Rescheduling alone wouldn’t solve marijuana banking woes

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The federal government’s proposed rescheduling of marijuana is a positive and necessary step forward, to be sure.

And while rescheduling would alleviate certain burdens associated with operating in the cannabis industry, it would do little to address banking difficulties that have long stifled and frustrated this sector.

Despite significant strides in marijuana legalization and regulatory clarity, most financial institutions will continue to be wary of the cannabis industry.

Short of full federal legalization, legislative reform that specifically addresses cannabis banking is the only way to ensure that state-regulated marijuana businesses can access the same financial services as other legitimate businesses.

History of cannabis banking

When adult-use marijuana passed in my home state of Washington in 2012 with 56% of the vote, it marked the start of a new era.

Initiative 502 legalized limited possession and private use of marijuana as well as adult-use sales.

Those of us working in the financial sector with an interest in the benefits of cannabis were excited.

We also were motivated by the prospect of servicing Washington state clients in this burgeoning industry with considerable growth potential.

The voters’ support was a clear mandate, but beyond that, officials needed to address a host of regulatory and safety concerns before an actual market could exist.

Starting from scratch, financial institutions formed dedicated teams to explore opportunities within the new industry.

We worked closely with officials to establish a banking framework that complied with Washington state’s commercial cannabis regulatory structure.

This included efforts to address safety concerns associated with handling large amounts of cash and cash transactions, which were – and continue to be – a direct result of federal illegality.

While the Cole Memo outlined the federal government’s intentions to refrain from intervening in state-regulated marijuana markets that took measures to effectively prevent criminal involvement, underage sales and illegal diversion to other states, its protections were far from comprehensive.

Sadly, the threat of federal raids led by the Drug Enforcement Administration in Washington state and other regulated markets such as California kept most financial institutions from getting anywhere near the industry.

Rescheduling’s impact on cannabis banking

The U.S. Department of Justice’s proposal in May to move marijuana from Schedule 1 to Schedule 3 under the Controlled Substances Act is monumental, no doubt.

For starters, rescheduling would address the burden of Section 280E of the Internal Revenue Code, which originated to curb organized crime.

Under 280E, businesses that “traffic” Schedule 1 or 2 substances can’t deduct ordinary business expenses.

This has saddled state-regulated marijuana businesses with higher taxes than businesses in other industries.

Moving marijuana to Schedule 3 would finally enable cannabis businesses to deduct their expenses like any other legal enterprise.

This would be a huge financial boon and significantly improve the prospects of profitability in this sector.

From a banking standpoint, however, rescheduling offers little relief.

Gaps in rescheduling

While Schedule 3 substances are permitted for medical use under federal law, they are heavily regulated and typically must be prescribed by licensed medical professionals and dispensed to patients through authorized pharmacies.

Moving marijuana to Schedule 3 wouldn’t change the federal government’s stance on the blanket illegality of recreational cannabis sales and use.

It also wouldn’t align state-legal medical marijuana markets – which typically rely on a dispensary infrastructure – with the federal government’s regulations for Schedule 3 substances.

Because state-licensed marijuana operations don’t comply with federal rules governing the sale of Schedule 3 substances, such businesses still would be considered illegal under federal law and most financial institutions would continue to refrain from serving clients in this sector.

Regardless of rescheduling, the cannabis industry still needs the federal government to recognize and respond to the critical nature of banking access for state-licensed cannabis businesses.

Cannabis industry struggles

The absence of efficient payment systems, which has long plagued cannabis retailers, has created a host of logistical headaches and operational disadvantages for the industry.

Cash-only businesses are forced to rely on workaround solutions that fall short of standard retail practices.

This not only creates friction in the customer experience and increases security risks, but it also opens the door to higher chances of currency fraud and inaccurate bookkeeping as well as driving up the cost of financial services to those lucky enough to secure a banking relationship.

Social equity is another area impacted by the industry’s lack of access to banking and financial instruments.

The difficulty cannabis entrepreneurs face in accessing capital is a major reason why initiatives aimed at benefiting groups disproportionately impacted by failed drug-war policies have fallen short.

It’s all well and good to grant licensing priority to those most impacted by the war on drugs, but without the proper financial backing, it’s incredibly difficult to start a cannabis business – let alone one with profitability potential.

Why SAFER Banking matters

One legislative effort that holds promise for finally resolving the cannabis industry’s banking obstacles is the Secure and Fair Enforcement Regulation Banking Act, commonly known as the SAFER Banking Act, which has repeatedly stalled in the U.S. Senate despite several iterations passing the House.

This proposed legislation would do far more to improve banking conditions for the cannabis industry than rescheduling would.

Despite the road bumps thus far, I remain cautiously optimistic about the SAFER Banking Act’s chances for success.

SAFER made it out of the Senate Banking Committee in September 2023, and Senate Majority Leader Chuck Schumer, a New York Democrat, has pointed to cannabis banking reform as one of the chamber’s priorities in 2024.

Banking advocacy is essential

The cannabis industry’s banking challenges are multifaceted and deeply entrenched.

Financial institutions can play an important role in supporting this dynamic industry, but they require a new legal framework to effectively do so without exposing themselves to untenable risk.

While rescheduling marijuana is a step in the right direction, it wouldn’t move the needle on access to banking services.

We stand at a critical juncture – closer than ever to achieving meaningful reform but still on shaky and uncertain ground.

The path forward requires a concerted effort to address the banking challenges that continue to hinder growth.

The more that cannabis business owners and industry stakeholders can sustain and ramp up their advocacy efforts, the more likely it is that we’ll see legislative reform come to pass.

This includes talking to congressional representatives, joining industry advocacy organizations and participating in efforts to reform banking regulations.

By advocating for legislative reform and fostering a more unified approach to cannabis banking, we can pave the way for the stable and prosperous future the industry deserves.

Russell Rosendal is the CEO of Kirkland, Washington-based Salal Credit Union. He can be reached at linkedin.com/in/russell-rosendal-salalcu.