Cannabis Rescheduling and the SAFER Banking Act: Potentially Transformative Changes to the Legal Cannabis Industry

The rescheduling of cannabis has emerged as a pivotal discussion point in numerous global circles, spotlighting its industrial, medicinal, and recreational facets. With an evolving legal landscape, the cannabis industry and banking sector are at the brink of witnessing monumental shifts.  

In the U.S., the Department of Health and Human Services (HHS) recommended the rescheduling of cannabis from Schedule I to Schedule III under federal law, facilitating easier research into cannabis due to its less restrictive classification. This recommendation follows an executive order from President Joseph Biden directing a review of marijuana’s classification under federal law in October of 2022. 

The History of Cannabis and Its Public Perception: The War on Drugs 

The “War on Drugs,” a term popularized during the Nixon administration in the 1970s, represents a complex and contentious chapter in the history of drug policy, particularly concerning cannabis. This campaign primarily aimed to prevent the production, distribution, and consumption of what were considered psychoactive drugs, including cannabis, through strict legal edicts and law enforcement efforts. 

Cannabis, despite its centuries-old history of medicinal and recreational use across various cultures, found itself at the epicenter of controversy and stringent regulation, especially after the passage of the Controlled Substances Act (CSA) of 1970 in the United States. The CSA classified substances into different schedules based on their potential for abuse, medical utility, and safety standards.  

Cannabis was placed under Schedule I, the most restrictive category, deeming it to have a high potential for abuse, no accepted medical use, and a lack of accepted safety under medical supervision. 

This classification led to a cascade of consequences, including widespread legal prohibitions against possession, use, and distribution, and severe penalties, often disproportionately affecting marginalized communities. The rigid stance ignored emerging scientific evidence suggesting cannabis’s potential medicinal benefits and low physical dependency risk compared to other Schedule I drugs. 

The historical narrative began to shift in the late 20th and early 21st centuries as several states in the U.S. and countries worldwide started to adopt more lenient policies, recognizing medical cannabis, and decriminalizing or legalizing recreational use. This movement indicated a growing trend towards re-evaluating the longstanding regulatory framework around cannabis. 

The Gradual Shift 

The paradigm shift in US cannabis policy, driven largely by evolving scientific research and societal perceptions, has only accelerated in recent years. Accumulating evidence began to highlight the plant’s medicinal properties, challenging its Schedule I classification under the Controlled Substances Act, which asserts that it has no accepted medical use. 

Research demonstrated that cannabinoids, like CBD and THC, found in cannabis, have potential therapeutic benefits for patients suffering from a range of conditions, including chronic pain, epilepsy, multiple sclerosis, and the side effects of chemotherapy, among others. These findings catalyzed a wave of change in public sentiment and policy. 

Starting with California in 1996, an increasing number of U.S. states began to legalize cannabis for medical purposes, acknowledging its medicinal benefits and therapeutic applications. This state-level momentum evolved into a broader movement, with numerous states following California’s lead and legalizing cannabis for recreational use. This began a dramatic departure from the previous century’s stringent prohibitions. 

This shift reflects not just a recognition of cannabis’s medical potential but also a changing cultural and political landscape. Public opinion polls, such as those conducted by the Pew Research Center, have shown a significant increase in the acceptance of cannabis, particularly in the 21st century. This growing tolerance, combined with economic arguments highlighting the revenue potential from legal cannabis sales, has further propelled legislative changes. 

Despite these advancements, conflicts between state and federal laws have persisted, presenting challenges and uncertainties for the future of cannabis policy in the United States and potentially influencing global regulatory approaches. 

Rescheduling Cannabis: A Glance into the Future 

The rescheduling of cannabis stands as the first step in transformative changes across the cannabis industry and the banking sector. It’s a shift that extends beyond legality, impacting the realms of medicine, economics, and social constructs. As the world navigates this green tide, it becomes imperative to sculpt policies that prioritize research, ensure fair market competition, and fortify safe banking practices. It goes beyond embracing a new industry in some states, while supporting a growing industry in others, but is about sculpting a sustainable, inclusive, and ethical cannabis future. 

The rescheduling of cannabis has become a focal point in various global discussions, with notable emphasis on its industrial, medicinal, and recreational dimensions. The legal landscape surrounding cannabis is gradually evolving, with significant implications for both the cannabis industry and the banking sector. 

Medicinal Prospects 

Rescheduling cannabis will potentially inflate research avenues, unraveling new medicinal prospects and facilitating more comprehensive research. This includes exploring its efficacy in treating various health conditions, such as epilepsy, chronic pain, and multiple sclerosis. The potential for new treatments derived from cannabis or its components could prove revolutionary. 

