Economics

Airbnb Regulations Spark Controversy, but Have Limited Effect on Super Bowl Market

January 29, 2018
Administrative Law, Economics, Internet

MJLST Staffer, Sam Louwagie

 

As Super Bowl LII descends upon Minneapolis, many Twin Cities residents are hoping to receive a windfall by renting out their homes to visiting Eagles and Patriots fans. City regulations placed last fall on online short-term rental platforms such as AirBnB, which prompted an outcry from those platforms, do not appear to be having much of an effect on the dramatic surge in supply.

The short-term rental market in Minneapolis has been a renter’s market in the opening days since the Super Bowl matchup was set. There are 5,000 placements in the Twin Cities on AirBnB this week, as compared to 1,000 at this time last year, according to the Star Tribune. The flood of posted housing options has limited prices, as the average listing has cost $240 per night—more than usual, but much less than the thousands of dollars some would-be renters had hoped for. One homeowner told the Star Tribune that she had gotten no interest in her 4,000-square-foot, six-bedroom house just five blocks from U.S. Bank Stadium, and had “cut the price drastically.”

The surge in AirBnB listings comes despite ordinances that went into effect in December in both Minneapolis and St. Paul. The cities joined a growing list of major U.S. cities that are passing regulations aimed at ensuring guest safety and making a small cut of tax revenue from the rentals. Minneapolis’ ordinance requires a short-term renter to apply for a license with the city, which costs $46 annually. St. Paul’s license costs $40 per year. As of mid-December, according to MinnPost, only 18 applications had been submitted in Minneapolis and only 32 in St. Paul. That would suggest that many of the thousands of listings during Super Bowl week are likely unlicensed. The cities both say they will notify renters they are not in compliance before taking any enforcement action, but a violation will cost $500 in Minneapolis and $300 in St. Paul.

The online rental platforms themselves had strongly objected to the passage of the ordinances, which would require Airbnb to apply for a short-term rental platform license. This would bring a $10,000 annual fee in St. Paul and a $5,000 large platform fee in Minneapolis. According to MinnPost, as of mid-December, no platforms had submitted an application and it was “unclear whether they [would] comply.” Airbnb said in a statement that it believes the regulations violate the 1996 federal Communications Decency Act, and that “the ordinance violates the legal rights of Airbnb and its community.”

While the city ordinances created controversy in the legal world, they do not seem to be having a similar effect on the ground in Minneapolis, as Super Bowl guests still have a dramatic surplus of renting options.

The Electric Vehicle: A Microcosm for America’s Problem With Innovation

November 11, 2017
Administrative Law, Economics, New Technology

Zach Sibley, MJLST Staffer

 

Last year, former U.S. Patent and Trademark Office Director, David Kappos, criticized a series of changes in patent legislation and case law for weakening innovation protections and driving technology investments towards China. Since then it has become apparent that America’s problem with innovation runs deeper than just the strength of U.S. patent rights. State and federal policies toward new industries also appear to be trending against domestic innovation. One illustrative example is the electric vehicle (EV).

 

EVs offer better technological upsides than their internal combustion engine vehicle (ICEV) counterparts. Most notably, as our US grid system moves toward “smart” infrastructure that leverages the Internet of Things, EVs can interact with the grid and assist in maximizing the efficiency of its infrastructure in ways not possible with ICEVs. Additionally, with clean air and emission targets imminent—like those in the Clean Air Act or in more stringent state legislation—EVs offer the most immediate impact in reducing mobile source air pollutants, especially in a sector that recently became the highest carbon dioxide emitter. And finally, EVs present electrical utilities that are facing a “death spiral” an opportunity to recover profits by increasing electricity demand.   

