New Green Investing: Safe Harbor for Financial Services and Cannabis

As each subsequent state legalizes marijuana for recreational and medical use, its inclusion in the already ineffective drug war becomes increasingly redundant. The American public agrees, with about 88% of respondents favoring some form of legalization, and 59% favoring access for recreational purposes.

Individual states have led the way toward legalization, but the continued federal prohibition imposes unnecessary burdens on cultivating, processing, and retailing cannabis. Currently banks will not take on cannabis-related companies as clients as they risk losing their charter and deposit insurance. Lack of access to basic checking accounts and lines of credit from the traditional banking system remains a limiting factor on the growth of the legal cannabis industry and represents a significant stumbling block in bringing the sector out of the hands of criminal actors into the formal economy.

The debate over nationalized legalization remains mired in the political thicket, but that intransigence should not prevent domestic businesses from moving beyond cash and into the safety and growth opportunities the banking system offers. Bills, such as the CLIMB Act or the SAFE Banking Act, which passed the House of Representatives in 2021 but stalled in the Senate, would help solve this problem. These measures create a reasonable safe harbor for financial institutions to provide basic banking services and access to capital through loans and securities offerings. The federal government’s continued willful blindness to the failure of marijuana prohibition prevents states from innovating in both addressing the historical injustices and policy inefficiencies inherent in the status quo. Freezing the cannabis industry out of financial services allows the federal government a backdoor to continue prohibition. This continued stonewalling creates a lifeline for illegal cartels and limits opportunities for restorative justice.

As states have moved toward greater legalization, 39 states for medical, 21 plus DC for recreational, the cannabis business has run into a rather strange problem: too much cash. Banks will not allow cannabis-related businesses to open accounts, forcing them to use physical cash for all transactions. Everything from accepting cash from customers, to paying vendors, paying salaries, and even covering property taxes must go through good old-fashioned paper currency.

Naturally, this creates a wide array of problems for an industry that in 2020 grew to $22 billion. Banks have so far proven particularly hesitant to take on these deposits as they fear retribution from federal regulators, including losing their FDIC insurance. While regional banks and credit unions have started serving the cannabis industry, national credit card companies and larger banks have shunned the industry so far.

This implicit national prohibition on banking for the cannabis industry further holds this emergent sector back from entering the mainstream economy. Cash-only businesses attract criminal attention and force proprietors to take increasingly greater risks to perform basic business functions. One business owner had to drive a bag of over $120,000 in cash from Los Angeles to Oakland just to pay a vendor. Other companies have paid the IRS millions of dollars in physical cash to satisfy federal tax burdens. The large amounts of cash that flow through these businesses increase costs for security and make them targets for theft.

Even beyond basic banking services, isolation from the financial services industry prevents both starting new and expanding existing cannabis businesses as they cannot get loans or access capital markets. Illegal drug manufacturers and drug trafficking organizations can use the billions they have made per year for over a decade to invest in production and distribution, reducing their need for outside capital.

Barriers to capital markets and loans disproportionately exclude minority- and female-owned businesses from entering the market. Civil rights activists have long viewed legalization as a racial justice issue. Prioritizing minority entrepreneurs with permits for cannabis businesses can act as a critical step in the corrective process. Without access to capital, minority communities may just resell their permits to large corporations or wealthy individuals, limiting the racial justice remedy. A license is worth only the paper it’s written on without the capital to make the business a reality. Restricting access to the traditional financial system will segregate the potentially transformative wealth that comes with cannabis legalization, enabling the same corporate capture that plagues so much of American business.

The current American policy empowers criminal elements and risks relinquishing a potentially lucrative industry to other countries. The high security burden and general inconveniences of running a cash-only business raise prices for state-licensed cannabis businesses. Should those costs rise high enough, illegal marijuana may be able to undercut legal marijuana by such a margin that the added risk does not discourage buyers from returning to illicit dealers. Greater access to capital and the corresponding economies of scale could further advantage drug trafficking organizations.

At the same time, most cannabis growers rely on Canadian listings, where full legalization has led to widespread public offerings. Companies should not have to flee north of the border to access critical capital for growth. Such rules only add more hoops for American investors to jump through.

Opponents of a federal financial safe harbor typically either oppose legalization wholesale or fear that states are currently outrunning state regulations. With so many Americans supporting legalization, those opposed represent a shrinking minority. Majority rule may not indicate good policy, but at this point limiting access to banking services only empowers criminal elements in the cannabis industry by driving up costs for legitimate actors. Preventing access to banking services acts as a backdoor to continued criminalization. If the federal government truly believes that financial services companies should continue to shun cannabis, then they should explicitly do so and not shadow block access through the FDIC.