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

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

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

But two separate analysis reports on the bill released by California Senate Committee on Banking and Financial Institutions and the Senate's Committee on Governance and Finance point out there are substantial challenges. What's more, the proposed law, as of Thursday, has not received public support from any California financial institution or the California Nevada Credit Union League.

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

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

According to FinCEN, an estimated 100 credit unions and 300 banks nationally have been serving the marijuana industry after the 2013 Cole Memo and the subsequent FinCEN guidelines gave financial institutions some level of assurances that they would not face federal prosecution as long as they complied with the Cole Memo and FinCEN guidelines.

Although the Cole Memo was rescinded in January, financial institutions have continued serving the cannabis industry because the FinCEN guidelines have remained intact.

“If California is going to devise a way for cannabis-specific depository institutions to legally operate in the state, those institutions will need to be walled off from the traditional banking sector,” according to an analysis report by the California Senate Committee on Banking and Financial Institutions. “This bill envisions such an approach.”

That approach includes authorizing cannabis limited charter credit unions and banks that would enable them to provide limited services to legal marijuana businesses.

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

The proposed law also would allow credit unions and banks to enter into agreements to establish exclusive closed networks for the purpose of helping each other provide services to cannabis businesses.

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

Private insurance issues include whether insurers would provide such deposit insurance, the cost of that insurance, and whether credit unions and banks would have the required amounts of collateral needed to secure private insurance.

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

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

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

This year's projected marijuana revenue for the Golden State is 32% more than the 2017 cannabis sales for Colorado, Washington and Oregon combined, which totaled $2.8 billion, BDS Analytics reported.

Instant Insights /

Calif. Senator Proposes Cannabis Limited Charter for CUs and Banks

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