 

Recent state and federal policy changes, however, may hinder efforts of EV innovators. Eighteen state legislators have enacted EV fees—including Wisconsin’s recent adoption, and the overturned fee in Oklahoma—ranging from $50 to $300 in some states. Proponents claim the fee creates parity between traditional ICEV drivers and the new EV drivers not paying fuel taxes that fund maintenance of transportation infrastructure. Recent findings, though, suggest EV drivers in some states with the fee were previously paying more upfront in taxes than their ICEV road-mates. The fee also only creates parity when solely focused on the wear and tear all vehicles cause on shared road infrastructure. The calculus for these fees often neglects that EV and ICEV drivers also share the same air resources and yet no tax accompanies EV fees that would also charge ICEVs for their share of wear and tear on air quality.

 

At the federal level, changes in administrative policy are poised to exacerbate the problem further. The freshly proposed GOP tax bill includes a provision to repeal a $7,500 rebate that has made lower cost EVs a more affordable option for middle class drivers. This change should be contrasted with foreign efforts, such as those in the European Union to increase CO2 reduction targets and offer credits for EV purchases. The contrast can be summed up with one commentator’s observation regarding The New York Times who reported, within the span of a few days, about the U.S. EPA’s rollback of the Clean Power Plan and then about General Motors moving toward a full electric line in response to the Chinese government. The latter story harkens back to Kappos’ comments at the beginning of this post, where again a changing U.S. legal and regulatory landscaping is driving innovation elsewhere.

 

It is a basic tenant of economics that incentives matter. Even in a state with a robust EV presence like California, critics question the wisdom of assessing fees and repealing incentives this early in a nascent industry offering a promising technological future. The U.S. used to be great because it was the world’s gold standard for innovation: the first light bulb, the first car, the first airplane, the first to the moon, and the first personal computers (to name a few). Our laws need to continue to reflect our innovative identity. Hopefully, with legislation like the STRONG Patents Act of 2017 and a series of state EV incentives on the horizon, we can return to our great innovative roots.

Prevalence of Robot-Assisted Surgery Illustrates the Negatives of Fee-for-Service Systems

November 6, 2017
Economics, Healthcare, Medical Devices

Jacob Barnyard, MJSLT Staffer

 

In 2000, the Food and Drug Administration approved the use of the da Vinci Surgical System, a robot designed to aid surgeons perform minimally invasive surgeries. The system consists of multiple arms carrying a camera and surgical instruments controlled by a nearby surgeon through a specialized console.

While few would argue the cool-factor of this technology, the actual benefits are significantly less clear. Researchers have conducted multiple studies to determine how the system affects patient outcomes, with results varying based on the type of procedure. One finding has been fairly consistent, however: unsurprisingly, costs associated with the use of robots are significantly higher.  

The use of the da Vinci Surgical System has increased enormously since its initial release, even in surgeries with little or no evidence of any benefit. A rational consumer, however, would try to maximize expected utility by only undergoing robotically-assisted surgery if the expected benefits for that particular surgery outweighed the expected increase in cost. A possible explanation for part of the growing popularity of this technology may be the prevalence of fee-for-service models in the U.S. healthcare system.  

In a fee-for-service model, each service provider involved in a patient’s care charges separately and charges for each service provided. As a result, these providers have an incentive to perform as many different services as possible, frequently providing unnecessary care. The consumer has little reason to care about these increased costs because they are often paid by insurance companies. Consequently, when a surgeon suggests the use of the da Vinci Surgical System, the patient has no incentive to research whether the system actually provides any benefits for the surgery they are undergoing.

A proposed alternative method to the fee-for-service model is a system using bundled payments. Under this system, a provider charges one lump sum for its services and divides it between each party involved in providing the care. This eliminates the incentive to provide unnecessary care as that would only increase the provider’s costs without increasing revenue. Robots would theoretically only be used in surgeries if they actually provide a net benefit. A potential drawback, however, is a decrease in potentially helpful services in an effort to cut costs. Currently, the available evidence suggests that this is not an issue in practice, however, and that some performance indicators may actually improve.  

