The U.S. is the largest and fastest-growing cannabis market in the world. The plant is approved for medical use in 33 states and Washington, D.C., and 10 states including the district have fully legalized marijuana. Efforts to legalize weed to some degree are ongoing in a number of other states.
Yet cannabis remains a banned substance on a federal level, and despite support for legalization being at an all-time high — 61 percent of Americans approve of legalization, according to the the General Social Survey)— the federal government seems reluctant to move forward.
The illegality of cannabis on a federal level creates many issues for cannabis businesses that prevent them from developing and forces them to incur higher operating costs that are then are carried over to consumers through higher prices.
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Cannabis And Banking
A central issue is the inability of cannabis companies to work with banks. Thousands of businesses are forced to operate with cash only, resulting in many unnecessary difficulties, such as the necessity for enhanced security at dispensaries and hiring specialized businesses to move cash around.
It's not just the businesses that are suffering. In 2017, the IRS collected around $4.7 billion in taxes from cannabis businesses that were paid in cash. To process these cash payments, the tax authority awarded a $1.7-million contract to The Mitre Corporation for “large cash payments for processing cannabis federal taxes.â€
The U.S. government has some guidelines in place for banks to operate with cannabis businesses, and there are several banks that do so. Most banks refuse to get involved due to the high compliance costs and regulatory uncertainty.
Some members of Congress have tried to address the issue of cannabis and banks, though the bills that were introduced didn’t even get past the introduction step.
This year might be a breakthrough one, as The Secure and Fair Enforcement (SAFE) Banking Act of 2019 was introduced earlier this month following a February hearing in the House Consumer Protection and Financial Institutions Subcommittee, a first for this type of legislation.
The SAFE Banking Act Of 2019
The SAFE Banking Act of 2019 was authored by Rep. Ed Perlmutter, a Democrat from Colorado, and Rep. Denny Heck, a Democrat from Washington, and cosponsored by Rep. Warren Davidson and Rep. Steve Stivers, both Republicans from Ohio.
The main point of the bill is to create protections for banks that provide financial services to legal cannabis businesses. It also covers ancillary service providers such as real estate owners, accountants, lawyers and others that work with cannabis companies but are not directly involved with the cannabis plant.
The bill has 143 co-sponsors, although only 12 are Republicans. On Tuesday, the legislation will receive the full committee markup, where amendments will be proposed and voted on before the bill heads to the House floor.
Many Supporters, But Skepticism Remains
The SAFE Banking Act bill has received the support of a number of stakeholders, including the National Cannabis Industry Association (NCIA), as well as representatives from the banking industry, law enforcement, and government officials.
The NCIA is optimistic the bill will pass given the bipartisan support it currently enjoys and the historic milestones reached over the past two months.
Still, there are only 12 Republican co-sponsors of the bill, and the Republican Party seems still far from embracing the notion of cannabis legalization — even though a majority of its electorate is in support of such a measure.
To get a better idea about the SAFE Banking Act and its potential fate in Congress, we asked the opinion of a number of U.S. companies that provide point-of-sale, compliance software and payment processing solutions to the cannabis industry about the the legislation.
Read on to see what Flowhub, Helix TCS Inc (OTC: HLIX)-owned BioTrackTHC, Zodaka and Green Bits think about the bill, its shortcomings and how it could change the way these companies operate.
Unlikely To Pass?
Some payment processing solution providers like the bill due to the problem it tries to address.
“Right now the act has four stipulations that are meant to protect the financial institutions currently serving the cannabis industry and to protect and encourage new banks to start serving the industry. These changes are needed and would be extremely positive. The SAFE Act would be a tremendous and very necessary milestone for cannabis,†Zodaka CEO Jordan Friedman told Benzinga.
The execs Benzinga spoke with still view the bill as unlikely to pass, with one reason being insufficient support from the GOP.
“While the SAFE Banking Act has positive intentions to protect cannabis businesses, it's unlikely to pass because it doesn't address federal legality and lacks bipartisan support,†said Flowhub founder and CEO Kyle Sherman.
Sherman’s opinion is echoed by Friedman, who also agrees that the bill is unlikely to reach President Donald Trump's desk.
“Even though the Republican Party's ideas and feelings on the cannabis industry are evolving, there is still a large portion of their party who feels cannabis should remain an illegal schedule one substance."
Drug's Federal Status Left Unaddressed
One major shortcoming of the bill is that while it tries to launch a system that would allow banks to work with the cannabis industry, it will keep the plant illegal on a federal level.
“Until cannabis is descheduled, the United States will grapple with a legal incongruity of enforcing federal law in a country where 33 states have legalized cannabis for medical or recreational use, with more states on the way,†said Ben Curren, CEO and Founder of Green Bits.
BioTrack THC CEO Patrick Vo said this means banks might continue to find it risky to do business with cannabis companies.
“ ... It would be unreasonable to expect banks to risk their entire portfolio of customers on the hope that their bankers make defensible determinations of cannabis business’ compliance with state and local laws while knowing that that business remains unambiguously illegal at the federal level," Vo said.
How Could Legislation Change Landscape For Payment Solutions Providers?
Providers of POS, compliance solutions and payment processing services expect that if the SAFE Banking Act passes, it won’t have a negative effect on their business and might even help them improve their operations.
On the one hand, offering more businesses the ability to open bank accounts would simplify POS providers’ business.
“Moving the cannabis sector away from a cash-driven status would simplify several aspects to running a cannabis retailer, making it even easier for legal cannabis businesses to use point-of-sale and auto-compliance platforms to power their store,†said Green Bits’ Curren.
At the same time, businesses would still be required to remain compliant with state and local regulations, and the only way to ensure this compliance is through the use of specialized software, said BioTrack THC's Vo.
“One of the most difficult hurdles for banks to overcome in working with cannabis businesses is validating the legitimacy of their financial and historical records," he said.
"Ensuring that a given business’ revenue has not come from black market diversion and that black market product has not made its way into the legitimate supply chain is very difficult to do, but is possible with proper seed-to-sale tracking."
Related Links:
Fed Chair Powell Says Banks In 'Very Difficult Position' With Cannabis
National Cannabis Industry Association Comments On Marijuana Banking Hearing In Congress
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