The cannabis industry’s challenges with obtaining banking services were discussed during a hearing held by the U.S. Senate Committee on Banking, Housing and Urban Affairs on debanking practices by federal regulators and major banks.
Republican Chairman Tim Scott of South Carolina tried to focus the Feb. 5 hearing, titled “Investigating the Real Impacts of Debanking in America,” on the debanking of legal industries, such as cryptocurrency and firearms, that he and other Republicans called “Chokepoint 2.0” under the Biden Administration. But cannabis-related debanking came up several times.
“It’s alarming and disheartening to hear stories about financial services firms cutting off services to digital asset firms, political figures and conservative-aligned businesses,” Scott said in his opening remarks. “No regulator, no bank is above the principles of fairness and market access.”
Ranking Member Elizabeth Warren, D-Mass., said her staff learned of 11,955 complaints to the Consumer Financial Protection Bureau from people who have been unable to open accounts or had accounts closed in the last three years. The common theme was that the accounts were closed with no warning, no explanation and no chance to appeal.
While not detailing who or what industries filed the complaints, Warren said, “Lawful cannabis businesses have been unable to open accounts and employees of those businesses have been debanked. This shouldn’t be happening.”
She said, “Banks may be taking shortcuts when assessing risks,” by using algorithms and third parties rather than taking time and resources to identify true risks.
SAFER Act needs more SARs reform, witness says
In 2023, the Senate Banking Committee approved the SAFER Banking Act, which not only intended to allow financial institutions to serve state-legal cannabis businesses with less heavy, costly oversight, it also included a section to address concerns about regulator policies that Republicans say have led to account shutdowns of businesses in legal industries for political reasons.
The bill was not heard on the Senate floor, and similar legislation was never taken up in the House of Representatives. Under a conservative Republican Congress this year, it’s still a big question whether another cannabis banking bill will go anywhere.
But some Democratic senators used the hearing to make the point that cannabis banking reform is needed. And a witness from the Brookings Institution supported changes that would lead to cannabis banking services and protect financially vulnerable consumers.
Aaron Klein, a senior fellow in economics at the Brookings Institution, said the SAFER Act would be helpful, but the last bill wouldn’t have addressed “the costly and unproductive SAR filing” associated with banking state-licensed cannabis companies.
“I fear the bill’s impact would likely underwhelm what is its proponents have argued,” he said in his written testimony. He suggested the committee combine SAFE banking with broader SARs reform or enhance the SAFE Banking bill to address problems with SARs filings.
He said banks filed 2.5 million SARs in 2023. More than 79,000 of them were marijuana-related, according to FinCEN.
Additionally, Klein said banks filed 20.9 million currency transaction reports for cash transactions above $10,000, a limit established in 1972. He said that adjusted for inflation, the limit would be over $75,000 today.
“I don’t understand who is reading all these reports,” he said at the hearing.
Klein said the costs of filing SARs and CTRs are passed on to cannabis-business consumers and result in limited competition and debanked businesses.
“If you’re running a state-licensed cannabis business, you should be treated like other businesses,” Klein told the committee. “Why you’re treated differently makes absolutely no sense.”
Sen. Thom Tillis, R-N.C., said the distinction between cannabis-related businesses and other industries that have had banking problems is that cannabis is still illegal.
“I, for one, think we should re-examine that,” he said. But he said Congress shouldn’t pass banking legislation that would make cannabis “default legal” and wouldn’t provide the industry with any clarity.
“Somebody wants to work on rules of the road and do that and bank the industry in a cohesive, sustainable way that doesn’t kind of skirt around the fact that it is still illegal at the federal level, count me in. Happy to do that,” Tillis said.
Hearing participants also discussed how cannabis business employees and investors have also been debanked.
Stephen Gannon, partner in the financial services practice at Davis Wright Tremaine, who has represented banks and digital asset companies, said he heard a story about the wife of a vineyard owner who happened to be an investor in cannabis. He said the vineyard and the investors in the vineyard all lost their bank accounts.
Digital asset companies also face debanking problems
The hearing was held approximately two years after Silicon Valley Bank, Signature Bank and First Republic Bank were shut down by the FDIC for insolvency. All three banks had a large number of big cryptocurrency and tech-related clients. A joint statement by federal financial regulators in January 2023 highlighted the banking risks related to crypto assets.
“The agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector and carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets,” the statement said.
While the agencies reminded banks to apply existing risk management principals, it did not prohibit or discourage providing banking services to any specific class or type permitted by law.
Still, the effect was pervasive debanking of crypto-related businesses, witnesses said.
One of the witnesses was Nathan McCauley, co-founder and CEO of Anchorage Digital Bank, the first and only federally chartered crypto bank. He testified his bank lost its corporate bank account because of its crypto-related accounts. He declined to name the bank that shut them down.
He said banks were willing to work with them, they were just worried about the regulatory risk.
“Again, we should have been a desirable, low-risk client for a bank. Yet over the course of a seven month period we spoke to over forty banks and were rejected by all of them,” McCauley said in his written testimony. “Many did not even cite a reason; others just vaguely told us it was not within their risk appetite to work with crypto clients.
He said they eventually found banking partners, but clients still don’t have the ability to send wire transfers.
When asked by Sen. Scott how widespread the problem is in the industry, McCauley responded he had been speaking at a meet-up of about 100 crypto founders in San Francisco. “And just as a show of hands, I said, ‘Hey, who here has had trouble getting a bank account or has had debanking issues?’ All of the hands in the room went up.”
