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Any connection between banks and the financial industry with cannabis businesses poses legal and regulatory risks. The cannabis industry still faces significant banking challenges, leading most transactions to be conducted in cash, which makes these businesses prime targets for robberies and burglaries.
This is despite the global cannabis market being worth around $64 billion, with the US accounting for a major portion, and it is projected to surpass $74 billion by 2029.
As the market continues to expand, more states are legalizing cannabis use. In 2023, cannabis legalization reached its highest point at the state level, with 25 states legalizing recreational cannabis and 38 states legalizing cannabis for medical use.
However, restrictions on facilitating financial transactions persist. The stigma attached to cannabis means financial institutions and banks risk a negative reputation if they support cannabis transactions. As a result, many remain wary of being labeled ‘weed banks,’ making cannabis banking a major struggle for business owners.
In fact, a federal ban on cannabis has blocked the use of debit and credit cards for payments to cannabis dispensaries. In 2021, VISA released a memo reiterating that using their payment channels for cashless ATMs is against company rules and violates regulatory prohibitions under the Controlled Substances Act. Similarly, in 2023, Mastercard prohibited all cannabis transactions through its channels.
While the popularity and usage of digital wallets are growing rapidly—with more than half of people in the US using them more often than traditional payment methods—cannabis businesses remain left behind in offering easy payment alternatives due to banking constraints. Moreover, these businesses must maintain secure physical cash storage.
Cashless payment methods could significantly help cannabis businesses improve customer transactions, monitor cash flow and accounting, and make tax payments easier while enhancing business safety. However, with no support from card or banking companies, most cannabis businesses must rely on cash or find workarounds. An industry operating on a cash-only basis attracts both thieves and tax cheats.
Reclassifying Cannabis to Make it Regulated
While more states have been legalizing cannabis, federal law still considers it illegal. Federal anti-money laundering (AML) laws have created a gridlock with state marijuana laws, denying cannabis businesses equal access to banking.
Under federal AML laws, banks are required to monitor and report proceeds from unlawful and illegal activities, including cannabis retail, as it remains federally illegal. The Bank Secrecy Law (BSA) further requires banks to implement policies ensuring their customers do not engage in unlawful activities, including cannabis sales.
Last year, in August, in an attempt to level the playing field, federal agencies recommended reclassifying cannabis from Schedule 1 of the Controlled Substances Act (CSA) to Schedule III.
Schedule 1 of CSA includes substances like heroin and LSD, which have a high potential for abuse and no accepted medical use. Meanwhile, under Schedule III, Schedule III includes substances like ketamine, which are accepted for medical use and have a low potential for physical and psychological dependence.
So, this move does not legalize cannabis at the federal level but changes its status from being prohibited to regulated.
After the Department of Health and Human Services (HHS) recommended reclassifying cannabis, the Drug Enforcement Administration (DEA) has started reviewing it before a final decision is made.
According to US Rep. Earl Blumenauer (D., Ore.), cannabis is likely to be rescheduled before the year ends. In an interview with WSJ, Blumenauer said these changes could give state-legal cannabis businesses better access to banking services.
This rescheduling of cannabis, according to him, “is perhaps the single most significant development in the last five years,” and its process is “soon to be completed… before the next calendar year. That is amazingly significant.”
The move will have a great impact on the cannabis industry, ranging from easing restrictions on scientific research into its medical benefits and risks to potentially expanding medical cannabis programs and prescriptions. According to Michael Johnson, CEO of Metrc, which makes cannabis supply chain tracking software:
“For years, pharma and biotech companies have viewed cannabis as a market with enormous potential. With rescheduling, investment firms that previously had clauses precluding them from investing may reconsider their stance.”
Additionally, cannabis businesses will be able to claim standard tax deductions under Section 280E of the IRS code, unlike Schedule I and II substances, which are prohibited from certain tax deductions.
Cannabis businesses currently can’t deduct their regular, normal operating expenses for tax purposes, meaning “virtually all of the state-legal enterprises are money-losing,” said Blumenauer.
Freeing businesses from the 280E tax provision will also allow them to list on major US exchanges.
Rescheduling cannabis to a less restrictive drug could further accelerate movement in the Senate to pass the Safer Banking Act. This would allow cannabis businesses to accept debit card payments, get small-business loans, and open accounts at federally insured banks.
The Safer Banking Act is “very, very popular,” and “there’s increasing pressure to be able to take advantage of this,” said Blumenauer. He is the co-founder and co-chair of the Congressional Cannabis Caucus and has been pushing for liberalizing cannabis laws throughout his political career.
Click here to learn about enhanced use cases of cannabis.
The SAFER Banking Act to Enhance Banking Access
The SAFER Banking Act, or The Secure And Fair Enforcement Regulation Banking Act, received bipartisan support and was passed in Sept. 2023 by the US Senate Banking Committee. The Act aims to allow cannabis businesses that are legal in states to access traditional financial services.
With this move, the idea is to facilitate financial transactions for marijuana firms and reduce the risk for payment processors, lenders, insurers, and other financial institutions that have been serving the industry in spite of the restrictions imposed on cannabis at the federal level.
“It makes absolutely no sense that legal businesses are being forced to operate entirely in cash, and it’s dangerous — and sometimes even fatal — for employees behind the register.”
– US Sen. Patty Murray (a couple of years ago)
Murray is the co-sponsor of the SAFER Banking Act, which allows cannabis businesses to use the same financial instruments as any other business.