The Affordable Care Act included incentives to adopt the bundled payment system, but fee-for-service is still vastly more common in the United States. While bundled payments have been shown to lead to a modest decrease in healthcare costs, many physicians are unsurprisingly opposed to the idea. Consequently, change to a bundled payment system on a meaningful scale is unlikely to occur under the incentive structure created by current laws.

In Doge We Trust

September 29, 2017
Economics, International Law, Internet

Richard Yo, MJLST Staffer

Despite the closure of virtually all U.S.-based Bitcoin exchanges in 2013 due to Congressional review and the uncertainty with which U.S. banks viewed its viability, the passion for cryptocurrencies has remained strong, especially among technologists and venture capitalists. This passion reached an all-time high in 2017 when one Bitcoin exchanged for 5000 USD.** Not more than five years ago, Bitcoin exchanged for 13 USD. For all its adoring supporters, however, cryptocurrencies have yet to gain traction in mainstream commerce for several reasons.

Cryptocurrencies, particularly Bitcoin, have been notoriously linked to dark web locales such as the now-defunct Silk Road. A current holder of Bitcoin, Litecoin, or Monero, would be hard pressed to find a completely legal way to spend his coins or tokens without second guessing himself. A few legitimate enterprises, such as Microsoft, will accept Bitcoin but only with very strict limitations, effectively scrubbing it of its fiat currency-like qualities.

The price of your token can take a volatile 50% downswing or 3000% upswing in a matter of days, if not hours. If you go to the store expecting to purchase twenty dollars’ worth of groceries, you want to be sure that the amount of groceries you had in mind at the beginning of your trip is approximately the amount of groceries you will be able to bring back home.

After the U.S. closures, cryptocurrency exchanges found havens in countries with strong technology bases. Hotbeds include China, Russia, Japan, and South Korea, among others. However, the global stage has recently added more uncertainty to the future of cryptocurrency. In March 2017, the Bank of Japan declared Bitcoin as an official form of payment. Senators in Australia are attempting to do the same. China and Russia, meanwhile, are home to most Bitcoin miners (Bitcoin is “mined” in the sense that transactions are verified by third-party computers, the owners of which are rewarded for their mining with Bitcoins of their own) due to low energy costs in those two nations and yet are highly suspicious of cryptocurrencies. China has recently banned the use of initial coin offerings (ICOs) to generate funds and South Korea has followed suit. Governments are unsure of how best to regulate, or desist from regulating, these exchanges and the companies that provide the token and coins. There’s also a legitimate question as to whether a cryptocurrency can be regulated given the nimbleness of the technology.

On this issue, some of the most popular exchanges are sometimes referred to as “regulated.” In truth, this is usually not in the way that consumers would think a bank or other financial institution is regulated. Instead, the cryptocurrency exchange usually imposes regulations on itself to ensure stability for its client base. It requires several forms of identification and multi-factor authentication that rivals (and sometimes exceeds) the security provided by traditional banks. These were corrections that were necessary after the epic 2014 failure of the then-largest cryptocurrency exchange in the world, Mt. Gox.

Such self-adjustments, self-regulation, and stringency are revealing. In the days of the Clinton administration when internet technology’s ascent was looming, the U.S. government adopted a framework for its regulation. That framework was unassuming and could possibly be pared to a single rule: we will regulate it when it needs regulating. It asked that this technology be left in the hands of those who understand it best and allow it to flourish.

This seems to be the approach that most national governments are taking. They seem to be imposing restrictions only when deemed necessary, not banning cryptocurrencies outright.

For Bitcoin and other cryptocurrencies, the analogous technology may be the “blockchain” that underlies their structure, not the tokens or coins themselves. The blockchain is a digital distributed ledger that provides anonymity, uniformity, and public (or private) access, using complex algorithms to verify and authenticate information. When someone excitedly speaks about the possibilities of Bitcoin or another cryptocurrency, they are often describing the features of blockchain technology, not the coin.

Blockchain technology has already proven itself in several fields of business and many others are hoping to utilize it to effectuate the efficient and reliable dissemination and integration of information. This could potentially have sweeping effects in areas such as medical record-keeping or title insurance. It’s too early to know and far too early to place restrictions. Ultimately, cryptocurrencies may be the canary that gets us to better things, not the pickaxe.

