A California senator is proposing a new law that would create acannabis limited charter for credit unions and banks to serve theGolden State's recreational pot industry that is poised to becomethe world's largest marijuana market.

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Sen. Bob Hertzberg, D-Van Nuys, said Wednesday that hislegislation to create what he called “a banking fix for legal cannabis business in California” clearedanother critical hurdle on its pathway to becoming law. SB 930passed the Senate Governance and Finance Committee on a bipartisanvote.

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If the bill is enacted, it would open a multibillion dollarmarket opportunity for California's financial institutions. Salesfrom marijuana products are expected to hit nearly $4 billion bythe end of the year. That sales number is projected to nearlydouble in just four years, according to research market firms.

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But two separate analysis reports on the bill released byCalifornia Senate Committee on Banking and Financial Institutionsand the Senate's Committee on Governance and Finance point outthere are substantial challenges. What's more, the proposed law, asof Thursday, has not received public support from any Californiafinancial institution or the California Nevada Credit UnionLeague.

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The California Bankers Association has reviewed SB 930 but hasnot yet taken a position on it, said CBA Spokesperson Beth Mills.The California league did not respond to a CU Times request forcomment.

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Given that marijuana use is illegal on the federal level, potbusinesses are unable to access banking services because financialinstitutions see too many big risks even though medical marijuanahas been legal in California since 1996 while recreational pot usewas recently legalized on Jan. 1.

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According to FinCEN, an estimated 100 credit unions and 300banks nationally have been serving the marijuana industry after the2013 Cole Memo and the subsequent FinCEN guidelines gave financialinstitutions some level of assurances that they would not facefederal prosecution as long as they complied with the Cole Memo andFinCEN guidelines.

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Although the Cole Memo was rescinded in January, financial institutions have continued serving the cannabisindustry because the FinCEN guidelines have remained intact.

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“If California is going to devise a way for cannabis-specificdepository institutions to legally operate in the state, thoseinstitutions will need to be walled off from the traditionalbanking sector,” according to an analysis report by the CaliforniaSenate Committee on Banking and Financial Institutions. “This billenvisions such an approach.”

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That approach includes authorizing cannabis limited chartercredit unions and banks that would enable them to provide limitedservices to legal marijuana businesses.

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Under the pot charter, those limited services would allow creditunions and banks to accept and maintain cash deposits and issue“special purpose checks” that can only be used to pay fees or taxesto the state and local jurisdictions and pay rent on property thatis associated with the cannabis business. The special purposechecks would permit pot businesses to pay California-based vendorsfor goods and services, and the checks also could be used topurchase bonds or interest-bearing notes or warrants backed by thefull faith and credit of the state.

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The proposed law also would allow credit unions and banks toenter into agreements to establish exclusive closed networks forthe purpose of helping each other provide services to cannabisbusinesses.

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However, what may create a major roadblock for financialinstitutions is that the proposed bill would require credit unionsand banks to secure their own private insurance.

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Private insurance issues include whether insurers would providesuch deposit insurance, the cost of that insurance, and whethercredit unions and banks would have the required amounts ofcollateral needed to secure private insurance.

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“Regardless of the need for a business is to move away from anall cash business model, no cannabis company will likely depositits money in an institution that can't fully insure its depositsand promise liquidity,” the California Senate Committee onGovernance and Finance noted in its analysis report. “The bill'ssuccess depends heavily on the private insurance market.”

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The California Department of Finance estimates the state willcollect more than $600 million in cannabis taxes in 2018.

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Sales of legal cannabis products in California is expected toreach $3.7 billion this year and grow to $7.7 billion in 2021,according to a report by Arcview Market Research, a privateequity company in San Francisco and BDS Analytics, aBoulder,Colo.-based market and consumer research firm. The reportalso projects that by 2021 California's demand for legal cannabiswill be three times greater than any other state.

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This year's projected marijuana revenue for the Golden State is32% more than the 2017 cannabis sales for Colorado, Washington andOregon combined, which totaled $2.8 billion, BDS Analyticsreported.

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