Under the key provisions of the SAFER Banking Act, ‘safe harbor’ protection will be provided to these service providers. This protection is from certain civil, administrative, and criminal penalties for offering services to cannabis businesses due to the status of marijuana under federal law.
While it’s not entirely clear yet if the change will impact the cannabis industry’s ability to access financial services, many believe this is likely to increase the accessibility of banking, lending, and insurance services for the industry and stimulate significant growth.
Notably, cannabis will remain illegal under the Act. The tension between state and federal law, however, will be resolved in regards to banking, insuring, and lending to a state-legal cannabis business.
Guidelines surrounding due diligence, ongoing monitoring, and reporting of suspicious activities will remain a part of the Act. Moreover, restrictions will continue to apply to activities that institutions commonly undertake in other highly regulated industries.
While the SAFER Banking Act hasn’t yet become a law, if it does, insurers, lenders, credit unions, and others won’t be able to decline to provide banking services outright; instead, they will have to take a risk-based approach to assess individual customer relationships.
That is not to say that institutions will be required to serve cannabis businesses, but it could lead to an influx of financial service providers and increase competition among both existing and new participants in the cannabis industry.
Overall, while many risks may be reduced, they won’t be fully eliminated. For now, it remains to be seen how the Act’s becoming law will impact the risk appetite of banks and other financial service providers.
A Shared Struggle, Crypto Continues to Face Banking Hurdles
Much like cannabis, crypto has been experiencing a similar banking restriction. While it has been more than a decade and a half since Bitcoin first came into existence, even today, despite the total crypto market growing beyond a trillion dollars, there aren’t many banks that support it.
While the crypto ecosystem is built on the belief that there shouldn’t be a centralized entity in control of the finances and endorses people becoming their own bank, until that becomes a reality, traditional banking has to act as a bridge.
Selective banking practices have been just as much of a problem for crypto as the cannabis industry. Right from the beginning, banks and financial institutions were reluctant to engage with the industry, citing a lack of regulatory clarity and association with illicit activities— despite cash being the most popular way to fund crimes.
After the 2017 crypto bull run, as regulatory scrutiny increased, many banks like JPMorgan Chase and Bank of America prohibited customers from purchasing crypto with credit cards.
In 2021, things seemed to improve, with banks like Silvergate and Signature Bank launching specialized platforms for real-time payments and crypto-related services. However, many banks had to distance themselves after the 2022 FTX debacle, which brought increased regulatory pressure and led many banks to distance themselves from the sector yet again.
Then, in 2023, the regional banking crisis in the US resulted in the shutdown of crypto-friendly banks like Signature Bank, Silicon Valley Bank (SVB), and Silvergate Bank, causing headaches for the industry. This resulted in stablecoin issuer Circle having USDC de-pegging from $1 due to the company’s $3.3bln being stuck in one of these banks (SVB).
This year, the launch of Spot Bitcoin ETFs and Ether ETFs signaled a regulatory green light to the industry. However, despite this, major banks are now selling these investment vehicles to their clients, yet the trend of selective engagement continues.
Banks still supporting crypto firms have become increasingly selective, imposing higher fees and stricter compliance requirements, leaving many crypto companies struggling to find reliable banking partners. All of this has caused operational challenges and trust issues, highlighting the need for more comprehensive regulatory frameworks to bridge the gap—just like in the cannabis industry.
Click here for a list of the top ten cannabis stocks in the growing market.
Cannabis and Crypto-friendly Banks
While both industries are struggling with getting banking services, there are still some providers who have been friendly toward cannabis and crypto:
#1. First Citizens Bank
This bank offers specialized services based on the unique legal and logistical challenges of hemp and cannabis-related businesses. From merchant services, cash management, and loans and lines of credit to commercial real estate and equipment financing & leasing, First Citizens Bank serves different cannabis and hemp banking needs of related businesses.
Its parent company, First Citizens BancShares, is publicly traded and oversees the broader operations and financial performance of the bank and its affiliates. The company is a top 20 US financial institution with over $200bn in assets. Its shares are currently trading at $2,030, up 43.11%, which puts the company’s market cap at $$31.4bln. First Citizens BancShares’ Revenue (TTM) has been $12.4bln while having an EPS (TTM) of 181.81, a P/E (TTM) of 11.17, and a dividend yield of 0.32%.
The likes of Safe Harbor Financial, First Federal Bank of Florida, North Bay Credit Union, and Dama Financial are also among those providing banking services to the cannabis industry.
#2. Amina Bank
Previously known as SEBA Bank, this fully licensed Swiss crypto bank with a market cap of over $30 bln operates globally and offers both traditional and crypto banking services. The FINMA-regulated institution aims to build a gateway to facilitate the movement of assets between the crypto and TradFi markets for financial investors.
Revolut, Juno, Wirex, Monzo, Mercury, and Bank Frick are banks that offer banking services to crypto companies and crypto-related services to their customers.
Conclusion
Both cannabis and crypto industries have faced the issue of lack of regulatory clarity and banking support. Despite this, some financial institutions have still chosen to serve related businesses in recent years.
In the case of cannabis, the potential reclassification as a less restrictive drug and the SAFER Banking Act might finally change things for the better, potentially ushering in a new era for the industry. However, not everyone agrees, with some expecting lending practices and banking services to remain expensive and unchanged for this emerging market.
Still, these advancements mark a shift in sentiment and may attract interest from those who have been sidelined. Significant changes may be on the horizon that could help the cannabis industry not only become normalized but get even bigger, triggering an inflow of investment in the near future.
For more cannabis-related content, head over to mycannabis.com.