 

*Dogecoin is the cryptocurrency favored by the Shina Inu breed of dog, originally created as a practical joke, but having since retained its value and now used as a legitimate form of payment.

**The author holds, or has held, Bitcoin, Ether, Litecoin, Ripple, and Bitcoin Cash.

The Rise and Fall of a Scholarly Crowdfunding Article

March 10, 2017
Administrative Law, Business Law, Economics

Tim Joyce, Editor-in-Chief, MJLST Vol. 18

Print publication of science and tech articles is a weird thing. On the one hand, a savvy articles selection team will prioritize articles on the most pressing and innovative advancements in the field. On the other, though—and precisely because these articles are so current—a draft piece can be partially outdated even before the publisher’s pressing start rolling. So it is that a little piece on investment crowdfunding, conceived in September 2015, meticulously researched throughout the 2015–16 academic year, and selected in April 2016, for publication in January 2017, can transform from forward-looking thinkpiece to historically-dated comparison piece.

My recent article with MJLST, 1000 Days Late & $1 Million Short: The Rise and Rise of Intrastate Equity Crowdfunding, compares the newly-activated federal Regulation Crowdfunding to Minnesota’s intrastate investment crowdfunding model MNvest. When the piece was originally conceived both of these laws were not yet active; in fact, it was not yet clear that the SEC would ever release final rules for what would become Regulation Crowdfunding. When the issue was ultimately sent to the printers, each of the laws had been active for at least 6 months. Like I said, weird.

This post is intended to update the curious reader on current happenings with investment crowdfunding on both a federal and a state level.

On the federal level, Regulation Crowdfunding rules have been final since October 2015 and active since May 2016. Nearly 200 offerings later, analysts and scholars are already starting to crunch the numbers. [Full disclosure: I am one of those academics. Our paper (co-author Zach Robins of Winthrop & Weinstine) will be presented at the Mitchell-Hamline Law Review Symposium next month, if you’re interested.] Similar to rewards-based crowdfunding models like Indiegogo and Kickstarter, there appear to be some things a crowdfunding issuer can do to increase the likelihood of success of their offering. Here are some examples.

First, a clear business plan is essential to attracting investors. After all, the “crowd” is made of lots of folks without sophisticated investing experience; so you have to find a creative way to hook them without violating securities disclosure restrictions. This isn’t always as easy said than done, and some portal operators have already gotten in serious trouble for violating their obligations to ensure offering accuracy.

Second, and perhaps a bit counterintuitive, the most successful Regulation Crowdfunding issuers actually have slightly higher minimum investments than you would expect. There is no dollar floor to the investment under the rules of Reg CF, but a small minimum opens the door to a potentially unwieldy cap table. In addition, a high minimum investment decreases the number of available spots for investors in the targeted offering amount; there is a very real “exclusivity” effect. To illustrate: it takes 10,000 investors at $10/per to get to $100,000 offering, but you could raise the same $100,000 with only 100 investors at $1,000/per. Issuers get to choose which investors they take on in oversubscription situations, and it can’t hurt to create a little buzz as investors “compete” for limited spots in the offering.

Finally, communicating the business plan using a strong video is a must—industry analysts report that campaigns using any video at raised significantly more money that those without (on the order of 11:1 times more money!). If that video is of good enough quality, according to those same analysts, your offering does even better. Of course, video quality only matters if your network is sufficiently large to reach enough potential investors. For issuers hoping to raise $50,000, that generally means connecting with more than 3,000 people.

There are plenty more nuggets of wisdom to glean from the first 8 months of federal investment crowdfunding offerings, and this post only scratches the surface. For more, see our forthcoming paper in Mitchell-Hamline Law Review’s symposium issue later this year.

