The Secure And Fair Enforcement (SAFE) Banking Act, which would grant banks a safe harbor to do business with legitimate firms within the marijuana industry, recently passed a House vote with bipartisan support and is now headed to the Senate. One of marijuana legalization’s biggest remaining questions may soon have an answer, and that’s good for more than just sellers and buyers.
At present, 33 states have adopted legislation to allow for the medicinal use of marijuana and 11 have gone as far as to legalize its recreational use. During roughly the same time period, public approval for legalization grew from 25% in 1996 to 61% in 2018. Of course, while D.C. has been deferring to these states for the most part, marijuana remains illegal at the federal level.
This presents a serious challenge for marijuana businesses: Banks are federally regulated, so it’s hard to find one that’s willing to serve institutions that are operating outside of federal law. Without access a depository institution, many of these businesses are forced to deal heavily in cash (not unlike their illegal predecessors). Congress appears to be ready to rectify that and allow businesses that are legal at the state level to enter the banking system.
Who benefits if marijuana businesses access banking?
Well, banks and credit unions for one. A safe harbor would provide banks with access to a new customer base that is engaged in a growing, $10 billion industry. A larger customer base provides banks with more capital and allows them to use that money to provide credit to more individuals and businesses.
Obviously, the emerging marijuana industry benefits from access to banks. Because of the current uncertainty, these firms largely keep their earnings in safes hidden somewhere on their property. Criminals know about this cash on hand, which leads to widespread burglary and armed robbery. The ability to work with financial institutions would also give these newly emerging businesses access to investment opportunities that could help them grow and expand.
The crime problem highlights another group that would benefit from legalizing marijuana banking: state and local governments. Not only would it reduce the likelihood of theft — which would in turn reduce violent crime and ease the burden on law enforcement — it would also help regulators monitor an emerging industry and make sure firms are complying with regulations and tax requirements.
This is part of the reason the National Association of Attorneys General sent a letter to Congress, backed by attorneys general from 38 different states and territories, urging passage of the SAFE Banking Act. In their words, “An effective safe harbor would bring billions of dollars into the banking sector, enabling law enforcement; federal, state and local tax agencies; and cannabis regulators in 33 states and several territories to more effectively monitor cannabis businesses and their transactions.”
Of course, legalizing an industry’s access to the banking system without legalizing the industry itself is not ideal. Legalizing marijuana at the federal level would automatically give legitimate marijuana firms access to the financial sector.
However, given the current political climate, that doesn’t seem likely. Nor is it likely that wide-scale recriminalization at the state level will occur.
Until that larger question is settled once and for all, we have to make the best of an awkward stalemate. Locking legal — or at least de facto legal — businesses out of our financial system probably does more harm than good.
Brian Knight is director of the innovation and governance project and a senior research fellow with the Mercatus Center at George Mason University. Trace Mitchell is a research associate with the Mercatus Center.
