from large institutions, which the government bailed out. Putting aside crypto or transparent blockchain, there are large segments of the U.S. population that are looking for an alternative to financially interact.

 

So, what does that mean for the U.S. Banking system?  

 

Well, it is not going away any time soon. In fact, inevitably we are going to see greater regulation in the U.S. surrounding cryptocurrency. The immediate challenge for the banking system will be how to embrace, if not drive, blockchain initiatives while complying with U.S. banking regulation and laws-both those that exist now and those that will be written in the coming months. Clearly, a completely cryptic blockchain can’t be integrated into the banking system or broadly into the money supply as it violates Anti-Money Laundering and Bank Secrecy Act regulations.  

 

We believe there will be a balance struck that requires institutions to understand the direct source of funds on the chain before those funds can be domesticated into the system. More importantly, institutions that drive their own chain or tokens will have a decided advantage over the next decade as we experience a wholesale economic and political transfer of power to Generations Y and Z. 

 

“Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly”. ~ Vitalik Buterin, Co-Founder of Ethereum 

 

If you would like to learn more about HDCompliance’s proven higher-risk compliance solutions, visit our website or contact Andy directly at a.montgomery@hdcompliance.com. 

 

Andy Montgomery  

Founder & CEO  |  HDCS, Inc.

 

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Why Your Financial Institution Should Be Talking About Cannabis

Why Your Financial Institution Should Be Talking About Cannabis

Why Your Financial Institution Should Be Talking About Cannabis


If you have ever attended one of our webinars (or speaking engagements) you will hear us say, “If your institution is in a state, or borders a state, that has some form of legalized cannabis sales, odds are that cannabis-related cash is in your financial system.” This has been an educated guess…until recently.


Here is a well-known fact: In 2021, legalized cannabis sales in the US grew 40% to $25B and a substantial amount is going through the US banking system, unreported or undetected.

Recently, researchers from four (4) different universities put together an abstract titled, “THC and the FDIC: Implications of Cannabis Legalization for the Banking System” dated December, 2021.


Below are some pertinent facts from the research:

  • It examines the effect of state-level adult-use legalization on banks’[1] deposit and lending activity.
  • While the legal implications of accepting deposits from cannabis-related businesses are uncertain, the question of whether these funds make their way into the banking system is an empirical question.
  • It found evidence that banks located in legalizing states exhibited higher levels of deposits after legalization relative to banks in the same period in non-legalizing states.
  • It also found that lending activity increased for banks in legalizing states, and while increases in lending were less sensitive to deposits compared to non-legalizing states, this difference was economically small.
  • Although banks can choose either a state or federal charter, all banks are subject to several federal regulations, which may make banks hesitant to engage in relationships with cannabis businesses.
  • Although there is some guidance, the guidance we have is vague with respect to cost of compliance and threat of prosecution over time as national political attitudes change, so banks may remain reluctant to provide services to cannabis-related businesses.

The research concluded that there were two mechanisms by which banks may accept deposits from cannabis-related businesses:

  1. Banks may believe that the federal government will keep its promise not to prosecute banks that conduct higher-risk customer due diligence. And if banks have these risk-based compliance measures in place and have the proper cost structure in place to allow the benefits to exceed the risks, the bank may accept deposits from cannabis-related businesses.
  2. Cannabis-related depositors may operate discretely and not identify themselves, and the bank simultaneously opts to avoid investigating further (don’t ask, don’t tell).

Even though these research above demonstrates that cannabis-related cash is flowing through our financial system, there still is a banking shortage, including lending opportunities.  Most recently, a Whitney Economic report concluded that over 70% of the cannabis industry’s biggest concern is the lack of banking.


And furthermore, if you are a cannabis-related business, it is not a good practice to conceal your involvement in the cannabis industry as that is, by definition, money-laundering and you and your beneficial owners could face serious fines and potentially jail time as demonstrated in this legal case in Oklahoma.


HDCS works with several community banks and credit unions throughout the US assisting in the implementation of a risk-based cannabis banking and lending programs. After implementation we also assist with the ongoing monitoring and reporting along with keeping our financial institution clients up to date on all local and federal regulation and legislation.