As for MNvest, unfortunately, while the law has been technically available for Minnesota crowdfunders since June 2016, it took until the end of the year for the Department of Commerce to approve any portals. So only a handful of issuers and portals are currently active in the space. True to form, for federal crowdfunding offerings at least, craft breweries are making a strong showing (read: in Minnesota, 4 of the first 4 MNvest issuers are breweries!). Hopefully we’ll see more of them as the vehicle becomes more well-known.

One thing that should further aid MNvest issuers is that the SEC recently released final rules that will make it easier and safer for intrastate issuers to use the internet to advertise. Before the rules update, issuers were bound by advertising and solicitation restrictions drafted in the 1970s (that is, before the interwebs). As crowdfunding, almost by definition, requires the use of the internet to reach a crowd, these updates should streamline and loosen up the fundraising process. The new final rules create a new exemption (Rule 147A); state legislatures that based their intrastate laws on old Rule 147 will need to update their laws accordingly first.

Investment crowdfunding laws of the intrastate and federal varieties hold promise for many issuers. And, while there is not yet a perfect model or a one-size-fits-all strategy for fundraising, it is clear that investors and issuers alike are excited by the promise this investment vehicle holds.

Who knows—perhaps in another 18 months the way we crowdfund will have experienced as much change again, to make this piece as quickly “historical” as my earlier article!

Court’s Remain Unclear About Bitcoin’s Status

January 25, 2017
Business Law, Economics, New Technology

Paul Gaus, MJLST Staffer

Bitcoin touts itself as an “innovative payment network and a new kind of money.” Also known as “cryptocurrency,” Bitcoin was hatched out of a paper posted online by a mysterious gentleman named Satoshi Nakamoto (he has never been identified). The Bitcoin economy is quite complex, but it is generally based on the principle that Bitcoins are released into networks at a steady pace determined by algorithms.

Although once shrouded in ambiguity, Bitcoins threatened to upend (or “disrupt” in Silicon Valley speak) the payment industry. At their core, Bitcoins are just unique strings of information that users mine and typically store on their desktops. The list of companies that accept Bitcoins is growing and includes cable companies, professional sports teams, and even a fringe American political party. According to its proponents, Bitcoins offer lower transaction costs and increased privacy without inflation that affects fiat currency.

Technologies like Bitcoins do not come without interesting legal implications. One of the oft-cited downsides of Bitcoins is that they can facilitate criminal enterprises. In such cases, courts must address what status Bitcoins have in the current economy. The Southern District of New York recently held that Bitcoins were unequivocally a form of currency for purposes of criminal prosecution. In United States v. Murgio et al., Judge Alison Nathan determined Bitcoins are money because “Bitcoins can be accepted as payment for goods and services or bought directly from an exchange with a bank account . . . and are used as a medium of exchange and a means of payment.” By contrast, the IRS classifies virtual currency as property.
Bitcoins are uncertain, volatile, and complex, but they continue to be accepted as currency and show no signs of fading away. Going forward, the judiciary will need to streamline its treatment of Bitcoins.

The “Fourth Industrial Revolution”: Queue Chaos and Disarray

October 17, 2016
Economics, New Technology, Tax Law

Rhett Schwichtenberg, MJLST Staffer

We are all familiar with Hollywood’s drastic miscalculations when predicting the future. In Timecop, which took place in 2004, time-travel was the conventional means of transportation. In the world of Marty McFly, 2015 marked the year where hoverboards were the standard means of transportation. In 2001: A Space Odyssey, the moon was colonized by 2001. The list goes on. While we [unfortunately] see none of this today, perhaps Hollywood was not too far off.

Today, robots are shaping the way we live and have contributed a world of good to society. While Google Glass might have been an utter failure, Google’s Self-Driving Car Project is making fast advances to provide the world with hand-free, piece-of-mind driving. Taxi giant, Uber, has also entered the self-driving market with the implementation of self-driving Uber vehicles in the Pittsburgh market. Self-driving technology has the ability to eliminate the extreme and unnecessary amount of traffic deaths occurring every day in addition to providing a reliable mode of transportation for individuals that cannot operate a vehicle. Apart from the transportation industry, robots are growing rapidly in nearly every industry including the agriculture, food service, manufacturing, military, and rehabilitation industries.

