January 5th was a seminal day for the cannabis industry in the United States. In what most pundits thought was an unlikely event, both Georgia Senate seats went to Democrats.
This, combined with a Democratic administration, which has been much more friendly to cannabis initiatives and the passage of new cannabis legalization initiatives in multiple states, offers a unique opportunity for federal legislation efforts to bring the industry on par with other federally regulated and taxed industries like alcohol and tobacco.
So, what will happen now? Well, there are two bills which have been pending in Congress that would substantially provide a catalyst to and a reshape of the industry. The House of Representatives passed H.R. 3884, the MORE Act (originally sponsored by Kamala Harris, Vice President Elect), on December 6 on a bi-partisan 228-164 vote to federally decriminalize cannabis. The House has also passed on three separate occasions by bi-partisan vote H.R. 1595, the SAFE Banking Act, which provides a federal safe harbor to financial institutions (FI’s) that choose to offer financial services to the cannabis industry. The SAFE Banking Act was effectively killed by Senate Banking Committee Chairman Mike Crapo in 2019 and the MORE Act expired without a vote in the Senate when the last congressional session expired. Even though both bills would have been reintroduced in 2021, they remained unlikely to pass in a Republican controlled Senate. But, as January brought the Democratic surprise, both bills are very much alive and well.
Prospects for The MORE Act
Even with the slightly changing balance in the House, the MORE Act is likely to be passed again in this House of Representatives. So, now that Democrats are in control of the Senate it will get immediately passed right? I would personally guess not. I think the Senate is going to take its time to make sure that all the law enforcement and regulatory concerns are addressed before passing the bill. Also, there is the matter of the treaties we signed with other nations in which we urged those nations to classify Marijuana as a “Schedule 1” narcotic. All of those considerations will take some time in the Senate. But, the Congressional Budget Office (CBO) has scored the MORE Act and estimates it will bring in an additional $11B in revenues to the economy and save another $1B in federal prison expenses. And right now, every penny counts.
The bottom line: Democrats are going to be acutely aware that they have to get their agenda passed in the next two years before the next election could shake up the balance in Congress. Federal cannabis legalization is definitely part of that agenda.
Prospects for SAFE BANKING
As previously mentioned, the bi-partisan Secure and Fair Enforcement Act (SAFE Banking Act) has passed in the House as a standalone bill and twice as part of doomed COVID-19 Relief Bills. As a standalone bill, it would have passed in the Senate if Senator Crapo of Idaho had let it out of the Senate Banking Committee and Majority Leader Mitch McConnell had brought it to the floor. But, these two men had extraordinary power to prevent its passage. Obviously, the operative word there is had as Democrat Chuck Schumer is now Majority Leader and Democrat Sherrod Brown of Ohio is Chairman of the Senate Banking Committee.
The bottom line: Democratic leadership in the Senate desires passage of the SAFE Banking Act and are likely to push it forward in the first few months of the new Congress. If SAFE Banking is attached to another COVID-19 Relief Bill in the House, like it was with the doomed HEROES Act, it could pass soon after inauguration as Democrats will be likely to want to increase stimulus payments from $600 to the $2,000 that they sought at the end of the last Congress.
What happens after SAFE Banking passes?
After Congress passes the SAFE Banking Act, the joint interagency body of regulators, FFIEC, will convene to begin writing the rules and regulations for financial institutions that engage with Cannabis Related Businesses. Generally, when new law is enacted this process can take a couple of years. However, I would anticipate that initial guidance from the agency will come out fairly quickly as the individual regulators have inevitably been considering this issue. They have been studying state regulators actual experience with current institutions in the space and they have an existing regulatory apparatus pertaining to higher risk industries.
Will financial institutions rush into bank cannabis after SAFE Banking passes?
No! That is the short answer. Banking the cannabis industry will never be for every financial institution. Why? Because it takes a commitment from the institution to put infrastructure in place to safely bank cannabis businesses. Banking cannabis businesses on an ad-hoc basis could be a recipe for disaster for the institution. The onus is on the bank to make sure that each cannabis business (or any business) is completely legal. As the state laws regarding legalized cannabis have been written, what legal means in the cannabis industry is that the business is licensed and compliant with all of the state and local laws. If an in institution takes on cannabis businesses, it would be well advised to have the subject matter expertise and a mechanism to insure the legality and compliance of the businesses. The institution also needs to be able to monitor the cash flows in and out of the cannabis businesses and compare them with “track and trace” software.
Will financial institutions that are early movers into the industry see benefits?
Yes! That is the short answer. While not all financial institutions will provide banking services to the cannabis industry, many more will move into the space in anticipation of SAFE Banking and even more will follow after its passage. This is because institutions will realize that they are unlikely to experience Federal Regulatory backlash just for banking the industry, which has been a grey area since the initial cannabis state initiatives were passed. Cannabis is a net new industry for institutions that rarely see net new industries. Early movers into the space will be able to capture what will be a growing and loyal business segment. As cannabis related businesses have been shut out of the financial services industry, the businesses and the employees are hungry for a variety of banking products (a cross-seller’s dream). And, because cannabis businesses pay to put their cash into banks, the depository alone is a significant profit center.
“What about lending?”
Less than a handful of financial institution are currently, openly lending to the cannabis industry. After SAFE Banking passes, we don’t expect lending to open up quickly. But we anticipate that over time more and more institutions will gradually move towards lending; especially if the secondary or collateral support issue can be resolved. That concern has already been alleviated in the Hemp industry as crop insurance became available with the passage of the 2018 Farm Bill. However, even though federally legal, the Hemp industry still struggles with obtaining long lasting banking relationships. But, beyond that, financial institutions have to address the concern of what happens if they have to liquidate collateral for a cannabis business. If it is a commercial building that is not single purpose, the prospects are better. However, if it is any cannabis product (crop, seed, retail item), then the financial institution can not only not take possession, but also can’t sell the product to a third party. (HDCS is developing a product to solve for this issue). The lack of institution lending has put a premium on the yields of loans offered by private money lenders (i.e., commercial real estate loan at 14% with a 2% origination fee on a 1 year term). This leaves a lot of interest margin for institutions that can get comfortable with the risk.
“What changes do you anticipate after the regulations are written?”
Ernest regulatory enforcement is the first answer. It is impossible to enforce rules and regulations that haven’t been written. This has been true for both State and Federal regulators when it comes to their member institutions that have waded into cannabis. Once the regulations are there to enforce, some institutions will find out they have done it correctly and some will find themselves with material weaknesses in their programs. The more intention and thought they dedicated to setting up those programs, the better they will fair. The biggest surprise will be for those institutions that have maintained that they don’t bank cannabis. We anticipate that the regulatory response will be: “Ok, but you need to prove it.” The hidden truth is the great majority of both legal and illegal cannabis revenue is going through financial institutions today. It may be disguised as other businesses (i.e., IT companies and consultants that deposit a lot of cash). We anticipate that many institutions are going to realize that they have a cannabis problem.