To learn more about the HDCS proven solution, visit our website or email me directly at b.postar@hdcompliance.com.


Becky Postar

COO  |  HDCS, Inc.



[1] The sample was comprised of over 150,000 bank-quarter observations from almost 7,000 unique banks located in 46 different states. 

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What is the deal with big banks and cannabis?

What is the deal with big banks and cannabis?

What’s the big deal with banks and cannabis?


Last fall J.P. Morgan Chase made a strategic decision to no longer facilitate trades of cannabis stocks for its customers. At almost the same time, Bank of America exited as a client a DEA -approved scientific laboratory that was studying the effects of cannabis. Why? Is it because the large money center banks have a cultural issue with cannabis? Considering that more than 70% of Americans support legalized adult sale and use of cannabis, it is difficult to believe that they are worried about customer backlash.


The truth is that the cannabis market is just not big enough yet for them to be concerned about. Am I really saying that a $25 billion market is not big enough for them to be concerned about? Yes! That is exactly what I am saying.


The largest banks in the United States are so massive that they have little interest in taking on the regulatory complexities that come along with cannabis. There is just not enough profit in the business to have to solve it. And, if they get it wrong (i.e., fail to put appropriate AML/BSA procedures and train staff throughout their massive retail complex), the consequences could be significant. I will leave aside that I know for a fact through my interactions with the industry that the money center banks already have a massive amount of legal and illegal cannabis funds flowing through their retail networks. Instead, I will maintain that they will not openly embrace cannabis clients unless they look like and generate the profit like larger corporations that are the bread and butter of the money center banks.


So, the same must be said of crypto right? Not exactly! The money center banks have been able to spurn crypto in the past for the same reasons they spurn cannabis. But crypto represents a real disruption to the entrenched banking system. We are entering a world of blockchain, defi, digital currency, NFT’s and stable coins that is accelerating at a very rapid pace. If the money center banks don’t adapt quickly, they face a considerable attrition in their business models. Don’t believe me? Consider where J.P. Morgan is spending their money and this recent quote from its CEO Jamie Dimon: “the bank needs to pay top dollar for talent and make other investments to beat back the threats from both traditional financial institutions and upstart fintechs. It’s a lot of competition, and we intend to win. And sometimes that means you’ve got to spend a few bucks.” American Banker, January 14, 2022.


For more insight on big banks and cannabis banking, listen to our COO’s interview on the Investor Ideas Podcast.  


To learn more about how HDCS assists community banks and credit unions on how to safely bank the cannabis industry visit our website at hdcompliance.com or contact me directly at a.montgomery@hdcompliance.com.



Andy Montgomery

Founder & CEO  |  HDCS, Inc.   

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Lending and the Cannabis Industry

Lending and the Cannabis Industry

Lending and the Cannabis Industry

 

Roughly 70% of legal cannabis businesses cite lack of banking as their biggest concern according to Whitney Economics, a leading economic consulting firm in the cannabis banking industry. This contradicts what some vendors in the cannabis banking industry claim which is that every cannabis company that wants a financial institution has one. The disparity is that there is a huge difference between having some access to move and secure money and having access to traditional banking services.


    One of the factors contributing to diminished profitability in the cannabis industry is the lack of affordable and stable banking options. As a career bank CEO, I know how valuable a good and open relationship can be for a traditional business with a bank. Those businesses that worked with good and responsive banking representatives in securing PPP loans would certainly attest to that. Of course, the cannabis industry was not eligible for the PPP or any other SBA lending or assistance program. In fact, there are a lot of traditional financial services that help businesses manage liquidity and maximize profitability from which cannabis businesses are excluded (This will be even more evident as interest rates rise).


    One of the biggest inhibitors to cannabis businesses operating with the same profit margins as traditional commercial customers is the lack of affordable debt available to the industry. Commercial businesses use debt to finance premises, equipment, inventory, and cash flow. There is some debt available to the industry, but most of it would hardly be called affordable-think 12 to 15% to finance a commercial building. The good news for the industry is that there are small number of financial institutions (banks and credit unions) that are beginning to offer debt to their cannabis companies.