Earlier this year, the EU made a proposal calling for the classification of autonomous  robots as “electronic persons.” If codified, this proposal could bestow legal rights upon robots, require companies to pay a social security tax for using them, and impose a liability insurance upon companies using robots in order to protect against any harm they might cause. While ridiculed by many, is there no merit in this proposal?

The age of robotics that is currently among us is being referred to as the “fourth industrial revolution” by economists. The first industrial revolution introduced steam power, the second, electric power, and the third, electronics and information technology. While the past three industrial revolutions have advanced at a linear rate (occurring approximately one-hundred years apart) the current revolution is advancing exponentially. Previous technology has threatened blue-collar jobs, but has never caused us to question whether jobs will even exist in the near future. With the implementation of quantum computing looming, the professionals in scientific and medical fields might experience issues of job security.

Alan Manning, leading author in labor economics and professor at the London School of Economics, seems to remain calm, cool, and collected when tasked with answering the question of how autonomy will affect the labor market. He strongly opines that such technology should not be taxed. Implementing the proposed tax will slow the advancement and use of such technology. Instead, Manning expects investment in modern technology to increase productivity and, at worst, leave the labor market where it currently stands. Manning believes the expert prediction that 47% of jobs will be threatened by autonomic robots is just that, a mere prediction. He retorts that such a prediction is grounded in ignorance rather than educated measures. Manning states that the entire job market must be looked at, not just the specific occupations that will see job reduction. Looking at the job market as a whole, Manning admits that jobs will be lost in some areas, but trusts that new jobs will arise due to an increase in companies’ spending power through the use of autonomic robotics.

So given that autonomic robotics and advanced computing technology is already written in our future, what are the implications of such technology? The simple answer is: we must wait and see.

Policy Proposals for High Frequency Trading

April 21, 2016
Business Law, Competition, Economics, Securities Law

Steven Graziano, MJLST Staffer

In his article, The Law and Ethics of High Frequency Trading, which was published in the Minnesota Journal of Law, Science, and Technology Issue 17, Volume 1, Steven McNamara examines the ethics of high frequency trading. High frequency trading is the use of high-speed algorithms to take advantage of minor inefficiencies in trading technologies, and in doing so gain large market returns. McNamara looks into ethical, economic, and legal aspects of high frequency trading. In the course of his discussion McNamara determines that: high frequency trading is a term that actually describes an assortment of different practices; the amount of dollars involved in high frequency trading is declining, but is still a concern for certain types of investors and regulators; a proper analysis of high frequency trading requires use of expectation-based, deontological moral theory; and that modern technology may call into question the use of the Regulation National Market System regime. McNamara concludes that even though high frequency trading may lower costs to most investors, many practices associated with high frequency trading support the position that high frequency trading is not fair.

Securities and Exchange Commission Chair Mary Jo White has recently commented on the legality, and potential ways to approach, high frequency trading. White, while testifying before the Senate Appropriations Subcommittee on Financial Services and General Government, informed the Congressional Committee that “You don’t paint with the broad brush all high-frequency traders — they have very different strategies.” This sentiment mirrors McNamara’s assertion that the term high-frequency trading actually involves various practices. However, White is seemingly defending some practices, while McNamara has a more negative view.

Differing still from these two views are the results of a study done by United Kingdom’s Financial Conduct Authority. That study concluded with the conclusion that high-frequency trade technologies are not rapidly predicting marketable orders and then trading those orders. However, the study examined practices in Europe, which has less market participants and a slower moving market than the United States.

In conclusion, Steven McNamara offers a very insightful, encompassing look at high frequency trading. His analysis resonates through both White’s testimony, and in the results of the study from the Financial Conduct Authority. Although all three perspectives seemingly stand for somewhat different propositions, what is clear from all three sources is that the practice of high-frequency trading is extremely complex and requires in-depth analysis before making any conclusive policy decisions.

