U.S. Cannabis Financial Regulatory Environment
Financial regulations, at the federal level, have had far-reaching implications for the cannabis industry in the United States. These regulations have forced cannabis companies to navigate the limitations of the financial system and face operational inefficiencies. The absence of accessible electronic payment options further complicates transactions and hinders the industry's integration into the broader economy. In response to these challenges, legislative solutions such as the SAFE Banking Act and the CLIMB Act have been proposed, aiming to improve access to banking services, enhance transparency, and facilitate capital investment for cannabis businesses. Furthermore, advocates including the National Cannabis Industry Association (NCIA) and members of Congress, such as Earl Blumenauer and Troy Carter, are actively working to advance bills that emphasize the need for a supportive regulatory environment that fosters the growth and development of the cannabis industry.
By: Cameron Johnson & Josh Gonzalez | June 21, 2023
Financial Regulations on a Federal Level: Implications for the Cannabis Industry
The United States classifies drugs at the federal level through the Controlled Substances Act (CSA) of 1971, which categorizes drugs based on their potential for abuse, addiction, and health risks. Cannabis is classified as Schedule I, along with substances like heroin and lysergic acid diethylamide (LSD), which makes it strictly illegal. Additionally, the Money Laundering Control Act of 1986 prohibits financial transactions involving proceeds from specific criminal activities, which includes the sale and distribution of controlled substances. This makes all financial transactions related to cannabis illegal under federal law, which prevents federally regulated financial institutions from engaging with the cannabis industry.
Federal laws, such as the above mentioned, create significant obstacles for state-legal cannabis businesses seeking access to traditional financial services. They are unable to deposit funds from their business activities into FDIC-insured banks, effectively excluding them from most financial institutions. Securing loans, obtaining insurance, and investing profits become nearly impossible when businesses cannot engage with federally insured banks or financial service providers.
The federal prohibition of cannabis has a profound impact on transaction costs for the industry, hindering operational efficiency. While electronic payments and banking services are standard in other industries, the legal cannabis industry lacks such conveniences. Cannabis businesses are forced to rely primarily on cash payments. Storing and processing large amounts of cash pose security concerns, and depositing cash in the limited cannabis-friendly banks can be prohibitively expensive due to associated fees. Consequently, many cannabis businesses resort to unconventional payment methods, such as classifying employees as 1099 workers or paying workers under the table, to navigate the limitations imposed by the financial system.
In addition to the challenges relating to transaction costs and banking, federal regulations also prohibit efficient interstate industries from emerging. Transporting cannabis between states, even between two legal ones with a shared land border, like between California and Oregon or New Jersey and New York, is illegal. Due to drug trafficking laws, the entirety of the cannabis supply chain (from seed to weed) must be established solely in that state. People and firms cannot transport cannabis out of state at any point in the supply chain. This prevents firms from benefiting from economies of scale across multiple states. States with mature cannabis industries cannot take advantage of an existing supply chain and export their intermediary or final product to other states.
In summary, the financial regulations imposed at the federal level present significant barriers for the cannabis industry in the United States. The Schedule I classification of cannabis, combined with the Money Laundering Control Act, hinders access to banking services, loans, insurance, and regular financial transactions. These challenges force cannabis businesses to rely on cash payments, increasing security risks and transaction costs. To foster a more equitable and integrated cannabis industry, addressing these federal financial regulations and breaking down interstate trade barriers becomes crucial.
Financial Regulations on a State Level: Challenges and Discrepancies
While drugs are classified at the federal level under different Schedules, states have the authority to regulate the distribution of cannabinoid products as they see fit. However, this leads to significant variations in regulations and enforcement from state to state. These discrepancies pose challenges for large-scale cannabis companies, like CURALEAF, particularly when it comes to transportation and the secure management of their profits.
Due to the legal complexities surrounding cannabis at the federal level, these companies often resort to using small-scale, non-major banks to store their profits across the country. These banks, although operating in a legal gray area, are not insured by the FDIC and therefore, are not bound by the same federal regulations as other banks. This presents both advantages and risks for cannabis businesses operating in multiple states. Having said that, the use of non-FDIC-insured banks provides a solution for cannabis companies to store their profits without facing immediate legal consequences because these banks are often more open to working with the cannabis industry as they understand the unique challenges these companies are facing. However, the lack of FDIC insurance also means that the funds held by these banks are not protected in the same way as those held by traditional banks. For example, in the event of a financial crisis or bank failure, there is no guarantee that the funds will be fully recovered.
The use of non-FDIC-insured banks also highlights the regulatory disparities between the federal and state levels. While some states have implemented robust regulatory frameworks to ensure the security and transparency of financial transactions within the cannabis industry, others have more relaxed or ambiguous regulations. This creates a fragmented landscape where cannabis companies must navigate a patchwork of state regulations and financial institutions, often resulting in additional costs, administrative burdens, and risks.
To address these challenges, policymakers at the state level may consider streamlining financial regulations and fostering greater consistency across states. This could involve implementing comprehensive frameworks that provide clear guidelines for financial institutions to engage with the cannabis industry while ensuring appropriate safeguards are in place. Additionally, exploring options for federal reform to harmonize regulations between states would provide greater stability and certainty for cannabis businesses, allowing them to operate on a level playing field with other industries. Another avenue would be the continual support of bills and acts that advocate for these such regulations.
Legislative Solutions for the Cannabis Industry: The SAFE Banking Act and the CLIMB Act
The SAFE Banking Act and the CLIMB Act are two legislative proposals that aim to address the financial challenges faced by the cannabis industry in the United States.