    HDCS recently wrote a wholesale cannabis lending policy for a bank in the mid-west which received a non-objection from the bank’s prudential federal regulator. The policy includes an adaptation for the allowance for doubtful accounts, risk rating methodology, oversight and other specific credit policy and administration adjustments specifically for the cannabis industry. While regulated financial institution lending needs to be focused on collateral that is non-plant related (i.e., commercial real estate and equipment), adding that leverage at affordable terms is a tremendous benefit to their cannabis customers while providing a significant boost to the institution’s traditional net interest margin (the difference between the rate it pays its customers for their deposits and what it charges customers on their debt). Furthermore, HDCS is actively working on providing financing alternatives on plant-based collateral (AR/Inventory) outside of the institution.


    Finally, there are a whole host of other financial services that are not readily available or affordable to the industry. Insurance, investments, consumer products, payroll, escrow, and title are all inconsistently provided and at a significant variance of costs and terms. As the financial institution has a robust program for vetting and monitoring their cannabis banking customers (assuming they have a sustainable program that will endure future regulatory scrutiny), they can serve as a conduit for additional financial services without those ancillary services having to build their own comprehensive programs.


To learn more about the HDCS comprehensive cannabis banking and lending solution, visit our website at https://hdcompliance.com/.


Andy Montgomery

Founder & CEO  |  HDCS, Inc.

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Considerations for Regulated Financial Institutions in Lending to the Cannabis Industry

Considerations for Regulated Financial Institutions in Lending to the Cannabis Industry

Considerations for regulated financial institutions in lending to the cannabis industry

 

The truth is that there are multiple institutions that are providing depository services to the cannabis industry. In fact, there are far more than most realize. They break down into three categories:

 

  1. Those that have a robust and scaled program, 
  2. Those that have a pilot program or are experimenting with a small amount of cannabis businesses,
  3. And, finally, finally those that have no idea of the extent that cannabis deposits are flowing through their institution. 

 

 However, only a small number of financial institutions are actively lending or considering lending to cannabis businesses.

 

Exploring Lending?

 

HDCS is approached with increasing frequency by institutions that are exploring lending to the cannabis industry. And, why not? If you have already developed a robust and comprehensive vetting and deposit monitoring compliance program, leveraging up a substantial cannabis base of deposits will produce outsized returns for the line of business. 

 

Let’s say you are starting from a net-zero cost of deposits (or more ideally negative) on a cannabis deposit portfolio, there is a significant demand on even homogenous (non-single purpose) CRE that a yield of 8% on a short-term maturity would be a discount to what is currently being offered by non-FI’s to the industry. Thus, even lending 20% of your deposit base with a better than 800 basis point spread is going to substantially increase the profit from the line of business and make those cannabis customers very sticky to your institution.

 

The HDCS Solution

 

Obviously, we advise our clients that there are unique considerations in lending to the cannabis industry that should be addressed. For example, we have developed an addendum lending policy, risk rating methodology, allowance methodology and credit approval process recommendations that are unique to the cannabis industry. We think adding this thought process and special consideration is not only regulatory prudent, but necessary because the cannabis industry is new and increasingly evolving-we don’t have 20-year RMA statistics on the industry. In our view, because of the preponderance of the abundant illicit activity and untested nature of the industry, any cannabis lending should be done with a risk premium and increased reserves.

 

Another issue we work with institutions on surround secondary support for loans. For CRE collateral that is not single purpose or marketable equipment, the increased risk is very manageable. However, if the primary source of repayment fails for a cannabis borrower, an institution, obviously, can’t take back any collateral that is associated with the plant itself. We work with the financial institution on alternative forms of collateral to provide that secondary support, but any institution that lends on cultivation, distribution, manufacturing, or retail directly associated with the plant will probably be classifying the loan as unsecured.

 

“Growth is never by mere chance; it is the result of forces working together.” – James Cash Penney

 

In summary, we believe that any financial institution that has put the appropriate infrastructure in place to solve the comprehensive, compliance framework necessary to run a safe and profitable cannabis banking line of business should at least evaluate providing some lending to their clients. It will not only boost the profits of the program, but as more and more financial institutions enter the market it will also make your cannabis clients harder to pry away.