Drug Shortages: A Mask for Reprehensible Activity?

March 10, 2016
Competition, Economics, Food and Drug Law, Healthcare

Ethan Mobley, MJLST Articles Editor

Access to life-saving prescription medication grabbed headlines after Turing Pharmaceuticals raised the price of its HIV drug, Daraprim, by about 5,000% overnight. While the Daraprim price hike initially appears to be driven by pure greed, it’s at least conceivable that basic economic principles of supply and demand may have played a minor role. Indeed, many other drugs have undergone serious price hikes arising from innocent supply constraints. While the defensibility of Daraprim price hikes remains uncertain, the story does bring to focus an issue affecting accessibility of hundreds of other life-saving prescription medications—drug supply shortages.

Drug shortages naturally restrict many patients’ ability to obtain life-saving medication, which can have disastrous effects. The Minnesota Journal of Law, Science & Technology addressed the issue in 2013 with a note written by Eric Friske. Friske found that drug shortages are often caused by a “combination of perturbed supply, manufacturing capacity, and utilization.” Friske then analyzed the efficacy of proposed (and now failed) legislation meant to reduce these supply shortages by requiring manufacturers to notify the FDA of impending shortages; the legislation would have also allowed the FDA to collaborate with manufacturers in order to streamline production. However, Friske determined these tools were insufficient to properly combat the shortage problem and proposed his own solution. In addition to notification requirements, Friske pushed for affirmatively incentivizing manufacturers to produce certain drugs and streamlining the drug manufacturing approval process.

Since Friske’s proposal, we’ve seen new legislation and regulation that aims to reduce the number of drug shortages. What’s more, the legislation and regulations contain notification requirements, manufacturer incentives, and streamlined approval processes—just like Friske proposed. While it’s obvious the drug shortage problem has not been solved, it is equally clear drug shortages have decreased over the past few years. Hopefully the trend continues so that life-saving drugs remain accessible to everyone, and drug companies will no longer be able to use supply shortages as justification for obscene price hikes.

Marijuana Industry Continues to Search for Banking Solution

November 9, 2015
Business Law, Competition, Economics

Neal Rasmussen, MJLST Managing Editor

While the legal marijuana industry continues to rapidly expand in the United States, a major question still looms: Where should the millions of dollars generated by the industry be placed? Up to this point the nation’s banks have refused to take money for fear of federal repercussions. The lack of banking is one of the biggest problems the industry currently has and creates a dangerous all cash environment. While it continues to be an industry dominated by cash vaults and armed guards, change could soon be on the way.

While the provisions of the unlicensed money remitter statute, 18 U.S.C. § 1960, the money laundering statutes, 18 U.S.C. §§ 1956, 1957, and the Bank Secrecy Act (BSA) still remain in effect with respect to marijuana-related business, the marijuana industry had hoped to take advantage of the new rules issued by the U.S. Treasury Department in 2014 which “clarifie[d] how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities.” In addition to the new rules, the Justice Department produced a memorandum calling for relaxed enforcement of the relevant federal banking laws so long as they followed the new rules. However, the most recent attempt by a Colorado state-chartered credit union, The Fourth Corner Credit Union, to take advantage of the new rules and memorandum has faced major opposition from the Federal Reserve Bank, who must provide clearance before the credit union can open.

The Federal Reserve Bank refused to grant the permission need to access the national banking system and The Fourth Corner Credit Union has sued in Federal Court demanding equal access to the federal system. While it remains unclear whether the presiding judge, R. Brooke Jackson, will hear the complaint, most view The Fourth Corner Credit Union as fighting a losing battle. Most believe that entering the federal banking system will be nearly impossible until marijuana becomes legal at the federal level. For now it will remain unclear as to where the industry should place its money.

Home | Contact Publishing Services | Report Web Accessibility Issues