Wharton Professor Talks About the Major Hurdles in Marijuana Legalization

The marijuana industry is on the top of the minds of policymakers across the United States. There are so many things to consider, one of the most critical policies being banking regulation. And with former Republican Speaker of the United States House of Representatives, John Boehner, as a confounding new pro-marijuana spokesman, it seems as if there’s never been a more apt time to discuss marijuana legalization and policy.

That’s why University of Pennsylvania Wharton School professor Peter Conti-Brown dove deep into the marijuana industry to discuss the many policy barriers that are causing issues. In particular, he looked how the government’s current stance on marijuana is causing more trouble than it’s solving when it comes to banking.

Marijuana Policy in the United States

In his brief, The Policy Barriers to Marijuana Banking, professor Conti-Brown lays out the issues very simply.

The marijuana industry is booming. Last year, it made an estimated $9 billion in sales, and it’s estimated to generate $1 billion in tax revenue in 2018. According to Conti-Brown, the industry is not going anywhere, but due to how the government views it, we’re looking at an uncertain future. “Legalized marijuana will remain small, uncertain, and unsafe, and the potential tax revenue benefits of it will not be maximized, until there is a national, legislative resolution of this national, legal problem,” he explains.

The problem is that the government’s current outlook on marijuana is ingrained. It started in 1970 when U.S. President Richard Nixon signed into law the Comprehensive Drug Abuse and Prevention and Control Act. At that time, marijuana was placed on the Schedule I drug list with the most harmful and damaging drugs, and it hasn’t been taken off since, even as states have called for marijuana legalization.

Then, in 2013, the Deputy Attorney General James Cole wrote the Cole Memorandum, which said that the DOJ wouldn’t prioritize marijuana enforcement where it was legalized, recreational or otherwise. Unfortunately, that Memorandum came to an end in 2018, when current Attorney General Jeff Sessions nullified it. This has created an even more fragile situation for marijuana legalization efforts, and that’s where professor Conti-Brown sees the most significant problems for banking in the industry.

Banking in the Marijuana Industry

“Marijuana-related businesses face a huge obstacle in that banking them, even if you are going to do a mostly cash business, is risky because we in the United States are a house divided,” Conti-Brown explains in a recent Knowledge@Wharton podcast. “From the state’s perspective, in these states where marijuana has been legalized, marijuana is essentially the same as chewing gum or candy bars … From the federal government’s perspective, this is the same as imported ivory or heroin or any other illegal substance or good. So long as that difference exists, our banking system, which is dominated by federal regulations, cannot allow banks to participate in this even when the states have legalized it.”

This division is a big problem and represented throughout the marijuana industry. For example, in Colorado, the Fourth Corner Credit Union was chartered in 2014 with the mission to service the cannabis and hemp industry. Unfortunately, getting started was a nightmare. They appealed to the U.S. Federal Reserve System for a “master account,” required to function as a credit union, but they were denied. According to the Federal Reserve, the credit union, “did not have the right to inject state marijuana money into the federal banking system, given the illegality of cannabis at the federal level,” Conti-Brown says.

Even after an appeal in the Tenth Circuit Court of Appeals, the bank was denied its right to serve the marijuana industry. And banks will continue to be denied the ability to offer marijuana banking because it’s required that banks abide by federal law, no matter what the state law allows.

“We are in a space right now where the state of Colorado is saying to these incumbent banks but not new entrants, ‘Please service the marijuana-related businesses.’ But the federal government is saying, ‘If you do that, you’re engaged in money laundering for an illegal activity,’ Conti-Brown says. “Normally, it’s more harmonious than that. It’s okay for one state moving in this direction, one state moving in that direction, the federal government stepping aside. That is how federalism works, and it has been our system for many years. But banking has not been a state-based system arguably since the 1860s.”

So, what’s the solution? Professor Conti-Brown sees three approaches that the U.S. could take to solve the marijuana banking problem: two to reject and one to accept. No matter what the government decides, the only decision that Conti-Brown believes is not workable is ignoring the issue or it will soon become a public policy crisis. His three policy solutions are:

Do Nothing. Congress can retain the status quo. This strategy will help the federal government avoid a fevered pitch of instability until tension reaches a crises point at which point a policy decision will have to be made. Legalize Completely. On the opposite end of the spectrum, the government could follow Colorado’s example and completed decriminalized marijuana and create a single policy for the entire country. The problem here is that authority is taken from the states, and too much is unknown about marijuana to impose a national solution. Tailored Approach. The best option is a tailored approach that leaves marijuana legalization in the hands of the states. However, there would also need to be a more middle-of-the-road approach to marijuana via the government.

In the tailored approach to marijuana policy, Conti-Brown sees four areas where the government will need to make changes.

The federal government needs to treat marijuana as it does alcohol and tobacco, giving the states license to control the drug as they see fit in their borders. Congress should reclassify marijuana as a Schedule II drug, allowing broader use and experimentation. Legislation should be changed to allow existing financial institutions to service marijuana-related businesses. Financial regulators should have an official policy to grant access to share or deposit insurance to banking institutions that work with marijuana-related businesses.

“This house divided can’t stand,” Professor Conti-Brown says. “There are going to be real issues with marijuana-related businesses being held up at gunpoint because they’ve got a bad cash management system. Maybe people will be hurt or, God forbid, killed. These are the risks of having a partially legalized business. These are the risks of the gray market, which is what marijuana is in Colorado. You can bet once this punches through to a national conversation that our legislative policy decisions have created a crisis, then I think we can expect Congress to react—because that’s what Congress does.”

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Kelly Vo Kelly Vo is a writer who specializes in covering MBA programs, digital marketing, and personal development. View more posts by Kelly Vo