Payments start-ups in the U.S. have said the rift between federal and state regulations means banks are unwilling to process transactions linked to legalized marijuana businesses.

Despite a flurry of state laws making it legal for retailers to supply marijuana, industry insiders believe a federal-level ban on the drug means the vast majority of transactions — worth billions of dollars — are being made in cash.

Financial institutions, fearful of being on the receiving end of stinging enforcement actions by federal authorities, will often refuse transactions or deny account services to businesses involved in the industry.

“Banks are very risk adverse, especially when it comes to dealing with marijuana businesses,” said Adam Healy, the chief information security officer at digital wallet provider Tokken.

“How can we de-risk these transactions?”

Tokken, along with other start-ups such as Kind Financial and PayQwick, have created online systems that help dispensaries and banks record and monitor transactions, with the goal of moving transactions away from cash.

“Really, how we see it in terms of law enforcement, is that we don’t want to operate in the shadows,” Healy told PaymentsCompliance.

“We really see it as an advantage to provide stability for the industry.

“We are talking about billions of dollars in transactions.”

Industry analysts GreenWave Advisors and the Arcview Group estimated the cannabis industry in the U.S. last year reached $6.5bn and $6.7bn respectively.

Both research groups estimate the industry will surpass $20bn by 2020.

But, with few exceptions, marijuana customers pay with cash, leaving retailers to pay their employees, taxes, landlords and suppliers with stacks of possibly questionable and hard-to-trace cash.

“Consumers and retailers don’t want to deal with the cash issue,” Healy said. “Local governments don’t want that volume of cash on the street due to public safety concerns.”

He added that if it was easier to bank marijuana-related businesses it would also mean billions of dollars in liquidity for smaller, community banks and millions in tax revenue for local and state governments.

That means the business cannot only accept card transactions from consumers but also utilize its balance like any other mainstream company with a business banking account, paying suppliers, employees and taxes.

Tokken was founded in February last year by a formal federal banking regulator, and says it helps law enforcement authorities by recording all transactions indelibly using distributed ledger technology.

All transactions are also “geofenced”, meaning the company can prove customers are making purchases where they say they are.

PayQwick, which has also targeted the legalized marijuana sector, has taken a slightly different approach.

Registered federally as a money services business, the firm is a licensed money transmitter in Washington and is overseen by the state’s Department of Financial Institutions.

It is also supervised in Oregon by the state’s Division of Finance and Corporate Securities, and intends to expand into Colorado, Nevada, and other states that adopt seed-to-sale traceability systems.

Marijuana customers, retailers and producers are able to use PayQwick’s app, website and prepaid card to make purchases or transfer money between each other.

The system allows for a customer to sign up for an account online and link it to their bank account and transfer funds to PayQwick, which sends the customer a physical card.

When the card is swiped the funds are transferred from the consumer’s PayQwick account to that of the retailer, which can then transfer it to their bank account.

It vows to minimise the risk of exposure to illicit activity by taking on the regulatory compliance role itself, ensuring customer due diligence requirements are met and anti-money laundering rules are being adhered to.

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