In January, the legal pot industry watched a federal judge kill what looked like its last, best hope for moving away from the daily risks and administrative fog of operating in cash. But now a group of techies is hoping to revive the dream of ditching paper money and legitimizing traditional banking services for the nascent sector.
A slew of new digital services are popping up to offer Colorado businesses an escape from cash. One service called Tokken is the brainchild of a soon-to-be-retired banking regulator named Lamine Zarrad. Zarrad hopes that his experience inside the federal banking oversight system will make it easier for him to persuade banks that Tokken solves the puzzle of legal-pot states in an illegal-pot nation, the New York Times reports.
Zarrad’s software hopes to create the kind of hard-and-fast digital transactions record banks want before accepting pot business. Tokken will eventually tap into Bitcoin technology to generate that paper trail, according to the Times.
The industry won’t switch from dollars to the digital currency, but instead conduct microtransactions in the Bitcoin marketplace that correspond with cash transactions in real life. Bitcoin generates a permanent record for each transaction through something called the blockchain. When Tokken flips a sliver of a Bitcoin between two accounts it owns, it can use the blockchain to generate a record of a real-world pot transaction that might satisfy a brick-and-mortar bank’s concerns about taking pot deposits.
Before this tech push, people in Colorado tried to use more traditional means to liberate cannabusinesses from cash. The Fourth Corner Credit Union (TFCCU) thought it had figured out how to satisfy federal guidelines for cannabusiness banking by creating the most elaborate fraud monitoring and compliance system anywhere in the banking industry, as ThinkProgress previously reported, but the Federal Reserve and National Credit Union Administration denied the group’s application to start taking deposits and making electronic transactions.
TFCCU is suing both agencies, but a judge bluntly dismissed its suit against the Fed in early January. The would-be bankers are appealing that decision, but the prospects for both cases are dim so long as marijuana is treated as an illegal narcotic under federal law.
CREDIT: AP Photo/David Zalubowski
Despite the federal stonewalling for the credit union idea, people like Zarrad are still confident they can find a way around federal prohibition. Tokken and other apps hope to create an intermediary service that gives banks legal certainty, and marijuana businesses an escape from the security risks and financial strain of dealing in cash. The coders’ efforts are guided by the same DOJ and Treasury memos that TFCCU relied upon.
To even begin to take advantage of those federal efforts, both pot sellers and their banks have to be able to see every transaction clearly and in full. Cash dealings put cataracts on the industry’s eyes. Storefronts and growers can keep immaculate records, but banks know that both outright money laundering and self-interested accounting fraud are much easier with a cash business. No matter how much they might trust a client, cash deprives them of the ability to verify her books up to the higher standards of certainty that the DOJ and Treasury laid out for marijuana banking.
The tech-based workaround Zarrad’s company plans to offer will still face the same practical hurdles that TFCCU couldn’t clear. If the retiring regulator can’t persuade traditional banks that the Tokken system gives them a sufficient foothold to deal safely with an industry still illegal at the federal level, all the Bitcoin maneuvering in the world won’t give dispensaries and growers access to business loans and debit card transactions.
And even if bankers decide Zarrad’s scheme fulfills the obligations that DOJ officials have sketched out for them, they may remain sidelined. Administration officials can write as many memos and strike as many regulatory compromises as they want, but they can’t erase the basic fact that any and all marijuana dealings remain criminal under federal law.
The blunt force of prohibition was on full display in U.S. District Judge R. Brooke Jackson’s dismissal of TFCCU’s lawsuit against the Fed in January. While the credit union “attempts to give me comfort that, notwithstanding the oath I took to uphold the laws of the United States, I can grant the relief it seeks,” Jackson wrote, his hands are tied by the federal Controlled Substances Act. The DOJ and Treasury documents “simply suggest that prosecutors and bank regulators might ‘look the other way’ if financial institutions don’t mind violating the law,” Jackson wrote. “A federal court cannot look the other way.”