Banking regulators just said no to a financial institution that aims to be the first to serve the expanding marijuana industry in Colorado.
The Fourth Corner Credit Union in Denver applied in November to the Federal Reserve for a "master account," which would allow it to interact with other financial institutions and open its doors to some of the hundreds of state-licensed marijuana businesses in Colorado.
Although recreational marijuana has been legalized in Colorado, it is still illegal on the federal level, discouraging most traditional banks from working with pot businesses.
The Fed's branch in Kansas City, which has been reviewing the application, privately informed the Fourth Corner Credit Union earlier in July that it had not been approved for a master account, the credit union said Thursday.
The credit union, which has the backing of Colorado's governor, fired back on Thursday night by filing a lawsuit in federal court in Denver against the Fed, demanding "equal access" to the financial system.
Mark Mason, who has been leading the credit union's creation, said that after months of answering the Federal Reserve's queries, he was unsurprised by the answer he received.
"I felt all along like they were trying to figure out a way to deny our application," said Mason, who also runs a law firm in South Carolina. Now, he said, "a federal judge who is only concerned in applying the law can make the decision."
Nearly all banks have refused to open accounts for the hundreds of marijuana businesses in Colorado and other states with similar laws, leaving the businesses to operate in an all-cash economy with the significant dangers that can bring. Many small-business owners in the state have had to improvise with safes, armored cars and other alternatives to banking.
Colorado's state government has said that the lack of access to banks is a public safety issue, as well as a deterrent in the state's effort to collect taxes.
Mason won the state's backing for his venture after he brought on money-laundering experts to build its policies. The credit union was granted a state license last year, on the condition that it still had to receive approval from the Fed before opening for business.
Andrew Freedman, Colorado's director of marijuana coordination, said he was disappointed by the Fed's decision.
"We thought it was a good solution to the problem," he said. "Here was a place willing to take on the risk of banking this underbanked group - and that could do rigorous compliance."
The credit union's lawsuit could push the courts to resolve the continuing conflict between the federal laws against marijuana and the dozens of states that have legalized it in some form.
Peter Conti-Brown, a professor of legal studies at the University of Pennsylvania's Wharton School, said there was little precedent to guide the courts in such a case. Still, he said, it will be an uphill battle for the credit union to prove that the Fed does not have the power to turn down the institution.
"Most of the cards are in the Fed's hand," he said.
This year, the president of the Kansas City Fed, Esther George, wrote that the Fed had "discretion" in deciding which master accounts to open. She also said the Fed would consider the decision made by the National Credit Union Administration not to grant the Denver credit union deposit insurance, similar to the $250,000 coverage that the Federal Deposit Insurance Corp. provides for standard bank accounts.
Shortly before the Fed made its decision this month, the credit union administration, an independent federal agency, privately informed the Fourth Corner Credit Union that it was not eligible for insurance, partly because it had not proved how it would "mitigate the risk associated with serving a single industry that does not have an established track record of success and remains illegal at the federal level."
Mason filed a separate suit against the credit union administration on Thursday night, claiming that the agency had violated his credit union's constitutional right to due process.
But his bigger issue is with the Fed. He says that even without insurance from the credit union administration, he could secure private deposit insurance and open if he could obtain a master account with the Fed. Such accounts make it possible to take credit and debit card payments and move money electronically.
In the lawsuit, Mason contends that the Fed's own rules give it little discretion in deciding who should and should not be able to have a master account, and do not allow it to rely on other agencies, like the credit union administration.
"We weren't treated fairly," he said. "We weren't treated according to procedure."
For now, Mason continues to run his five-person law firm in South Carolina and pay many of the costs for the credit union out of his own pocket, backed by a board that includes three marijuana entrepreneurs in Colorado. The credit union has a handful of executives and a building in Denver waiting to open for business.
Under the federal guidelines issued by a division of the Treasury Department last year, financial institutions are pressed to file "suspicious activity reports" when a new pot business opens or closes an account. But that guidance left unclear whether it was legal to deal with such businesses.
Colorado politicians have sponsored bills in the House and Senate that aim to dispel the confusion.
In the meantime, Conti-Brown said that Mason's credit union - and the businesses that want to use it - may be stuck using cash.
"They are going to face the longest of odds until there is a clear and permanent change to federal policy," he said.