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Would a ‘Public Cannabis Bank’ Really Work in California?

August 22, 2017
Most cannabis business owners eventually confront the stresses of working in an all-cash environment. If you’re lucky, you’ve found one of the 368 reported banks or credit unions providing limited services to the industry under FinCEN guidelines. You might be experimenting with more exotic solutions like cryptocurrencies or pre-paid services like Tommy Chong’s Green Card. In the past few months, a bold new financial project has re-emerged from Occupy-inspired economic circles to captivate city councils, state treasurers and weary cannabis industry entrepreneurs: the public bank.

'A multi-billion dollar cannabis industry could be the catalyst that propels public banking into becoming a reality.'
John Chiang, California State Treasurer

A public bank is a bank fully owned and operated by the state or municipal government within which it operates. Instead of depositing its money in a third-party bank owned by private interests and insured by the FDIC, the state or city deposits and insures the public bank’s money and builds up its own assets. A public bank can choose whether or not to engage with the Federal Reserve system, which means it could possibly provide a suitable home for the cannabis industry’s cash.

A lot of the action around public banking and cannabis right now is happening in California. The state’s Cannabis Banking Working Group, chaired by State Treasurer and gubernatorial candidate John Chiang, devoted an entire session to the public banking option on August 10th.

“The emergence of a multi-billion dollar cannabis industry could well be the catalyst that propels public banking into becoming a reality,” Chiang said to open that session. “We are here to test the idea and see if it’s truly workable.” His comments have been prefaced by similar considerations of the concept in San Francisco, Oakland, and most recently in Los Angeles.


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Public banks are nothing new, either in the United States or internationally. Beginning in rudimentary fashion with the rise of colonial “land banks,” public banks were developed within the states of Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee and South Carolina, and countries such as Argentina, Malaysia and China currently maintain their own state-run banks. However, the only US public bank currently in existence is the Bank of North Dakota.

Founded in 1919 as a populist alternative to national banks that had reduced their willingness to lend to local farmers, the Bank of North Dakota now controls over $7 billion in assets and $876 million in capital, returning 46% of its earnings to the state every year. It famously occupied the financial high ground during the 2008 meltdown, which kickstarted the current public bank revival.

The Bank of North Dakota refused comment on both the current resurgence of interest or its own relationship to North Dakota’s imminent medical marijuana program. Because the Bank of North Dakota maintains a master account with the Federal Reserve, it probably won’t accept cannabis deposits unless expressly mandated by the state of North Dakota.

Other states have studied the Bank of North Dakota model. Not all have come away impressed. At the Working Group session, former commissioner of the Massachusetts Division of Banks David Cotney cited his state’s 2011 feasibility study, which determined that BND’s model was inapplicable for a state as large and economically and financially diverse as Massachusetts, to say nothing of a state the size of California, which contains the world’s sixth largest economy.


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What Would It Take?

Creating a public bank, even one that would be constructed to accept cannabis business deposits as well as provide merchant services, would be an extremely heavy lift. Banking experts have commented on the extraordinary levels of capitalization needed for such an effort. For the Los Angeles bank alone, initial capitalization costs are estimated between $125 million to $250 million for a bank with $1-2 billion in assets, for starters.

Before founding the cannabis legislation database CannaRegs, Amanda Ostrowitz worked as a bank examiner for the Federal Reserve, which informs her perspective on the road ahead. “The number of different things a bank has to pass through, it’s not just simple stress tests,” she said recently. “It’s safety and soundness exams, consumer lending compliance, there’s so many different factors that go in… There’s a reason why the federal reserve is still refining the systems and equations to this day and why these examiners go through at least two years of training before they’re certified examiners. And to put that kind of infrastructure into place from the ground up is going to be extremely costly.”

Using that logic, Ostrowitz believes getting a cannabis bank up and running would take more time and effort than the industry can spare. As several speakers at the Working Group noted, absent a master account from the Federal Reserve and access to the fedwire, a cannabis bank would merely serve as a vault that couldn’t even complete intrastate transactions with other banks.

Adam Johnson, author of the investment newsletter Bullseye Brief, elaborates: “There are very few banks that are chartered solely within state lines, which means that they’re by definition unable to handle transactions across a state line where it would certainly become illegal transfer.”


