As Prepared for Delivery on September 9, 2021
Thank you very much, and it’s a pleasure to join you today.
I was sworn into a term on the NCUA Board in 2019—having served as chairman until January of this year — but this is actually my second term of service on the Board. I was appointed to the NCUA in 2005 under President Bush and served a four-year term that ended in 2009. I can tell you that serving two appointments at the same agency, separated by a decade, is one way to gain a unique vantage point on how rapidly things can change.
For example, when I first served on the NCUA Board, I don’t know that I would have attended this type of conference. Of course, that’s assuming I would have been invited in the first place.
At that time, several states already allowed qualified patients to access and use marijuana for medicinal purposes, but as a regulator, I would not have considered the banking challenges of the cannabis industry to be at the top of my list of concerns. Of course, during that time, we were also facing the housing crisis, the financial industry meltdown, and the subsequent recession and recovery – so we were focused on some particularly compelling priorities.
Well, here we are today, which is a testament to how fast things can evolve in a relatively short time. I take that idea of change and evolution as my theme today because as a regulator, I’m concerned that the legal and regulatory infrastructure surrounding the cannabis industry is not evolving quickly enough.
And so as not to leave you in suspense, let me be clear about where I stand: it is time for federal action to clarify and harmonize the laws and regulations surrounding the state-legal cannabis industry and marijuana-related businesses so that this industry can take part in the legitimate financial services industry.
Growth of an Industry, and New Challenges
For our purposes here today, I don’t need to recount all of the statistics about the number of states that have legalized cannabis in one form or another or the explosive growth of the state-legal cannabis industry over the last decade. If you weren’t already familiar with those facts and statistics, you wouldn’t be here. It’s simply a remarkable social and cultural change that has taken place right before our eyes, and it’s only going to continue to develop over the coming years.
Yet while this revolution has unfolded, federal law surrounding marijuana and cannabis-derived products has barely changed. There have been some welcome changes at the federal level, like delisting hemp from the list of controlled substances in the 2018 Farm Bill, but even those changes have been slow to arrive and relatively marginal. And there’s been no meaningful legal change on the federal level when it comes to marijuana, despite all the rhetoric around marijuana legalization federally.
As a result, we’ve seen only limited development of the basic commercial banking infrastructure needed to provide financial services to this rapidly growing industry. Looking at the data from the Treasury Department’s Financial Crimes Enforcement Network (opens new window), or FinCEN, as of the end of last year there were only 515 U.S. banks and 169 credit unions providing banking services to marijuana-related businesses s in accordance with the 2014 FinCEN guidelines, which as you all know is currently the only legitimate way for cannabis businesses to secure depository accounts with financial institutions.
Let’s think about those numbers. My agency, the NCUA, regulates the system of federally insured credit unions, which includes more than 5,000 institutions. Yet, only 169 of those are providing services to one of the fastest-growing industries in the nation. That can only be described as a serious market failure.
The problem is not with the financial institutions themselves; many of them would be happy to provide services to the industry, but they’re unsure of how to proceed given the limited FinCEN guidance. The guidance from FinCEN, along with the Justice Department’s guidance in the 2013 Cole memo, which was rescinded, was at least a start. But those were published in 2014 and 2013, respectively—almost a decade ago—and are too vague in any event to give financial institutions the clarity and confidence they need to move forward with cannabis banking beyond providing basic bank account services.
This means we have this promising industry that’s developing and growing rapidly, yet no way for the people who work in this industry to conduct the most fundamental business operations through legitimate financial channels. That is, frankly, an untenable situation. In stating these facts, I’m not telling you anything you don’t know — again, it’s why we’re here today. The more critical question centers around what needs to happen next.
Here’s a basic reality: as a rule, regulators really don’t like to get out too far ahead of the policy process. We always seek to respect the existing statutes and to defer to Congress as the policy-making arm of the government. However, there are times when an independent regulator in the executive branch needs to step forward to provide leadership, or at least nudge things along. I believe that’s the case today with marijuana and the financial services industry.
The Hemp Precedent
I have some relevant experience here based on the work we did at NCUA two years ago to normalize banking services for hemp-related businesses. One of the first regulatory reforms I undertook at the request of Senator McConnell was to push for interim regulatory guidance on providing financial services to hemp-related businesses. Many credit union industry leaders were focused on this issue, and we knew we needed to take action.
After Congress legalized hemp as an agricultural commodity, removing it from the list of controlled substances and allowing its cultivation in accordance with applicable state plans, there remained a lack of clarity about the industry’s regulatory status while we awaited new rules from the U.S. Department of Agriculture. Keep in mind that the 2018 Farm Bill only addresses the cultivation of hemp — it is silent regarding the production and processing of hemp-derived products like CBD, which represents a huge slice of the hemp market in the United States.
And so, a lot of hemp entrepreneurs found themselves stuck in a regulatory limbo, and as a result, financial services providers were unsure of how to work with them, especially since FinCEN guidelines only addressed state-licensed marijuana businesses and bank accounts. This new industry needed access to financial services to get off the ground – these entrepreneurs needed access to capital to invest in facilities and equipment; they needed to be able to meet payroll; they needed access to bank accounts, so they didn’t have to rely on cash transactions; and so forth. Does that sound familiar?
