Will Reclassifying Marijuana Solve the Cannabis Industry’s Banking Dilemma?

Despite Drug Policy Overhaul, Marijuana Industry’s
Banking Woes Continue

Summary

The announcement by the Biden administration to downgrade marijuana’s classification as a controlled substance marks a significant shift in national policy. However, this change may do little to address a persistent issue faced by the cannabis industry: the difficulty in accessing basic banking services, such as loans and checking accounts, that are readily available to other industries.

Morgan Fox, the political director for the National Organization for the Reform of Marijuana Laws (NORML), expressed skepticism regarding the impact this decision would have on financial institutions’ willingness to engage with cannabis businesses.

Similarly, the American Bankers Association, through spokesperson Blair Bernstein, stated that this proposed reclassification of cannabis would not alter the banking industry’s stance, given marijuana’s continued illegality under federal law—a boundary many banks are not prepared to cross.

Despite marijuana’s legal status in various forms across most of the United States, the banking sector remains reluctant to handle cannabis-related funds. This reluctance stems from concerns over potential legal repercussions from the federal government. This standoff leaves many in the growing cannabis sector without access to essential financial services, compelling them to operate on a cash-only basis. This situation not only poses significant operational challenges but also increases their vulnerability to criminal activities.

The Drug Enforcement Administration’s (DEA) proposal aims to reclassify marijuana from Schedule I—a category shared with drugs like heroin and LSD—to Schedule III, placing it alongside substances such as ketamine and certain steroids. Although reclassification would permit some medical uses, it maintains federal jurisdiction over unauthorized dealings of these substances.

However, transitioning through regulatory processes in Washington could take months, despite the timing aligning with an election year and potentially benefiting President Biden’s appeal, notably among younger voters who generally view marijuana use more favorably.

Cannabis operators are currently burdened with the risky practice of transporting large sums of cash for tax payments, due to the absence of banking facilities. Although proposals to shield banks from federal prosecution for servicing marijuana businesses have been introduced in Congress, progress has stalled.

Julie A. Hill, a law professor at the University of Alabama, suggests that while reclassification might make some banks more open to serving cannabis clients, they would still face steep regulatory scrutiny to monitor transactions from the industry. “Cannabis companies should anticipate that banking services will continue to be costly,” Hill remarked, highlighting the ongoing challenges despite potential regulatory changes.

Echoing this sentiment, Dotan Y. Melech, CEO of CTrust, a cannabis credit rating agency, emphasizes that without a deeper understanding of cannabis-related risks, substantial changes in lending practices are unlikely.

A report by the Congressional Research Service noted that only a small fraction of financial institutions currently engage with cannabis companies. The extent of services these institutions provide remains somewhat ambiguous.

Adam Goers from The Cannabist Company sees the administration’s move as a groundbreaking step forward, potentially paving the way for further research and tax reforms beneficial to the industry. He advocates for the SAFER Banking Act, a legislative proposal intended to encourage more banks to service legal cannabis businesses.

Morgan Paxhia, co-founder of Poseidon Investment Management, views the DEA’s rescheduling effort as pivotal for federal legalization and a catalyst for increased investment in the sector. Yet, without the passage of supportive banking legislation, it’s uncertain whether this change will significantly alter the banking landscape for cannabis businesses.