The California legislature is currently considering a first-of-its kind urgency bill, SB 51, the “Cannabis Limited Charter Banking and Credit Union Law.” The law would empower privately insured charter banks and credit unions to be licensed as “cannabis depository institutions”, or “CDIs”, to bank California cannabis money. SB 51 passed the California Senate handily (36-1) in May, and now is working its way through the Assembly. Because SB 51 is an “urgency” bill, if passed, SB 51 would become effective upon Governor Newsom’s signing.
SB 51 seeks to fix the California cannabis industry’s “cash only” problem by providing cannabis entrepreneurs with the means to bank cannabis money in safe, privately insured, and state-approved ways. Currently, federally insured banks will not bank cannabis dollars because of the risk of federal criminal prosecution, as cannabis remains a Schedule 1 controlled substance. While the California bill would not change federal law (which is currently the target of its own proposed amendments on the congressional level through the SAFE Banking Act of 2019), it would expressly authorize state and local, privately insured, licensed banking institutions to bank cannabis money, including for the purposes of paying commercial leases, licensed vendors, and to purchase authorized debt instruments.
But despite the promise of SB 51 to move cannabis out of an all-cash industry, the bill is currently subject to some significant limitations.
Bill Would Impose Significant Limitations on Cannabis Depository Institutions
SB 51 would subject CDIs to regulation and licensure by the California Department of Business Oversight and would create the Cannabis Limited Charter Bank and Credit Union Advisory Board to oversee implementation of the Cannabis Limited Charter Banking and Credit Union Law. Once licensed, CDIs would be permitted to accept deposits and issue “special purpose checks” for only four specifically enumerated purposes: (1) to pay fees or taxes to the state or a local jurisdiction; (2) to pay rent on property leased by, or on behalf of, the account holder’s cannabis business; (3) to pay a vendor physically located in California for expenses related to the account holder’s cannabis business; and (4) to purchase bonds or similar debt instruments issued by the state or a local agency.
Under SB 51, special purpose checks would be required to contain a statement that the check may only be deposited at the issuing CDI, or another CDI that agrees to accept the check. The bill specifies that no private or public entity is required to accept special purpose checks. CDIs would be permitted to cash special purpose checks presented by a non-account holder, but only if the check was issued by that CDI to an account holder for an authorized purpose. Given these significant restrictions on cashing special purpose checks, vendors outside the cannabis industry may be unwilling to accept them.
As a result, CDIs would be very restricted in terms of the type of financial services they could provide to the cannabis industry. Specifically, CDIs would not be able to engage in any activities beyond those necessary to accept deposits and perform actions expressly authorized by the bill, and would be explicitly prohibited from engaging in any banking activity with any non-CDI financial institution, though they may form a banking network with other CDIs. This means that CDIs would be effectively prohibited from issuing debit or credit cards, making loans, and carrying out electronic transfers, at least as to non-CDI institutions. CDIs would otherwise be subject to all applicable requirements of the financial banking laws.
Practical Challenges and Impact of the SAFE Banking Act (2019) in Congress
The bill also presents some practical challenges. Most notably, each CDI would be required to be privately insured. In this nascent industry, and because of the continuing federal illegality of cannabis, prospective CDIs might have difficulty finding a private insurer willing to take on that risk.
This difficulty may be compounded by the pending federal SAFE Banking Act, which would provide a safe harbor for banks and credit unions to serve cannabis businesses. SB 51 provides that, if the federal government removes cannabis from the schedule of controlled substances, or enacts legislation that establishes protections for financial institutions serving cannabis businesses, SB 51 becomes inactive and each CDI must wrap up business within one year. That creates substantial uncertainty for those considering whether to form CDIs.
Although the Department of Business Oversight will have authority to adopt emergency regulations should SB 51 go into effect, it may still need significant time to complete the rulemaking process. According to a recent Assembly report, the Department may not begin accepting applications for licenses until 2021, with the first approval in early 2022.
Despite the bill’s limitations, its enactment would mark a significant legislative advancement in the cannabis industry, and would make California the first state to provide a banking system for the legal cannabis industry. The law would also provide much needed relief to cannabis businesses that have been shut out from banks and credit unions, and to state and local tax collecting agencies, which have had to manage accepting large tax payments in cash.
SB 51 is currently under consideration in the Assembly before the Business & Professions and the Banking & Finance committees. The next hearing is set for July 9, 2019. The last day for any bill to pass the legislature is September 13, 2019, and the last day for Governor Newsom to sign any bill into law is October 13, 2019, so Californians will know in a matter of months whether SB 51 will pass this year.