Growing up, Lamine Zarrad learned the hard way what it’s like to be a disenfranchised outsider. Born in Azerbaijan, Zarrad and his parents fled ethnic conflict in the former Soviet republic in the 1990s and ended up living in a freezing former lithium processing factory in Moscow. Surrounded by contaminated machinery, they survived on condensed milk and corn flakes distributed by Western nongovernmental organizations.

That’s why, after emigrating with his family to the United States as a teenager and embarking on a wide-ranging career that included a stint in the Marines and a job at Merrill Lynch during the 2008 financial crisis, he got a job as Denver-based bank examiner for the Treasury Department’s Office of the Comptroller of the Currency, and quickly identified with an entire industry filled with outsiders: The burgeoning marijuana market. Just as he had been, the industry was financially disenfranchised. 

While cannabis businesses make up one of the fastest-growing industries in the country, many of them are devoid of the basic financial services most other companies take for granted, such as bank accounts and credit card processing. (A recent Marijuana Business Daily poll found 60 percent of marijuana enterprises don’t have banking services.) The main reason for the lack of banking services is marijuana is still labeled a Schedule I narcotic by the federal government, and so banks and credit card companies fear prosecution if they work with cannabis-related ventures. Zarrad’s Treasury Department bosses weighed in on the matter in 2014, noting in a guidance that financial institutions providing services to marijuana enterprises should carefully track the businesses and their conduct. But it was far from a ringing endorsement of cannabis banking, and possibly made matters more difficult. Now financial institutions that want to work with marijuana-related clients must undertake expensive oversight of those businesses, with little legal protection. 

Zarrad realized there was a growing need to handle, track and protect all marijuana funds in a way that satisfied federal regulators, and yet was nimble enough to navigate the shifting legal terrain. “There was a vacuum that had to be filled by an entity that was small enough to be agile, but also had the intellectual capital to address these regulatory hurdles,” said Zarrad, 36, wearing a slick button-down shirt and sipping an espresso at a coffee shop in the chic Cherry Creek neighborhood of Denver. And thanks to that vacuum, Zarrad saw an opportunity. He recently quit his job with the Treasury Department to develop Tokken, an electronic payment and banking system for the cannabis industry.

Lamine's Photo Lamine Zarrad hopes that his company, Tokken, will solve the marijuana industry's banking woes. Photo: Jenaya McGowan Zarrad

Zarrad isn’t the only entrepreneur attempting to solve — and therefore profit from — the marijuana market’s financial woes. Many startups are promising to become the “financial backbone” of the industry, each offering a slightly different solution to the problem. While Tokken or another contender could end up at the top of the heap, all of them face an existential conundrum: With industry stakeholders and politicians of all stripes pushing for a federal solution to the banking crisis, could the need for such services soon be gone for good?

Like Tokken, most of these ventures are aiming to use technology to solve the market’s banking problems. Several companies in the past few years have developed in-store kiosk systems that lock away cash payments and track each transaction. But since many consumers these days don’t carry much cash and most marijuana businesses can’t take credit cards (and those that do are likely employing questionable financial footwork), many marijuana shops now feature ATMs — a costly service to consumers and a bulky liability for businesses. It’s why the 3-year-old California company Spare, which developed a smartphone app that allows merchants to dispense cash to customers, has turned its attention to cannabis, recently enrolling in the Colorado marijuana tech accelerator CanopyBoulder. The idea is that Spare will electronically transfer money into a marijuana business’ bank account, then the budtender will hand over cash to a consumer to pay for purchases — all the benefits of an ATM without the hassle.

Other services, such as Greenito and PayQwick, offer electronic ways for customers to make purchases and businesses to pay vendors without exchanging cash at all. But most of these services require marijuana operations to have bank accounts. To help financial institutions meet the regulatory requirements of such accounts, Hypur, an Arizona company, is developing a software platform that, among other things, allows banks to track every transaction at their marijuana clients’ businesses. 

