California regulators are proposing the creation of a specialized, private-sector-based banking system that would allow banks and credit unions to serve marijuana businesses without inviting federal sanctions.

Executives at the state Business, Consumer Services & Housing Agency on Wednesday held a closed-door meeting with banking and credit union representatives to float the idea of a network for financial institutions that have marijuana clients. Agency general counsel Peter Williams later explained the proposal to reporters.

Banks and credit unions would agree to become “central correspondent” banks and conduct transactions on behalf of other network institutions—most likely the small, community institutions that serve marijuana growers and retailers. Cannabis business transactions would be segregated from other normal banking activities.

The state’s Department of Business Oversight, which regulates credit unions and banks, would “maintain a presence” at correspondent banks to watch for any irregularities in the volume of cash handled or the numbers of transactions recorded by both the network and central banks.

“We think this presents to the federal government something which they have not seen before, which is complete transparency in the banking system,” Williams said.

“We’re also coupling that with the fact that we’re going to have three licensing entities that are going to be heavily regulating this industry in a manner that is more detailed and more specific than any other state,” he said. “And banks will have access to those databases so they can know their customers and make sure that their customers are doing everything within the law of the state of California.”

Getting banks and credit unions to accept regulated marijuana businesses as customers has been one of the biggest challenges in states with legal medical or recreational markets. The federal government still deems cannabis an illegal drug. The U.S. Treasury Department during the Obama administration issued guidance for banks that choose to serve the industry. Compliance requires rigorous reviews of bank clients and regular paperwork.

But the lack of any promise of immunity for guidance-compliant banks, and the threat of a change in enforcement priorities by the Trump administration, has kept most large financial institutions from offering services to the marijuana industry. California leaders fear that when the multibillion-dollar recreational market launches in January, businesses will be awash in cash but have no place to safely deposit it.

State Treasurer John Chiang created a working group that studied the problem for a year with the intent to devise a solution. In a report issued last month, Chiang said he would continue studying the idea of creating a public bank while lobbying federal lawmakers for changes in marijuana banking regulations.

A spokesman for Chiang said the treasurer did not attend Wednesday’s meeting with banks and credit unions and declined to comment on the correspondent bank proposal.

Williams said the plan was met “with a generally positive response” by the bankers who attended the meeting. Williams said he and Jan Lynn Owen, commissioner of the state Department of Business Oversight, also presented the idea to federal regulators.

“Each of them gave us a generally positive response to our idea,” he said. The Federal Deposit Insurance Corp. “said they would treat cannabis banking in the state of California like they would treat any other high risk cash-intensive business and all the compliance that goes along with those kinds of businesses.”

The next move is up to bankers, who will have to decide if the promise of additional fees and deposits by potential marijuana businesses is enough to offset fears of federal intervention, Williams said.

Beth Mills, senior vice president of communications and marketing at the California Bankers Association, said the organization is sympathetic to state regulators trying to find a marijuana banking fix, but the correspondent bank proposal doesn’t go far enough.

“It doesn’t change the fact that it’s illegal to bank these businesses,” Mills said. “Really, the solution is at the federal level.”


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