Regulation is vitally important for the safety, soundness, and integrity of the financial system, and to ensure consumer protection and public confidence. Regulatory reform is perfectly consonant with those goals; I’ve always believed the regulatory system could and should be effective without being excessive.
That also means that regulations need to change with the times, responding to shifts in market conditions, public demand, technology, and so forth. So last August, when I spoke to the Payments, Banking, and Compliance Conference here in Washington and urged federal action to normalize banking services for cannabis-related businesses, I was speaking from that perspective — the perspective of common sense regulatory reform in response to a rapidly evolving market reality.
I emphasized that marijuana legalization is ultimately inevitable on the federal level, and as such, we need to clarify and harmonize federal banking laws and regulations as they pertain to the state-legal cannabis industry and marijuana-related businesses. I argued — and I believe I may have staked out the clearest position on this question of any federal financial regulator, to date — that the legal and regulatory infrastructure must evolve so this growing industry can take part in the mainstream financial services industry. I urged Congressional action, which needs to happen sooner, rather than later.
That was about eight months ago. I would love to be able to stand here and say that since that day, tremendous progress has been made on this pressing issue, and we’re well on our way to having a framework we can use to move forward.
Unfortunately, I don’t believe that’s the case. At least not yet.
“I emphasized that marijuana legalization is ultimately inevitable on the federal level, and as such, we need to clarify and harmonize federal banking laws and regulations as they pertain to the state-legal cannabis industry and marijuana-related businesses. I argued — and I believe I may have staked out the clearest position on this question of any federal financial regulator, to date — that the legal and regulatory infrastructure must evolve so this growing industry can take part in the mainstream financial services industry. I urged Congressional action, which needs to happen sooner, rather than later.”
I’ll admit I find that frustrating, and I imagine many of you share that frustration. However, I continue to be optimistic about the potential for cannabis banking reform, and we can point toward a number of reassuring signs.
Indicators of Progress
For example, in February, we saw the House of Representatives pass the Secure and Fair Enforcement (SAFE) Banking Act, which would go a long way toward normalizing banking activities for cannabis businesses. I don’t typically take positions on pending legislation, but the SAFE Banking Act seems like a good place to start in addressing this problem. Yes, we know the House has moved on this legislation previously and it hasn’t yet passed the Senate, but let’s be optimistic that further action may follow. Hope springs eternal, I always say.
I can also tell you that the community of federal executive branch regulators is taking this issue very seriously, as we want to be prepared to act when Congress does pass some form of legislation. I can tell you the NCUA has an internal working group focused on preparing for what we’ll need to do to respond when the time comes. So, know that regulators are working to prepare the ground for what comes next, even if those efforts are not entirely visible right now.
Moreover, we’re seeing various state initiatives to address the banking and tax status of cannabis businesses. For instance, just last month lawmakers in New York introduced legislation to reform the state tax code to allow cannabis enterprises to deduct business expenses. Meanwhile, lawmakers in Pennsylvania and Washington are also working on related issues, and I’m sure there are others. I’m not entirely satisfied that the most constructive action seems to be happening at the state level. We need a federal solution, rather than a patchwork of state reforms. But in the absence of Congressional action, I’m pleased that these state officials are working to address this issue, and I commend them for their leadership and foresight.
And we need that federal solution because the situation, as it stands, is untenable. Here we have a rising industry that is growing and will only continue to grow. And yet the basic commercial banking infrastructure needed to provide financial services to this rapidly growing industry is virtually non-existent.
Just a few weeks ago, the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, published their Marijuana Banking Update(opens new window). This report shows that as of September of last year, we had 553 banks and 202 credit unions providing services to marijuana-related businesses, in accordance with FinCEN’s 2014 guidelines. As you all are aware, those guidelines provide the only legitimate way, at least right now, for cannabis businesses to secure depository accounts with financial institutions.
Now, the good news is that the number of financial institutions working with MRBs has, in fact, grown, if slowly. But let’s put those numbers in context. My agency, the NCUA, regulates and insures the nation’s credit unions, which includes almost 5,000 institutions. Yet, only 202 of those are providing services to one of the fastest-growing industries in the nation.
“And we need that federal solution because the situation, as it stands, is untenable. Here we have a rising industry that is growing and will only continue to grow. And yet the basic commercial banking infrastructure needed to provide financial services to this rapidly growing industry is virtually non-existent.”
I am not satisfied with that, nor should you be. That’s why I’m pleased that you all are hosting this event here in Washington today, because what we need is ongoing communication between industry leaders, regulators, and other stakeholders to keep the momentum going.
Credit Unions and the Cannabis Industry
In the meantime, the NCUA is trying to offer as much helpful guidance as possible to the federally insured credit unions we oversee. We make it clear to credit unions, in particular state chartered credit unions in states where marijuana is legal, are welcome to serve cannabis- and marijuana-related businesses provided that they do their due diligence, observe all relevant “Know Your Customer” and Bank Secrecy Act requirements, and adhere to the FinCEN guidance.
I also understand our team has compiled a compendium of all the state laws related to cannabis and marijuana enterprises so that NCUA examiners can quickly refer to relevant state requirements in their dealings with credit unions. So, we’re trying to offer as much clarity and direction as we can, while we await definitive action from Congress.
I’ll note that the NCUA does have some solid background on issues related to cannabis banking, given the work we did in 2019 to normalize banking services for hemp-related businesses. At the time I was serving as the Chairman of the NCUA Board, and one of the first regulatory reforms I undertook was to push for interim regulatory guidance on providing financial services to hemp-related businesses. Many credit union industry leaders were focused on this issue, and we knew we needed to take action.
Our approach was not overly prescriptive or heavy-handed. We simply sought to provide credit unions the ability to test the waters and to determine how best to serve this burgeoning industry until we had definitive regulatory guidance from the USDA, which finally took effect last year. I’m proud of the fact that we were able to take a leading role in setting standards and clarifying a forward direction, at least for the credit union industry. I hope we can continue to provide that leadership, but again, definitive legislative action from Congress on cannabis banking reform is sorely needed.
And let’s be clear: normalizing financial services is only one piece of the puzzle. There are a variety of other issues that will need to be addressed either by Congress or by executive branch regulators. There are going to be regulatory challenges related to the FDA; the agricultural and environmental implications; the law enforcement and criminal justice side; and questions of equity to ensure that the industry is inclusive and all communities are benefiting in a fair and just fashion. Most of these issues are outside my area of expertise and control, and I hope the Emerging Markets Coalition is working with regulators and policymakers in these areas as well to address these challenges.
Frankly, I’m glad that I’m only working on the financial angle because that’s probably the easiest piece of this equation to address. From the financial side, we’re basically talking about handling deposits, clearing electronic transactions, and setting up mechanisms for credit. We have the tools in place to do all of that right now.
I recognize that makes it sound over-simplified. But I want to make it clear that our goal here is eminently achievable. There’s a quote I like from the late General Colin Powell, who said that leaders need to be simplifiers, people who are able to “cut through argument, debate and doubt to offer a solution everybody can understand.” Well, in this case, I think we all understand the problem pretty clearly, as well as the solution. As a regulator, I’ll do all I can, but we need a concerted push, which is why I appreciate the work that the Emerging Market Coalition is doing to drive this issue.
One additional reassuring sign is that I now regularly hear about this issue from financial industry leaders. Whereas even a few years ago, many of them might have been a little diffident or uncertain about cannabis banking, they now raise the question all the time: “What are you all doing in Washington about banking for marijuana businesses?” And I always tell them, “Look, I’m already on your side here! Go talk to your Congressional delegation. We need their help.”