The SAFE Banking Act is a bipartisan bill that seeks to improve access to banking services for state-legal cannabis businesses. It offers protections for financial institutions that provide services to the cannabis industry, shielding them from federal prosecution or regulatory actions. By allowing cannabis businesses to access banking services, the act aims to enhance safety, transparency, and efficiency in financial transactions within the industry. This would help reduce reliance on cash transactions and provide better opportunities for businesses to access loans and credit.
In contrast, the CLIMB Act, or the Capital Lending and Investment for Marijuana Businesses Act, focuses on allowing national stock exchanges to list cannabis transactions and state-licensed cannabis businesses. Currently, federal restrictions prevent national stock exchanges from listing cannabis-related companies. The CLIMB Act aims to remove this barrier, enabling cannabis businesses to access capital and investment through national exchanges. This would provide greater visibility and potentially attract a wider range of investors, addressing the financing challenges faced by the industry.
Both acts recognize the need to create a more supportive environment for the cannabis industry by improving financial access and removing federal barriers. They aim to promote stability, transparency, and equity within the industry, while also facilitating the growth and development of state-legal cannabis businesses.
Advocates for the SAFE Banking Act and CLIMB Act
The National Cannabis Industry Association and several members of Congress, are actively working to advance the bills and promote its passage. Here's a brief overview of their efforts:
National Cannabis Industry Association (NCIA):
Founded in 2010, NCIA is the only national advocate specifically dedicated to supporting small cannabis businesses.
They are a leading organization fighting for The SAFE Banking Act.
NCIA's mission is to promote responsible, sustainable, and inclusive growth of the cannabis industry while advocating for a favorable social, economic, and regulatory environment.
Their values include advocacy, education, community, inclusion, responsibility, and sustainability.
The Chief Executive Officer of NCIA is Aaron Smith.
Earl Blumenauer (D-OR-3):
Earl Blumenauer is one of the advocates for The SAFE Banking Act.
He introduced the bipartisan bill, known as the Secure and Fair Enforcement (SAFE) Banking Act, along with Dave Joyce (R-OH-14) and Senators Jeff Merkley (D-MA) and Steve Daines(R-MT).
Earl Blumenauer is also the Founder and Co-Chair of the Congressional Cannabis Caucus.
Troy A. Carter (D-LA-2) and Guy Reschenthaler (R-PA-14) Republican from Pennsylvania) House Representatives.
These two are the ones who introduced the CLIMB Act to Congress
While specific advocates for the CLIMB Act are not mentioned in the researched information, it is likely that organizations like the National Cannabis Industry Association (NCIA) and supportive members of Congress would align with the objectives of this act.
Additional Advocates:
Several Senators and Representatives have shown their support by cosponsoring the SAFE Banking Act.
In the Senate, this legislation is cosponsored by U.S. Senators Jacky Rosen (D-NV),Bill Cassidy (R-LA), Kirsten Gillibrand (D-NY), Cynthia Lummis (R-WY), Brian Schatz (D-HI), Lisa Murkowski (R-AK), Edward J. Markey (D-MA), Kevin Cramer (R-ND), Ben Ray Luján (D-NM), Dan Sullivan (D-AK), Catherine Cortez Masto (D-NV), Rand Paul (R-KY), Angus King (I-ME), Tammy Duckworth (D-IL), John Fetterman (D-PA), Ron Wyden (D-OR), Kyrsten Sinema (I-AZ), Alex Padilla (D-CA), Dick Durbin (D-IL), Peter Welch (D-VT), MarkKelly (D-AZ), Michael Bennet (D-CO), Patty Murray (D-WA), Tina Smith (D-MN), Amy Klobuchar (D-MN), Elizabeth Warren (D-MA), Tim Kaine (D-VA), Debbie Stabenow (D-MI), Bernie Sanders (I-VT), Bob Menendez (D-NJ), Chris Coons (D-DE), John Tester (D-MT), Mark Warner (D-VA), Martin Heinrich (D-NM), John Hickenlooper (D-CO), Mazie Hirono (D-HI), Gary Peters (D-MI), and Chris Murphy (D-CT).
In the House, this legislation is cosponsored by U.S. Representatives Warren Davidson (R-OH-08), Jim Himes (D-CT-04), Brian Mast (R-FL-21), Barbara Lee (D-CA-12), Guy Reschenthaler (R-PA-14), Nydia Velázquez (D-NY-07), Lori Chavez-DeRemer (R-OR-05), and Lou Correa (D-CA-46) & more.
The SAFE Banking Act has received approval from the House seven times, but is yet to be officially passed through the senate due to lack of political will. Advocates have played a major role in the resurfacing of the bill on multiple occasions and continue to fight on their behalf emphasizing the need for safe and regulated banking access for cannabis businesses.
The federal financial regulations imposed on the cannabis industry in the United States have created significant obstacles for state-legal businesses. The classification of cannabis as a Schedule I substance and the restrictions imposed by the Money Laundering Control Act hinder access to traditional banking services, forcing businesses to rely on cash and face challenges in integrating with the broader economy. However, proposed legislative solutions like the SAFE Banking Act and the CLIMB Act offer promising avenues for improvement. The SAFE Banking Act aims to enhance access to banking services, promote transparency, and reduce reliance on cash payments. Similarly, the CLIMB Act seeks to facilitate capital investment and visibility for the industry. With the persistent efforts of advocates and support from key stakeholders, these bills have the potential to create a more equitable and integrated cannabis industry, fostering growth and contributing to the overall economy.
*AEPC is a nonpartisan, nonprofit 501(c)3 organization. We do not advocate for any political party, only for data-backed policy. All opinions published reflect the available data at the time.