Cannabis will soon move from a Schedule I federally controlled substance to Schedule III. It’s a big deal for the industry, but more reform is needed to eliminate the financial roadblocks that businesses still face.
Brett Ballman
The Biden administration’s recent decision to formally begin the process of reclassifying cannabis from a Schedule I banned substance to a Schedule III controlled substance has prompted a wave of cautious optimism across the industry. And while it certainly represents a major step forward, rescheduling doesn’t solve the banking issues that have plagued the industry since the development of legal state markets.
Cannabis Banking Challenges Remain Despite Rescheduling
Reclassifying cannabis as a Schedule III substance under the DEA’s Controlled Substances Act won’t align the state-legal cannabis markets with federal law. Because of this, financial institutions not currently working with cannabis clients will most likely continue to consider it a high-risk industry and will be hesitant to get involved. As of now, the heavy reporting requirements and extensive paperwork required of financial institutions serving cannabis clients mean that the challenges for cannabis companies seeking banking services still remain.
For institutions like Salal that provide financial services for the cannabis industry, the regulatory demands are extensive. Even with rescheduling, we’ll still need to comply with state regulations and satisfy the demands of federal regulators at the National Credit Union (NCUA) and the Financial Crimes Enforcement Network (FinCEN). Both agencies require detailed auditing, reporting, and oversight, which carry a substantial operational burden.
Another significant issue in the cannabis space is the lack of participation from major credit card companies. A move to Schedule III for cannabis won’t prompt companies like Mastercard, Visa, American Express, Discover, and others to change their stance on cannabis transactions. These companies have set thresholds that currently exclude cannabis, and they won’t process transactions for cannabis-related purchases until those purchases are legal under federal law. This severely limits the financial flexibility of cannabis businesses and forces them to rely on cash transactions or alternative payment methods.
The Need for Safe Banking in Cannabis
The rescheduling of cannabis signals a sea change in federal attitude toward the plant, but without passing the SAFER Banking Act or completely removing cannabis from the federal government’s list of controlled substances, financial and banking struggles will persist for the industry. One glimmer of hope is that moving cannabis from Schedule I to Schedule III opens the door to potential financial relief through the nullification of Section 280E of the Internal Revenue Code, which prevents cannabis businesses from claiming tax credits and deductions for expenses they incur in the operation of their businesses. Doing away with 280E would free up cash flow for cannabis businesses and, in theory, increase profitability, making cannabis businesses more attractive to lenders while paving the way for better lending options in the future.
Cautious Optimism
The cannabis industry has reason to celebrate rescheduling as a positive step in the right direction. It recognizes the need for reform and provides hope for improved financial conditions for the many struggling businesses, weighed down by regulations, taxes, and illicit market competition, just trying to stay afloat. However, major challenges remain, particularly in terms of banking and credit card processing. Here at Salal, we are optimistic that the industry will keep moving toward full legalization and financial integration, albeit in very small steps. That’s why it’s crucial for us and our fellow stakeholders to remain engaged, informed, and steadfast in our ongoing efforts to service this industry and achieve comprehensive reform.
Salal’s cannabis banking experts know the ins and outs of the cannabis industry and can help your business function at the highest level. Reach out today to see how we can help you streamline your operations and find success.
