Pubdate: Wed, 17 Feb 2016
Source: New York Times (NY)
Copyright: 2016 The New York Times Company
Contact: http://www.nytimes.com/ref/membercenter/help/lettertoeditor.html
Website: http://www.nytimes.com/
Details: http://www.mapinc.org/media/298
Author: Nathaniel Popper

AS MARIJUANA SALES GROW, START-UPS STEP IN FOR BANKS

When Lamine Zarrad was not at his job as a federal banking regulator 
in recent months, he was spending a lot of time at Denver's marijuana 
dispensaries.

As a federal employee, he could not partake of the pot.

He was there, instead, to pitch the shops on a start-up he has been 
working on in his free time and is making official this week after 
quitting his job as a bank examiner at the Office of the Comptroller 
of the Currency, a division of the Treasury Department.

Mr. Zarrad's start-up, Tokken (pronounced token), is one of several 
recently created companies looking to solve one of the most vexing 
problems facing marijuana businesses in Colorado and several other 
states: the endless flow of dirty, dangerous, hard-to-track cash.

The State of Colorado legalized marijuana for recreational use in 
2014, joining several other states where the drug has been 
decriminalized in some form, but Visa and MasterCard will not process 
transactions for pot dispensaries and most banks will not open 
accounts for the businesses - leaving dispensaries dealing with a 
constant influx of cash, and nowhere good to put it.

Tokken and others start-ups, with names like Hypur and Kind 
Financial, have been putting together software that helps banks and 
dispensaries monitor and record transactions, with the long-term goal 
of moving transactions away from cash.

Stephanie Hopper, the owner of Ballpark Holistic Dispensary in 
Denver, said the tech solutions could not come soon enough.

"We are all kind of chomping at the bit, trying to figure out what to 
do," Ms. Hopper said. "We're fighting so hard on so many fronts that 
taking one thing off of us would be such a relief."

The array of attempted answers to Ms. Hopper's problems underscore 
what a gray area the marijuana industry still occupies. Despite the 
various state laws legalizing it, marijuana is still listed by 
federal authorities as a so-called Schedule 1 drug. Such drugs, which 
also include LSD and heroin, are deemed to have the highest potential 
for abuse.

The Department of Justice has said that it will generally let states 
enforce their own laws on marijuana. And the arm of the Treasury 
Department responsible for enforcing money-laundering laws has 
provided guidelines for banks that want to work with 
marijuana-related businesses. But federally regulated banks have 
generally refused to open accounts, and credit card companies have 
prohibited transactions from going across their networks.

There are already several, less savory ways of dealing with the cash 
problem. Some dispensaries open bank accounts under fake names. Mr. 
Zarrad, the founder of Tokken, said that in his regulatory work, he 
caught a number of these schemes when he was examining banks in Colorado.

In a slightly more legitimate maneuver, some small companies have 
offered prepaid cards that can be used for purchases in dispensaries, 
though the legality of this is still unclear.

A few credit unions and small banks in Colorado have opened accounts 
for dispensaries - but they generally take on only a few marijuana 
customers each, and even they are still generally unable to process 
electronic payments.

Ms. Hopper, one of the lucky dispensary owners to have a bank 
account, is still left doing much of her business in cash and sending 
it out covertly with employees who deposit it at the bank, constantly 
worrying about their safety.

"We make sure it's never the same person - never the same time of 
day," she said.

Most of the start-ups trying to help with this problem are focused, 
in one way or another, on tracking every detail of every purchase in 
a more sophisticated way. Careful record-keeping can answer the 
concerns of banks worried about violating anti-money laundering laws. 
The start-ups hope their software can allow banks to open up their 
accounts, and their payment networks, to cannabis businesses.

Hypur, a two-year-old company based in Arizona, has built software 
for banks that uses GPS to geo-locate each purchase and prove it was 
done in an authorized dispensary.

That has been enough to allow Hypur to raise more than $5 million 
from investors.

The California-based start-up Kind Financial is offering software as 
well as hardware, in the form of kiosks that can go inside 
dispensaries. Customers can deposit cash in the Kind kiosk to pay for 
their purchase, removing one headache for the dispensary.

Mr. Zarrad's start-up, Tokken, is younger than the others, but he is 
aiming to offer something new - an electronic payment system that 
will not rely on the credit card companies or debit networks. 
Somewhat like PayPal or Venmo, Tokken will use the electronic money 
transfer system in the United States known as the Automated 
Clearinghouse, or ACH, to move money from the bank account of a 
dispensary customer to Tokken's bank account. Tokken will then keep 
subaccounts for each dispensary - making it unnecessary for the banks 
to deal directly with dispensaries.

Mr. Zarrad is confident he can stay on the good side of the banks 
because of his experience as a regulator, and before that, in the 
financial industry.

Mr. Zarrad, 36, briefly worked as a financial adviser for Merrill 
Lynch after serving in the Marine Corp for six years. He took the job 
with the O.C.C., which regulates all national banks, in part because 
he spotted the opportunity in marijuana compliance and wanted to 
understand the financial system better.

In his nearly two years with the O.C.C., Mr. Zarrad was often on the 
road, combing through the books of regulated banks. He said that his 
teams would not crack down on banks if they were openly working with 
marijuana businesses, as long as they were tracking the transactions carefully.

The problems cropped up when the banks did not take enough steps to 
prevent money laundering, the process of making illegally gained 
proceeds appear legal.

Mr. Zarrad began working on Tokken in his free time, and found a 
programming partner, Tom Rau, who lives in North Carolina. The system 
they have built will allow customers to make purchases with a Tokken 
app on their smartphone, taking cash out of the equation.

The special sauce that sets apart Tokken is that every transaction 
will be recorded on the ledger underlying the Bitcoin system - known 
as the blockchain. Because transactions on the blockchain are 
irrevocable, pot dispensaries and banks will have a reliable and 
complete record of all Tokken transactions, including the specifics 
of each transaction - without requiring any Bitcoins to change hands 
(a tiny portion of a Bitcoin will be sent between Tokken accounts in 
order to record the transaction on the blockchain).

Mr. Zarrad hopes that the transparency offered by Tokken's blockchain 
backbone will make banks feel comfortable opening up accounts for the 
start-up. He is planning to approach some of the banks he previously 
regulated and is hoping that his background will convince them that 
he understands the compliance issues they are facing.

Mr. Zarrad's presentations have been enough to pique the interest of 
the Fourth Corner Credit Union, which has been trying to set up a 
dedicated financial institution for the marijuana industry. Mr. 
Zarrad's background and expertise have also been enough to persuade 
Ms. Hopper, of Ballpark Holistic Dispensary, to commit to running the 
Tokken software as soon as it is set up.

"This is not someone who was just sitting around and had an idea," she said.

Mr. Zarrad is hoping to have the software operational later this year 
and will soon begin raising funds from investors. Now that he is off 
the federal payroll, he will also be able to enjoy the products 
peddled by the dispensaries, especially the edible marijuana products.

"I lean toward edibles - I just don't like smoking," he said. "When I 
am no longer employed, that will be my occasional indulgence."
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MAP posted-by: Jay Bergstrom