What Cannabis Rescheduling Could Mean for the Industry

5 minute read | August 9, 2024

We look at the potential business and banking impacts of HHS cannabis rescheduling.

Ever since Washington state first legalized medical cannabis in 1998, and later sanctioned recreational cannabis in 2012, the legal status of cannabis has undergone almost continuous change across the United States. As more states legalized cannabis over the past decade, the federal government began to take another look at its strict ban on cannabis.

Over fifty years ago, on May 1, 1971, the Controlled Substances Act (CSA) went into effect and created five “schedules” that classified drugs based on three factors:

  • Accepted medical use
  • Potential for abuse
  • Safety and potential for addiction

Schedule I substances are considered to be unsafe, to have no medical use, and to have a high potential for abuse and addiction. At the time, cannabis was added to Schedule I, alongside heroin, LSD, and MDMA, deeming it unsafe under any circumstances.

As states began to dispute this classification, in 2014 the Department of Health and Human Services (HHS) and the Drug Enforcement Agency (DEA) considered rescheduling cannabis. However, HHS decided at that time to leave it on Schedule I. Eight years later, in 2022, President Biden asked HHS to take another look. This time, the HHS found medical evidence to support a recommendation to move cannabis to Schedule III, where it would be grouped with substances such as ketamine, anabolic steroids, and testosterone.

The Department of Justice (DOJ) then concurred, and on May 21, 2024, announced its plan to move cannabis with over 0.3% THC content from Schedule I to Schedule III. DOJ’s first step was to publish its Notice of Proposed Rulemaking, and if its rule is finalized, some restrictions on cannabis would be eased.

However, rescheduling to Schedule III would not free cannabis of all restrictions: this change mainly recognizes the medical benefit of cannabis and permits its purchase with a prescription. The DEA and the Food and Drug Administration (FDA) would still regulate cannabis, and the expanded legalization of recreational cannabis cultivation and sale activities under state law would not be replicated under federal law.

This misalignment between federal and state law means that cannabis banking will be constrained for the foreseeable future. “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,” explained Brett Ballman, Salal’s First Vice President of Business Banking. “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.”

In particular, credit card processing services will remain elusive. “Mastercard, Visa, American Express, Discover, and others won’t process transactions for cannabis-related purchases until those purchases are legal under federal law,” Brett said. “This severely limits the financial flexibility of cannabis businesses and forces them to rely on cash transactions or alternative payment methods.”

Nonetheless, cannabis businesses would generally benefit from the rescheduling because they would then be able to take certain tax credits and deductions for ordinary and necessary business expenses (currently prohibited under Internal Revenue Code Section 280E) and would also have more access to bankruptcy courts. “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,” Brett said.

Industry businesses, alongside academia, would also have more options for cannabis research with fewer onerous registration requirements. “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,” Brett elaborated. “Here at Salal, we are optimistic that the industry will keep moving toward full legalization and financial integration.”

The biggest challenge we see in the cannabis rescheduling process is conflicting political priorities. “There is so much going on in our country and across the world that needs attention, which could push cannabis rescheduling aside,” said Munzer Sukhun, Vice President of Business Services. “However, it is an important topic and one that has a lot of momentum going into the second half of 2024.”

So, uncertainty remains: beyond the indeterminate length of the rescheduling process, cannabis products would also require the approval of the FDA. “Until we get closer to finalizing the changes, we won’t know all of the implications, good or bad,” Munzer said.

It is also unclear whether the DOJ and DEA would begin to enforce Schedule III regulations in states that have legalized cannabis, thereby hampering current criminal justice and social equity reforms now in progress. Salal would expect and hope for an update from either Congress or the DOJ to the previous Cole Memo guidance regarding the DOJ’s enforcement priorities, upon which our Cannabis Program has been built for the benefit of all our cannabis business members and the public safety of our communities. “Our team has been diligent in keeping up with the progress and passing along any knowledge to our members who inquire,” Munzer assured. “Once additional details are finalized, we’ll make sure our community partners and our members have the resources they need to integrate any potential changes into their businesses.”

And Salal will continue to advocate for you. “The cannabis industry has reason to celebrate rescheduling as a positive step in the right direction,” Brett encouraged. “It’s crucial for us and our fellow stakeholders to remain engaged, informed, and steadfast in our ongoing efforts to achieve comprehensive reform.” We look forward to navigating this journey with you.

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Questions? Comments? Requests? Feel free to reach out to your Salal Business Services team at 206.298.9398 or BusinessServices@SalalCU.org.

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