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As Marijuana Sales Grow, Start-ups Step In for Wary Banks

The New York Times mentions Hypur in an article about start-ups providing technology to help financial institutions serving cannabis businesses. Hypur is described as a software for banks that geo-locates each purchase to prove it was done in an authorized dispensary.

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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