Could Ohio solve the cannabis industry’s cash-only problem?

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By Omar Sacirbey

Could Ohio wean the marijuana industry from its need to do business in cash?

Ohio’s new medical marijuana law proposes a “closed-loop” payment processing system. It would be similar to pre-paid debit or gift cards. Regulators must still decide whether to use the system.

The proposal comes at a time when legal marijuana companies have had to rely on cash-only transactions. That’s because most banks, credit unions and credit card companies are reluctant to do business with them, given the uncertain federal regulatory environment.

That conundrum has forced marijuana businesses to use cash to pay employees, buy lighting and other equipment, or pay taxes. Moreover, MJ business owners don’t have a safe place to keep all that cash, endangering employees and customers.

But could Ohio’s proposed closed-loop system solve such issues? Opinions are divided and several industry officials are skeptical – especially given that a small but growing number of financial institutions are serving MJ customers.

Still, some industry observers reckon the system could work. At the least, it could be a useful stopgap measure in new MMJ markets, such as Ohio or Pennsylvania, where banks are unaccustomed to cannabis businesses.

“It’s not completely out there. At the same time, you also have private businesses in states like Washington and Arizona who are offering different types of payment systems and stored-payment methods,” Robert McVay, an attorney with the law firm Harris Moure in Seattle, said.

How Ohio’s closed-loop system would work

Under Ohio’s proposed system, MMJ patients and registered caregivers would put money in special accounts, using checks, credit cards, or cash at a state-licensed liquor store or a state agency. The money in the accounts could be used for dispensary purchases.

Dispensaries, cultivators, and other marijuana businesses also would have accounts they could tap to buy products and pay bills. If a marijuana business needed to make a payment outside of the closed-loop system, the state would cut a check for the payee.

The Financial Crimes Enforcement Network would have access to every transaction – should the U.S. Treasury agency decide to investigate.

The Ohio Department of Commerce – which is in charge of establishing the MMJ program’s payment system – hasn’t yet made a decision about the closed-loop plan.

“We are just beginning the process to set up Ohio’s Medical Marijuana Control Program, and no decisions around a closed-loop payment system have been made at this time,” Kerry Francis, a spokeswoman for the Ohio Department of Commerce, said. “Also, there haven’t been any decisions around banking regulations.”

Critics weigh in

Critics of a state-run closed-loop system – like the Ohio plan – argue it wouldn’t shield banks from federal interference.

“It is possible that a mandatory closed-loop system could be established and banks would still prefer not to service the marijuana industry to cash checks from the state system,” said Tom Haren, an attorney with Ohio-based Seeley, Savidge, Ebert & Gourash.

At the same time, in more established marijuana markets such as Colorado and Washington, a growing number of marijuana businesses are finding banks to work with them. Observers say traditional banking is the better route, certainly for the long-term.

“As long as the state financial regulator is on board with the institution’s accepting marijuana dollars, a lot of smaller banks and credit unions are willing to roll the dice with federal law in the same way that marijuana businesses are rolling the dice with federal law,” McVay, the Seattle attorney, said. “The banking problem exists mainly in states that are newer to the industry.”

In fact, the number of banks willing to do business with marijuana companies is growing. As of March, 301 banks in the United States had marijuana-touching clients, up from 51 in March 2014, according to federal data.

Despite that growth, banks can still face federal scrutiny if they’re not careful. Earlier this year, a small Illinois bank landed in legal hot water for violations allegedly relating to cannabis. In March, Millennium Bank, with one branch in Des Plaines, Illinois, signed a consent order – a voluntary agreement with court-enforceable terms – with the federal and state banking regulators over alleged violations of the Bank Secrecy Act.

Spotty track record

So far, closed-loop systems introduced in states with legalized marijuana programs haven’t been that popular.

“Let’s not forget that banks can bank cannabis today. It has been done and it is being done,” Dante Tosetti, director of treasury compliance at Privateer Holdings, a canna-centric private equity firm in Seattle, said.

Ohio’s system also could be costly and cumbersome to roll out, Bret Kravitz, an attorney with Dickinson-Wright in Ohio, argued.

“Development and implementation of a closed-loop payment program will likely cost millions of dollars,” Kravitz said. “This significant cost would likely need to be accounted for within the state’s budget and possibly reimbursed through fees and expenses paid by licensed medicinal cannabis businesses and possibly registered patients and caregivers.”

Critics also question whether a closed-loop system would be fast and flexible. For example, if a dispensary owner needs to pay rent, how quickly would the Ohio Department of Commerce issue a check to the landlord?

A temporary solution?

While there may be less demand for closed-loop systems in established cannabis markets, they could be useful in new markets, where banks initially may well be wary of taking marijuana customers. A closed-loop system could at least be a short-term alternative.

“The best solution is a private sector solution. But if Ohio doesn’t have a private sector solution, then I would applaud alternate efforts to protect the safety of the people of Ohio,” Privateer’s Tosetti said.

Omar Sacirbey can be reached at