Home / Be The Change / The Federal Reserve Hates Legal Weed, So They’ve Been Stifling It — But they are Losing the Fight

The Federal Reserve Hates Legal Weed, So They’ve Been Stifling It — But they are Losing the Fight

While we wear down government’s war on drugs with logic and civil disobedience, there is another war still being carried out in states where cannabis is legal. The Federal Reserve declared its solidarity with drug prohibition last year when it denied a master account to the Fourth Corner Credit Union, a non-profit cooperative of state-licensed cannabis manufacturers in Colorado.

According to George Selgin at the Cato Institute:

“Since asking any sort of depository institution to operate without such an account, and hence without access to the Fed’s payment facilities, including its check clearing, wire transfer, and ACH facilities, is like asking a commercial airline to make do with propeller-driven biplanes…”

The Fed denied the master account application because cannabis is still absurdly classified as a Schedule 1 drug by the federal government. Even former Attorney General Eric Holder, who ran the war on drugs for six years, now says cannabis should be reclassified.

Because of the prohibition stance adopted by centralized economic planners—thus making most banks unwilling to deal with cannabis businesses for fear of FDIC seizure—the $6.7 billion industry in Colorado must operate mostly on a cash basis. Faced with this situation, only 30 percent of cannabis businesses have a bank account. Even those that do have a bank cannot take debit or credit cards because the major card carriers will not create accounts until federal law is changed.

Prohibition makes it dangerous to the merchant and employees–since all that cash must be physically moved from place to place–and means that 10 percent of the cash is probably lost to theft.

Now, a startup company called Hypur has created a system which gives banks the safety margin they need to engage with cannabis businesses. Their technical wizardry is making it possible for private institutions to work in spite of federal prohibition, essentially allowing banks to give the Fed the finger.

“The startup’s secret sauce is a software platform that audits a cannabis company in its entirety, shifting through documents and state licenses, financial statements, tax returns, property leases, and more, to ensure it is legal and legitimate. The software connects to the cannabis company’s point-of-sale system as well as the state’s seed-to-sale system, which follows marijuana plants from the grow house until they’re sold to a customer, to monitor the business and ensure compliance.”

Over the past year, they have been able to help five banks in Colorado serve multiple cannabis businesses. Naturally, many banks are eager to get in on the lucrative cannabis market that will only grow as legalization sweeps the nation.

Hypur begins by streamlining the cumbersome process of making sure a cannabis business is compliant with state law. It creates automated notifications for when a license or lease will expire, so the business can remain compliant.

Banks are granted all of the financial information of a cannabis business in real-time, from seed to sale of the end product. Every dollar is accounted for and open to the scrutiny of government regulators.

Here’s where the money came from and here’s how much cash you should expect coming through your door at any given point. We allow banks to know a given transaction is a legitimate transaction between a consumer and that merchant,” said Michael Sinnwell, Hypur’s chief operating officer and co-founder. “We call it Know Your Customer’s Customer. Banks know their customer but now they have an idea of their customer’s customer to make sure it’s not laundered funds.

They even have an app so customers can pay directly from their bank account to the business’s bank account, providing even more transparency if the customer so chooses to participate.

There is no indication that the Federal Reserve will let up on its drug war, but some members of Congress are attempting to reign in government officials. An amendment to a proposed Senate bill addressing addiction recovery services would bar federal officials from punishing banks that work with state-licensed cannabis businesses.

This move would at least allow banks to put aside their fear of the State so they can take part in the lucrative cannabis industry, which would also remove the danger of having to deal in billions worth of cash.

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