http://www.businessweek.com/articles/2014-01-09/legal-pot-the-gateway-drug-to-state-run-banking

Banks

Legal Pot: The Gateway Drug to State-Run Banking?


Marijuana clone plants grown at The Joint, a medical marijuana cooperative in Seattle, on Oct. 16, 2013

Photograph by Ted S. Warren/AP Photo

Marijuana clone plants grown at The Joint, a medical marijuana cooperative in Seattle, on Oct. 16, 2013

If ever a hippie dream existed, it would probably look something like what’s being proposed in Washington by Democratic State Senator Bob Hasegawa. He wants to open a state-run bank specifically to serve Washington’s newly legal marijuana industry. The proposal would solve two real problems: Pot businesses would no longer be trapped in an all-cash economy thanks to federal laws that prohibit banks from handling drug money, and the state would send less money to Wall Street.

There’s just one state-run bank in the country: the Bank of North Dakota. It uses the revenue collected through taxes and other government income to provide capital for low-interest loans to state residents, including students, homeowners, and farmers. The bank’s operations return millions to the state’s coffers. (It’s worth noting that the bank has nothing to do with pot.)

As the financial crisis caused a credit crunch for borrowers, some citizens and states themselves started looking to North Dakota as a model of how to keep lending afloat. “After the banking crisis in 2008, some farmers came to me from eastern Washington, literally in tears, saying their credit was being cut off,” Hasegawa says.

Heather Morton, who tracks financial regulation at the National Conference of State Legislatures, found bills in six state legislatures in 2010 related to the creation of state-run banks. Interest swelled as the economy continued to struggle and the Occupy Wall Street movement took up the idea of state banks as an alternative to Wall Street. By 2011 the number of states with bills contemplating the creation of their own banks hit 15, according to Morton’s research, before legislation eventually tapered off last year as the economy improved.

In Washington, one of eight states in which legislation was put forward in 2013, the state-banking push predates the advent of a legal marijuana retail sector. Hasegawa’s bill, which he has sponsored for several years, gained support from 44 out of 98 lawmakers in 2012 but was killed in the banking committee. Each year, Hasegawa tinkers with the legislation in response to opponents, who include the state’s banking community, bond brokers, and the state treasurer. The critics argue that the effort is too risky and would diminish competition, among other things. (After lengthy study, a formal commission in Massachusetts recommended against creating a bank there, saying the effort would be more capital-intensive than it’s worth.)

After voters approved legalizing recreational marijuana in Washington last year, however, Hasegawa saw a new opening. Marijuana businesses have had to resort to largely operating in cash and have been agitating for federal authorities to give banks permission to handle pot accounts. Because pot isn’t legal at the national level, federal money-laundering laws prevent financial institutions from handing marijuana-related money.

Hasegawa has submitted a new bill for the 2014 legislative session that would create a state-run bank as the sole depository for the state’s marijuana businesses. Passage of the bill, which Hasegawa knows is a long shot, would provide “a foot in the door” to a broader state-run bank. But even if it fails, the state senator still sees an upside: “It has drawn the debate away from the detractors of the other arguments.” Washington’s legislative session opens on Jan. 13, and recreational sales in the state are expected to start this spring.

Opposition has now “focused on the illegality of marijuana itself,” Hasegawa says, “which makes me think a lot of their other arguments are really just smoke screens.”

Weise_190
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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