 

HDCS always recommends that before engaging in cannabis lending that an institution presents a thoroughly considered plan and receives a non-objection from its regulators. HDCS is happy to help your institution walk through the considerations of cannabis lending and in developing a plan. 

 

To schedule a meeting to learn more about Cannabis Banking and Cannabis Lending success stories or cautionary tales, please contact us through our website at https://www.hdcompliance.com/about-us or contact me directly at a.montgomery@hdcompliance.com.

 

Andy Montgomery
Founder & CEO  |  HDCS, Inc.    

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State Legalization

State Legalization

The list of states without a legalized cannabis program is now very short and getting shorter. Those states are:

 

  1. Idaho
  2. Indiana
  3. Kansas
  4. Kentucky
  5. Mississippi
  6. Nebraska
  7. North Carolina
  8. South Carolina
  9. Tennessee
  10. Wisconsin
  11. Wyoming

 

Out of these 11 states, several are in serious discussions regarding legalization. With voters in Nebraska and Mississippi more than likely approving medical measures at the ballot next year.

 

I do want to point out that some states that have approved programs struggle with implementation.

 

For example, almost 70% of voters in South Dakota approved an adult-use program in 2020; however, the ballot wording was found unconstitutional.

 

The State of NY approved adult-use through the state legislature, but implementation of that program is struggling (for several reasons).

 

Another issue I want to mention is that there are states that are considered to have legalized medical cannabis, but have very limited, almost non existing programs, like the states of Louisiana and Texas for instance.

 

Contact me if you would like to learn more about HDCS and how to safely bank the cannabis industry.

 

Becky Postar

HDCS | Director of Product and Business Development

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Why free isn’t free in Cannabis Banking!

Why free isn’t free in Cannabis Banking!

Why “free” isn’t free in cannabis banking

 

Why? Because, no matter how you look at it, adding a cannabis banking line of business adds a material amount of risk to an institution. If an institution does not have a clear-eyed view as to how to scale a cannabis banking line of business and make a meaningful return on the program, why even add the risk at all?

 

Surprisingly, we have seen several institutions that have added the line of business but are implementing solutions that will either inhibit them from scaling from the outset or that will be problematic as more institutions enter the market. There are 3 approaches to cannabis banking that I think should carefully be reconsidered and remodeled:

 

  1. The long-term pilot program: Many of these programs are designed to test the risk and iron out the kinks before going larger. A potential problem with these programs is that they tend to be very manual and unprofitable for the institution. Thus, they lose visibility within an institution and eventually get abandoned.
  2. The all-manual scaled program: This is when an institution relies solely on human capital to build and scale a program. A comprehensive cannabis program requires ongoing subject matter expertise specific to cannabis, vetting and auditing of cannabis businesses, and monitoring of deposits to match the cannabis business’ “Seed to Sale” platform. We have seen virtually no 100% staff-based program outperform any of the technology platforms in ROI at scale.
  3. The model that places an undue cost on the cannabis related business: If the technology platform that a financial institution uses is free to the financial institution but shifts the cost unduly to the cannabis business (for example by charging per deposit transaction), it makes those businesses very vulnerable as more competition enters the market. Furthermore, charging your cannabis customer per transaction can discourage the cannabis businesses from depositing all of their cash inside of the institution, which was the whole reason to enter the line of business in the first place. We encourage institutions to seriously model what their third-party providers are making on the cannabis platform versus what the institution is making-after all, it is the institution that is taking all the risks.

 

Our Solution is Safe and Profitable for Financial Institutions


In our view, financial institutions should collectively evaluate the risks, returns and resources required before entering into cannabis banking. It can be a safe and profitable program for many financial institutions, but the return should justify the risk and the bulk of the return (or even a meaningful part of it) should not be going to a third-party provider that is not carrying any of that risk.

 

HDCS can help you evaluate the risks, rewards and resources especially if you are in the initial decision-making process of cannabis banking, and HDCS can assist you with implementing and maintaining a safe and profitable program from the beginning all the way through examinations. We are with you every step of the way.

 

To learn more about our comprehensive solution, please visit us at hdcompliance.com or email me directly at a.montgomery@hdcompliance.com.

Andy Montgomery
Founder & CEO | HDCS, Inc.

