California’s Cannabis Bank Bill On Hold Until 2020

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A version of this piece was published on Sept 3 under the headline “California Cannabis Charter Bank Bill Closer to Becoming Law,” and has been updated to reflect the hold on the bill.

Senate Majority Leader Bob Hertzberg on Monday announced that he will hold SB 51, a bill that seeks to establish limited charter banks and credit unions for cannabis-related businesses, until 2020. Hertzberg said he will work with State Treasurer Fiona Ma, who also worked on the bill, and Governor Gavin Newsom’s office “to iron out necessary clarifications and implementation details.”  

“If we’re going to do this, we have to do it right,” Hertzberg said in a statement. “We owe it to the dozens of cities, counties, and cannabis industry officials who have been supporting this effort to see it through.”

Ma added in a statement that she “will continue to champion this issue on behalf of business investors as well as constituents that voted for a healthy, legal cannabis industry in California.” 

On the last day of August, the California State Assembly’s Appropriations Committee approved the bill, and it appeared headed for the governor’s desk. The legislature will now pick up the bill in January. And because the bill is labeled “urgent,” it will take effect immediately if signed into law.

As Cannabis Wire previously reported, Senate Bill 51 would authorize California’s Department of Business Oversight to license “cannabis depository institutions.” These entities would then be authorized to accept deposits, as well as to issue and redeem special purpose checks, which account holders could use to pay fees and taxes to state and local government agencies, as well as to pay their rent and vendors located in the state for cannabis-related expenses.  

If implemented as is, account holders would be barred from using these checks in any other capacity. They would also be unable to transfer their balances to other banks outside the system. In its analysis of the bill, the Assembly’s Appropriations Committee determined that the Department of Business Oversight will likely spend about two million dollars every year “to adopt emergency regulations, process applications, conduct examinations and enforce the provisions of the bill.” 

These cost estimates, the committee underscored, “rely on optimistic assumptions that enough banks [will] participate in the proposed closed loop system to make it viable.” Also, because the bill would establish an advisory board tasked with generating an annual report of enforcement activities and making recommendations to lawmakers, the Appropriations Committee anticipates “unknown, but likely modest” expenses for the State Treasurer, Controller, and the chief of the Bureau of Cannabis Control, who would be required to participate. 

In a section of the analysis titled “Will it work?,” the committee determined that the bill may only offer “a partial and temporary cash management solution until a more viable federal solution emerges.” However, it noted that “Given the practical challenges these businesses face in completing even the most mundane business activities, even a partial and temporary solution could be worth pursuing.” 

Still, the Appropriations Committee did identify key concerns: First, because institutions would be obligated to obtain potentially pricey private insurance, there is “the distinct possibility that not enough [cannabis depository institutions] will become operational to create a viable system.” “Typically,” the committee noted, “deposits at traditional banks and credit unions are insured by federal agencies with risk pooled across institutions and backed by the federal government. In contrast, a private entity willing to insure a [cannabis depository institution] will likely charge high premiums given the risk associated with cannabis banking.”

The committee also signaled that Hertzberg’s measure cannot guarantee that these institutions will be protected from federal law enforcement, and “one unfortunate side effect of this bill could be the concentration of cannabis business assets into one or several easily identifiable institutions, making them an easier target.”

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