A Colorado company has launched a debit payment service for legal marijuana sellers and buyers that, it says, gets around the federal legal hurdles that prevent major banks and card networks from servicing the nascent industry.
CanPay is based in one of the 26 states (and the District of Columbia) with some form of legal recreational or medical marijuana. In November, California, Massachusetts and Nevada each approved recreational marijuana for adults.
But even with those state approvals, marijuana remains a Schedule 1 drug according to federal law—heroin and LSD are among the drugs also on that list—a reality that essentially prohibits federally chartered banks and major payments networks from handling payments from legal marijuana operators. Among the reasons are federal money laundering and related laws targeting drug dealers. A bipartisan group of U.S. senators earlier this year proposed a bill called the Marijuana Access to Banking Act that would permit banks to provide depository and other financial services to state-legal marijuana businesses, but that bill has yet to make it out of committee.
What that means is that legal marijuana buyers typically must use cash for transactions, or a cashless ATM process that’s not connected to national networks. As well, some merchant acquirers have gotten in the business, and some dispensaries accept bitcoin.
Those limitations have left an opening in the market that CanPay hopes to fill. Its mobile app links consumer checking accounts with “non-identifiable, single-use and random payment tokens generated in the CanPay App” that is then used to buy legal marijuana from participating dispensaries, the company said. That allows the transaction, which goes on the ACH network, to bypass the major payments networks.
There are a few catches: Users must download the app from the CanPay site because Apple and Google, mindful of the federal restrictions, do not allow marijuana-buying apps on their sites. And to use CanPay, dispensaries must maintain bank accounts to which those payments are sent; that means working with small, state-chartered financial institutions such as Safe Harbor Private Banking, a division of Partner Colorado Credit Union. To use the service, dispensaries pay 1.6 percent of the transaction plus 25 cents.
“CanPay makes money like a traditional merchant services provider by charging the merchant a small volume-based fee and per-transaction fee,” says Dustin Eide, CanPay CEO. “The CanPay user pays no convenience fees, sign-up fees or other fees for using CanPay.”
Attorneys who specialize in the laws governing legal marijuana sales, but who did not want to be identified because of the issue’s sensitivity, said the CanPay service seems legitimate and does not appear to run afoul of any federal laws.
Eide says one of CanPay’s benefits is the transparency of the service. “CanPay is the only known payment option that affords cannabis retailers the legitimacy that comes from doing business in their own dba [doing business as] name because the network operates in full transparency,” he says. Because of that requirement, he says, CanPay ensures that its retailer clients “are operating under the Cole Memo and FinCEN guidance, and thus every transaction processed on the CanPay network undergoes compliance review.”
The Cole Memo includes U.S. Department of Justice drug-enforcement guidelines that explain how the federal government will deal with states that have legalized marijuana. FinCEN requires financial institutions to file suspicious activity reports.
Even with such precautions, legal marijuana sellers and their payment providers take a risk, says Judith Rinearson, a K&L Gates partner who focuses on consumer financial services. “I believe that it’s important that legal marijuana sellers have a safe and secure way to hold their funds,” she says. “But until the federal law changes, there’s always a risk. Now that we are facing a change in administration, the new attorney general could change entirely the current guidelines and law enforcement’s position.”
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