At least one financial technology company, Kind Financial of Los Angeles, is trying to fill as many financial-service gaps in the marijuana industry as possible, manufacturing store kiosks, partnering on a “Link to Banking” cannabis compliance program for financial institutions and developing KIND Pay, a mobile phone-based electronic payment program. But as company CEO David Dinenber admits, developing such solutions isn’t easy. “We have been working on this for a very, very long time,” he said of his KIND Pay mobile payment program. “I have been wrong many times in saying when this will come to market. Whatever is on the market today in this space is not 100-percent transparent, in terms of adhering to [federal banking guidelines].”

It’s why some marijuana businesses have considered making an end-run around banks altogether and now accept Bitcoin. But since most consumers don’t regularly use Bitcoin, which many people associate with black-market operations such as the Silk Road drug bazaars, most experts don’t see the cryptocurrency as a long-term solution.

Tokken is attempting to fuse the best elements of several of these approaches. Like several other ventures, Tokken will involve a smartphone app that will allow consumers to electronically pay for marijuana purchases, but these funds will go to Tokken, which will keep bank accounts for each of its clients. The clients can use these funds to pay others in the Tokken system, such as vendors and contractors, or it can liquidate the funds for a fee. “We want to be a digital banking institution that provides banking services to cannabis industry,” Zarrad said.

While Tokken will have to partner with brick-and-mortar institutions for its bank accounts, Zarrad aims to appease regulatory concerns by tapping into the blockchain, the public ledger listing all bitcoin transactions. While he’s quick to note his system doesn’t rely on Bitcoins, Tokken will use the blockchain to record every operation in its system in a way that’s transparent to regulators while still maintaining client and consumer privacy. “Not only is the money moving from one banking institution to another, it’s traceable, but our internal transactions are highly traceable, too,” he said. “Everything is transparent and public, but it is not a privacy violation. There’s no way people’s private information could be released without our cooperation.”

Zarrad aims to launch a beta test of his system involving two banks and 10 Denver-area marijuana businesses late this summer. After that, he’d like to go statewide, then coast to coast. “I would very much like to be a kingmaker,” he said. “If you are not on the Tokken system, you are not sophisticated enough and shouldn’t be in the industry at all. That is the long-term goal, to be the professionalizing system in the industry.”

But even if Tokken manages to appease regulators and banks alike and scores widespread adoption, how long can it survive? Politicians on both sides of the aisle are pushing for solutions to the marijuana banking conundrum on both the state and federal levels. Then there’s the possibility marijuana could be rescheduled so it’s not among the most prohibited drugs in the country. While these developments would be good news for the cannabis movement, they could be bad news for Tokken and similar ventures. Could political shifts make their services unnecessary?

Many observers say even if marijuana banking rules change, the industry will still need specialized financial services. “I believe that even if banking is widely allowed, a lot of people won’t want marijuana purchases on their credit cards,” said Mark Goldfogel, executive vice president of the Denver-based Fourth Corner Credit Union, which is currently fighting in court to become the world’s first marijuana-focused bank. “It is going to be a high-cash business.”

Plus, added Goldfogel, he assumes even when marijuana banking becomes the norm, it’s still going to be a highly regulated industry: “I don’t think banking will be solved in a nonrestrictive way. The solution will come with a lot of additional overhead thanks to the scrutinizing of all of these transactions.”

That means that when the big financial players are ready to get into the marijuana space, enterprising solutions like Tokken could be attractive investments. “American Express, Chase and all the other big financial institutions have venture groups that are looking for opportunities,” said Emily Paxhia, co-founder of the marijuana hedge fund Poseidon Asset Management. “And as soon as those guys can get credit card processing in this industry, they will want it. And then some of these companies tackling this issue right now will become attractive acquisition targets.”

It’s why Zarrad isn’t worried about the industry’s banking woes going away. Plus, he believes Tokken’s approach could be perfect for other highly regulated or high-cash industries such as online gaming, loan payment services and prison payment services.

But for Zarrad, Tokken isn’t just a financial play. It’s also enables him to build on what he learned as an immigrant and a refugee to help him reduce the gap between the haves and have-nots. 

“I know about being on the outside and then being brought into the fold,” he said. “I think I can use that same psychological push to help legitimize the industry. These people deserve to have access to banking. It’s what gets me up in the morning.”