So, I wanted the NCUA to take a leadership role in providing some clarity while we worked through that transition. In our initial interim guidance, we sought to keep it fairly simple and to give credit unions the flexibility they needed to work with lawfully operating hemp-related businesses. As long as they did their due diligence and managed their risks accordingly, we wanted credit unions to be able to experiment with the best way to work with these businesses. Based upon feedback to our initial guidance, we followed that up with additional advisory guidance in June 2020 to address unforeseen issues and to provide additional clarity.
Our approach was not overly prescriptive or heavy-handed. We wanted to provide credit unions the room to experiment and to decide for themselves how best to serve this burgeoning industry while we awaited the definitive regulatory guidance from the USDA, which finally took effect this year.
Now, there are still some significant challenges in the hemp space, and things haven’t progressed as quickly there as we might like, in part because they still don’t have a clear regulatory direction from the Food and Drug Administration. But I’m proud that, at least when it came to credit unions, we were able to take a leading role in setting standards and clarifying a forward direction.
I’d like to see something similar happen for cannabis and marijuana-related businesses, which is why I’d like to outline three steps that I would like to take now, as a regulator, to move this issue forward.
First, we already have a working group at the NCUA devoted to cannabis banking, and I’ve been in communication with them and will be working with them to determine what we might do next to better address the challenges to cannabis banking on our side. At this point, we may be somewhat limited in what we can achieve, but I’m urging the agency to think hard about taking those next steps.
Second, and this might be the most significant action item we can achieve right now, I am calling for the establishment of a formal working group on the part of financial regulators to take the lead on this issue and to start developing a principles-based approach to cannabis banking. The good news is that we already have a vehicle through which this could be accomplished: the Federal Financial Institutions Examination Council, or FFIEC. Most of you have never heard of FFIEC, which is fine, but it’s an interagency body that develops uniform principles, standards, and report forms for the federal examination of financial institutions. The NCUA is a member, and I’ve done a lot of work with the Council over the years, so I know it’s a natural place for this working group to reside and to deliver a preliminary regulatory framework that we can share with other regulators and members of Congress who share our concern about addressing these problems.
Third, I will urge Congress, in my capacity as an individual Board member, to take action to address cannabis banking as the 2014 FinCEN guidelines are simply not enough to support what hemp and cannabis businesses need to grow and sustain. You’re probably aware there are various legislative proposals dealing with these challenges. I’m told the SAFE Banking Act, for example, includes a number of promising proposals that would go a long way toward providing the clarity we need, but for now, I don’t plan to endorse any particular piece of legislation. Congress should make that determination, but I will be happy to provide any advice or guidance from the regulators’ perspective that will be of assistance. In fact, just next week, I’ll be talking to one of the credit union trade associations on their annual visit to meet with members of Congress, and I’ll be encouraging them to help us make the case to their representatives and senators. I certainly appreciate the members of Congress who are taking part in this conference today, and I look forward to working with them to make progress on this issue.
A caveat here: I’m a financial services industry regulator, and I can only speak to issues related to that area. I recognize there are a host of other regulatory issues that will need to be considered to address consumer protection issues, environmental issues, and other concerns.
The good news is that the banking issues should be relatively straightforward, compared to some of those challenges. We’re talking here primarily about taking deposits, opening up lending at reasonable rates of interest, and opening increased access to payment systems so you don’t have to handle massive piles of cash. If we can address those needs in a straightforward manner, we create an on-ramp to legitimize the cannabis industry while ensuring the safety and soundness of the financial system. Really, these should not be such difficult issues to address, should they? The 2014 FinCEN guidelines laid the groundwork for depository accounts, but it’s time now to build on those guidelines to accommodate the rapid growth of the industry.
I’ve spent a good deal of time and energy on this issue over the last couple of years, talking to experts on the legal side, on the industry side, in the financial services industry. I’ve heard a variety of perspectives, but there’s one common refrain: they all agree that legalization is a matter of when, not if – and they urge federal action to get it done.
The bottom line is this: Legalization in some form is going to happen, and the abdication of responsibility to address these issues in Washington is simply ludicrous. This is precisely the time we need leadership at the federal level to steer this ship in the right direction. In one of my discussions with an attorney who works on these issues, he noted that this is a unique opportunity to create a completely new industry – but that will require rethinking an outdated approach to marijuana that centers around the prohibition mindset.
As the great management thinker Peter Drucker noted, “The greatest danger in times of turbulence is not the turbulence – it is to act with yesterday’s logic.” Or perhaps, in this case, to fail to act based on yesterday’s logic. It’s time to get past yesterday’s logic and focus on the future.
Moreover, as I look at this promising, growing industry, I can’t help but notice that it sits comfortably at the intersection of several of my top priorities: regulatory reform, support for entrepreneurialism and innovation, and financial inclusion. That’s a tremendous opportunity that brings tremendous challenges – but it requires leadership to get it done. And continued inaction, just allowing a patchwork of ad hoc state solutions to take effect, is not my idea of leadership.
The fact that we haven’t had adequate federal leadership on cannabis banking to date doesn’t mean that we can’t have leadership now, so I’m happy to take what actions I can to create forward momentum. For those of you in the industry, I can’t promise you that you’ll get everything you want—but certainly, if we can address key needs like commercial lending and opening access to electronic payments for this industry, we’ll have made a significant step forward. And my pledge to you is that I’ll be working with you to get it done.