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Harborside Is Interested

But some in the industry think well enough of the project to occupy a seat at the table, most notably Harborside Medical Center co-founder Dress Wedding. In addition to serving as Harborside’s Director of Holistic Services, he also volunteers at the advocacy group Friends of the Public Bank in Oakland.

Harborside has not officially endorsed the public bank initiative. But Wedding supports the social and economic justice elements of the public bank, and argues for a bank business plan that would apply for a master account and commingle municipal and cannabis funds.

He is seconded by Matt Stannard, Policy Director of Commonomics USA, who told the Working Group: “What a public bank can do is really  stare in the face of whatever existing guidelines, however ambiguous or however contingent those federal guidelines might be… and say, ‘We are going to do everything and beyond that these non-regulatory guidelines [such as the Cole Memo and the FinCEN guidelines] ask of us.’”


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The possibility that the Federal Reserve would grant an account to such an application is remote. But so was the idea of a legal cannabis industry 20 years ago. The current cannabis-based public banking initiatives are stuck in feasibility study mode, but Ostrowitz feels that the acceptance of some potential variation of this perennial economic moonshot could be catalyzed out of necessity. Its impact could extend well beyond cannabis.

“There’s a lot of these things in history,” said Ostrowitz. “They were built to solve one problem [and they] balloon and become the new way. If it works and it makes sense, then who knows? Maybe this is a model that goes all the way through, but we’ve got to look at the costs and the general impacts on society.”

Justin Hampton's Bio Image

Justin Hampton

Justin Hampton has written about cannabis since High Times published his first national byline in 1993. He has also contributed to SPIN, the Los Angeles Times, and the LA Weekly. He works as a lifestyle/communications consultant.

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  • Chance Kunga

    The Cassandra Warnings and hysteria come by and large from banking interests who fear the competition public banks would engender to the banking/Wall St oligopoly. As the article states, the potential for public banks far outstrips the problems they would solve for the legal cannabis industry. What was not even mentioned was the alternative source of revenue to taxation, and even more importantly to usurious Wall St bonds that are the only options for states and municipalities today.

    • BenSamizdat

      “Oligopoly” = Word of the Day (DING!) I like “Krakocracy” though.

  • CannabisWallet

    “A public bank can choose whether or not to engage with the Federal Reserve system, which means it could possibly provide a suitable home for the cannabis industry’s cash.”

    A bank that does not interact with the fed is not a bank, it’s a safe. Unaccredited banks and credit unions are unable to transfer money with other banks or the Fed system, so account holders would not be able to write a check, use ACH, transfer money via wire, fund a Paypal or Apple Wallet account, etc. All the account holder would be able to do is swap money with others that used the same bank. The cash issues would still be there for anyone attempting to do business with suppliers who have “real” bank accounts.

    • BenSamizdat

      Credit Unions have been working just fine since 1864. They are “accredited” and can transfer money between each other, between them and State and Federal banks and this is not illegal or difficult. The ONLY things Federal Insurance does for banks is (1) it creates an insurance fund of only $100,000 per account and (2) because banks are now overleveraged and undercapitolized, they are often cash-poor and the Feds will give them a “loan” to float their accounts until they can clear things up. It used to be illegal for banks to be cash-poor but decades of dirty politics ruined our system and created the nonsense we have today. Credit Unions must be fiscally prudent and they cannot operate this way, so they don’t need the Feds or their stinkin insurance or those fake-ass “real” bank accounts.

      • CannabisWallet

        Credit unions are not private banks without insurance. They are insured by the NCUA, and have the same type of routing numbers and SWIFT codes that banks do. This is not about insurance, this is about the ability to transfer money between institutions – which requires routing number for US institutions and SWIFT for wire transfers.
        These are controlled at the federal level, and a bank without a routing number is not a bank.