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State Legalization Roadblocks

State Legalization Roadblocks

And since the election New York, New Mexico, Virginia and Connecticut have passed adult-use sales through the state legislature and signed into law by the governor.

 

But I want to circle back to a couple of states: Even though over 74% of voters approved Mississippi’s medical cannabis Initiative 65, the state’s supreme court found it unconstitutional on May 14th.

 

And almost 70% of South Dakota voters approved adult-use Amendment A but it too was found unconstitutional by a state judge and is now in the state’s supreme court.

 

And over 54% of South Dakota voters approved medical Measure 26 but it was initially delayed in state legislature; however, the state has moved forward and claims it is on schedule for implementation.

 

So, even though the majority of voters are supporting and approving these measures and initiatives, it does not necessary mean they will be implemented.

 

Please join us next Tuesday the 29th for a free 30-minute joint webinar on cannabis banking and cash management best practices. To register, visit our website at

 

https://www.hdcompliance.com/events

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Our mission is to help bankers make informed decisions about whether to serve the cannabis industry and how they can do it both safely and profitably. So subscribe to our blog to stay up to date on the latest information on legislation, regulations, market insights, and compliance best practices. 

 

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Will the SAFE Banking Act Commoditize Banking Services for the Cannabis Industry?

Will the SAFE Banking Act Commoditize Banking Services for the Cannabis Industry?

Will the SAFE banking act commoditize banking services for the cannabis industry?

 

As we move inexorably closer to the SAFE Banking Act becoming law, there is anticipation that this will move large numbers of financial institutions into providing a broad-based of financial services to the industry and make the pricing of those services competitive with more traditional commercial businesses. I hate to burst that expectation, but it simply won’t.

 

After SAFE Banking gets signed into law FFIEC (the Federal Financial Institutions Examination Council) will begin writing the rules and regulations to govern how federally chartered institutions provide banking services to the cannabis industry. The truth is that FFIEC has been gathering data and observing cannabis banking for some time now. Most of us who have been involved in regulated financial institutions for some time are fairly confident that cannabis will be deemed among the highest risk type of customers (think casinos, check cashing operations etc.) and that the regulation for Federally chartered institutions will be pretty stringent. Why? The answer is that there is a lot of illicit cannabis business that coexists alongside the 100% legal and compliant business. Well, that doesn’t apply to State chartered institutions, right? Well, not right! As long as a bank has their deposits insured by the FDIC or a credit union has their deposits insured by NCUA, compliance with the federal regulations cascades down to state regulators.

 

As there has been no real regulatory apparatus provided to financial institutions in banking cannabis to date, many of the existing programs may have to reinvent themselves and put a lot more infrastructure in place in order to keep their programs. Some of those institutions will decide it is not worth the expense or risk. This is especially true if the institution has not scaled their program and only has a handful of cannabis clients. Thus, this could reduce, at least temporarily, the number of institutions that bank cannabis. And, for those that choose to continue or go into cannabis banking, they will need to put robust and comprehensive compliance programs into place which will add cost to the institution that they will need to pass on to cannabis customers.

 

We do believe that more institutions will move into cannabis banking over time once federal clarity around regulation has been established. But, they will do it with comprehensive programs and the intention to produce a return for taking on the additional risk. There are other changes that can also be very positive for the industry. With Federal banking clarity, the large payments interchanges (i.e., Visa, Mastercard, AMEX, Paypal, etc.) will be likely to enter the space. Also, major armored car services like Brinks and Loomis Fargo will make it much more efficient to courier cash. Finally, in recent iterations of the bill, the SAFE Banking Act would allow for financial institutions to lend to cannabis businesses with a government guarantee, which would ameliorate some of the collateral risk for institutions. Thus, SAFE Banking will be a substantial boon to the cannabis industry. It will provide open, permanent and broad-based financial services and more efficiency in operations. If only it solved for the unfairness of 280E, but that will take legalization I suppose. 

 

To learn more about what a successful, comprehensive cannabis banking program looks like, contact us through our website at hdcompliance.com. You can reach Andy Montgomery at a.montgomery@hdcompliance.com.

 

Andy Montgomery
Founder-CEO | HDCS, Inc.

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