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I have been doing some research on the cannabis industry over the past couple of months, and from what I have been reading it is a consistently growing market, and the barriers to entry are now becoming lower, thanks to various U.S. states making the substance legal, as well as the decriminalization of cannabis.

One pain point that I have seen come up often is that there isn't a reliable payment processor for the sale of cannabis and cannabis derivatives. Large banks usually decline transactions for cannabis payments, and there are many hoops to jump through. This sounds like a a huge opportunity if a solution can be found, but as I was reading more on the legalities of cannabis payment processors, it gave me pause. While multiple cannabis payment processors do exist, there are some very gray areas with how these processors are able to process payments, some bordering on illegal.

It would be great if it can be explained whether creating a cannabis payment processor can be legally done in the United States. Currently, large companies that deal with financial transactions (Stripe, Master Card, Visa, the big banks) reject or prohibit cannabis transactions.

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  • So these big name companies can't figure it out, but we can?
    – Ron Beyer
    Sep 14 at 21:16
  • This is very much a work in process in an area where the law is in flux. Efforts have been made to do so in Colorado, but generally speaking, without real success. Conjecture on what could be designed is beyond the scope of Law.SE so I am voting to close.
    – ohwilleke
    Sep 14 at 22:02
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    @ohwilleke I don't think this is so much a question about how practically to set up a payment processor as it is about whether such a payment processor is legal (see the first sentence of the OP's final paragraph). The question could be answered by citing a relevant law which prohibits processing such payments for example. As such I think it is on-topic.
    – JBentley
    Sep 14 at 22:06
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    @JBentley The law isn't anywhere near that simple or clear. Whether it is legal depends to a great degree on hw creative you are in devising a way to make it so.
    – ohwilleke
    Sep 14 at 23:01
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    @ohwilleke "The law isn't simple or clear" is the foundation of an answer, if backed up by a justification and/or sources. The fact that that is the answer doesn't make the question off-topic.
    – JBentley
    Sep 15 at 0:07
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Recall that federal non-enforcement of the ban no marijuana is via a non-enforcement memo from the Attorney General (which was revoked in 2018) and not an actual change in the law. Since sale of marijuana is illegal at the federal level, receiving money in exchange for marijuana is a federal crime. There are also federal laws prohibiting various forms of "banking" in a broad sense, if you know that the money is the proceeds of a criminal transaction. Taken together, it is not possible to devise a legal banking system to cover such transactions in the US, without a change in federal law (a small change, legalization, or a huge change, tweaking every little law involved in banking).

The main concern is federal laws against racketeering and money laundering. The Bank Secrecy Act of 1970 requires finanicial institutions to report suspicious activity

18 USC 1956 starts the prohibition with

Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity

and since sale of marijuana is illegal, those funds are covered by this law.

The federal agency FinCEN receives and analyzes data on financial crimes, and they issued a "guidance" in 2014 regarding marijuana banking. They affirm the obligation to file Suspicious Activity Reports for marijuana-related businesses, which essentially tells banks to specially-tag SAR to distinguish cases that an institution reasonably believes comply with the Cole memo. But this only addresses the requirement for FinCEN reporting, and does not address other federal regulatory and criminal resources for crime prevention. Even just looking at the FinCEN requirements, dealing with a marijuana-related business imposes a huge ongoing burden on the financial institution.

Civil forfeiture is a risk which a prudent businessman would shy away from. Property that is used in commission of a crime or results from commission of a crime can be sued and seized (that is a bit bizarre, but you can sue property), and the person who holds the property need not have committed any crime. Assets in the possession of banks and credit card companies are not immunized against civil forfeiture proceedings.

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The practical problem is that cannabis is still illegal under Federal law

As such, anyone who deals with it, including as a payment processer must operate entirely within a State where it is legal to avoid falling under the interstate commerce jurisdiction of the Federal government.

For a payment processor, that means staying off the internet and the telephone system since these are inherently interstate (and arguably international) and not using the Post Office. It also means not processing payments to or from residents of states outside the one they operate in. It also means not using any interstate based payment companies like MasterCard or Visa or Paypall.

Which basically leaves cash or some form of ad-hoc IOU system that's settled by cash. In which case, you don't offer much in the way of value-add to the retailer, do you? They can just do that themselves.

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