        Perhaps you want to take a look at the case of the Fourth Corner Credit Union being denied a federal charter by the Kansas City Fed after being chartered by the state of Colorado. Here is an article that might shed a bit more light on the situation for you –

        • BenSamizdat

          I never said Credt Unions didn’t have insurance, just that they didn’t have Federal Insurance, which is the threat the Feds use against banks that are doing Canna-business. the NCUA is the National Credit Union Association and is independent of the Feds, just like a State-Created Canna-Bank would be. Because Credit Unions are independently insured, they don’t need that paltry $100k/account insurance buffer. Because Credit Unions are not-for-profit, they don’t invest in crazy pyramid stunts (re: Stock Market), they are never overleveraged or undercapitolized unless there is an in-house scam, which rarely happens. Therefore they don’t need those overnight loans from the Federal Reserve to stay solvent. Also, I said they can transfer money everywhere they want, which anyone should understand meant they have multiple routing numbers. Unless Sessions has pulled some new rabbit out ofhis hat, the threat of the Feds is NOT about revoking routing numbers, it is about revoking insurance and access to the overnight loans. This is why WA, OR, and CO Canna-businesses operate just fine with Credit Unions. Or, I guess if you want to use a real bank, create a shell company called Joe’s Landscaping and convert your cash to money orders at Walmart so they don’t’ ask too many questions at the Bank of Babylon. Another option is always off-shore banks too.

          • CannabisWallet

            NCUA is the National Credit Union Administration and they are a federal agency, I’m not sure where you are missing that part of the equation. While we don’t normally source from Wikipedia, I’ll point you in that direction this time, since the page has correct information on it –

            Credit unions are insured and certified by the NCUA, and again, I’ll refer you back to the Fourth Corner case, which clearly demonstrates that without a federal charter (which was not given to them by the KC Fed) it is impossible to be a financial institution, since the ability to transfer money between institutions has nothing to do with insurance and everything to do with routing numbers. We can all rest assured that if the AG does not personally understand how to stop a banking transaction, there are many others that do, and some of those people are federal employees.

            You might also want to read Sundee Siefriends book if you have not. And last but not least, investigate the BSA/AML regulations that apply to every bank or credit union in the US. More specifically you can read up on the SARs report filing requirements for Marijuana Limited, Priority, and Termination reports. Every bank or credit union that is openly doing business with marijuana industry companies is filing these reports every 90 days on their customers.

          • BenSamizdat

            The NCUA is an “Independent Agency” that exists outside of all Federal executive departments. There is no cabinet secretary over it nor is it beholden to the Executive office of the President. Instead, Congress created the NCUA through a statutory grant of authority. They are as independent of the Federal Reserve as you can get and neither Sessions nor Trump has much, if any, legal authority to threaten them, which is why OR, WA, CO etallia are using Credit Unions as their Canna-Banks. Perhaps you were the one mising part of the equation?

            ANY public bank that is incorporated operates under the aegis of Congress. Any bank that uses Federal currency has to deat with the Fed’s somehow, and that means they need Federal routing numbers, including a Public Cannabis Bank.
            What is the threat here? In the past, the threat was to shut down the Federal insurance, not to revoke routing numbers. I keep asking you if you have any new information or some extraorinary rendition that Sessions is pulling and you keep avoiding answering. As far as I know, there is no new threat here. Under current law, Sessions can’t do squat to the Credit Unions. I don’t care if Cali creates its own Private Bank like Brown Brothers Harriman & Company, it doesn’t matter, if Sessions is somehow doing an end-around Congress and assuming some kind of authority over independent banks to cut off their routing numbers, he can do the same to the private banks and to the Public Cannabis Bank of California and you are right back to where you started. You can’t print your own money, but that would be interesting if Cali tried!

            My only point here is that why reinvent the wheel? Use the Credit Unions, help the school system in situ, or use an offshore bank or create a shell company and cross your fingers that your bank asks no questions about repeated cash deposits. Either way you are not hiding anything from Uncle Sam.

  • BenSamizdat

    What’s wrong with using Credit Unions? They are private banks that don’t need Federal insurance. That’s what Oregon did and it’s working out just fine. The schools get an influx of cash too.

  • Ben Hintze

    The logic that we should not do something because it is difficult is one of the worst arguments. Public banking offers communities the ability to bridge budget gaps for infastructure projects, student loans, and pension funds at low rates. Instead of being beholden to vulture banks like Wells Fargo and Bank of America.