According to an article published in The New England Journal of Medicine, one of the most promising areas of cannabis research lies in its potential efficacy in treating epilepsy, particularly drug-resistant forms in children. Studies, including those on Epidiolex, a CBD-based drug approved by the FDA, have shown significant reductions in seizure frequency, a breakthrough for individuals for whom traditional antiepileptic drugs fail. 

In another major potential medical application, cannabis has shown promise in alleviating chronic pain, one of the most common conditions it is prescribed for in states where medical cannabis is legal. Research suggests cannabinoids may have analgesic properties, providing an alternative to opioids, which are associated with high addiction and overdose rates. 

Studies have also indicated potential benefits of cannabis for patients with multiple sclerosis (MS). Cannabinoids have been associated with improvements in symptoms such as spasticity and muscle spasms, both of which are common in MS patients. 

 Economic Implications 

From an economic perspective, the newfound legitimacy of reclassification can potentially bolster investments, create employment, and inflate tax revenues. As legal markets expand, cannabis-related companies, ranging from cultivators and retailers to firms focused on technology, logistics, and professional services, are attracting substantial interest from investors. This surge is not limited to traditional investment- there’s also a notable rise in venture capital funding and public offerings for cannabis-related firms, which signals confidence in the industry’s future. 

In terms of job creation, the cannabis industry has already proven to be a significant force. Legal cannabis businesses require a wide range of roles, including agricultural workers, scientists, retailers, and ancillary support services, which contributes to employment diversification and economic resilience. In a Leafly report published in February of 2022, the U.S. cannabis industry boasted more than 428,000 jobs, a 33% increase from the previous year’s 321,000 cited in their 2021 report. According to the same report, it marks the fifth year in a row of annual jobs growth for the industry greater than 27%. 

In addition, the legalization of cannabis has opened a valuable source of tax revenue for states. By imposing sales or excise taxes on cannabis products, states like Colorado and Washington have generated hundreds of millions of dollars in revenue, which can be allocated to public services, education, substance abuse prevention and treatment programs, and general state funds.  

 Legal Ramifications 

The impacts of reclassification will only serve to further impact criminal justice reform, expanding on the steps taken by the Biden Administration announced previously. On October 6, 2022, President Biden publicly stated, “First: I’m pardoning all prior federal offenses of simple marijuana possession. There are thousands of people who were previously convicted of simple possession who may be denied employment, housing, or educational opportunities as a result. My pardon will remove this burden.” He went on to call on governors to do the same for state-level convictions. 

Historically, cannabis prohibition has led to high rates of criminalization, particularly among minority communities, with substantial social and economic costs. Reclassification could lead to the expungement of criminal records for non-violent cannabis offenses nationwide and a reduction in the number of future convictions. This would contribute significantly to more equitable legal and social systems. 

The reclassification would do more than impact individuals. It could also dilute legal barriers, minimizing the industry’s overarching implied illicit reputation and paving the way for a structured, legitimate marketplace, and one more like the framework alcohol and tobacco businesses operate under. 

A regulated cannabis market could also diminish the illicit trade, as consumers would prefer to purchase from legitimate, reliable sources, ensuring product quality and safety. This shift could also free up law enforcement resources to tackle more serious crimes, enhancing public safety and overall community relations. 

The Impact on the Cannabis Industry 

Market Expansion and Innovation 

Dismantling regulatory hurdles signifies a broadening market space and could potentially trigger a surge in innovative products, spanning edibles, vapes, and therapeutic items. One major and immediate impact, assuming the DEA follows the Department of Health and Human Services’ recommendation, the result of a nearly yearlong investigation on the agency’s part, will be Section 280e of the IRS tax code will no longer apply to cannabis businesses.  

The 280e provision under federal law prevents state-licensed cannabis businesses from claiming standard business deductions available to every other business in America. According to many, it has become the single biggest financial drain on the cannabis industry. 

With the financial barrier removed, these businesses will be positioned to innovate and expand their available market space. In regions where cannabis has been legalized, companies are already rapidly diversifying their product lines, moving beyond traditional smoking options to introduce a variety of edibles, topicals, vapes, and even beverages infused with THC or CBD. 

Recreational usage is not the only avenue for expansion, of course. There’s a significant emphasis on therapeutic products. With more freedom to research and develop, the array of cannabinoid-based products designed to alleviate pain, anxiety, and sleep disorders without the psychoactive effects of THC will likely also see a surge and significant expansion. 

Competition and Small Businesses 

The liberalization of cannabis laws presents an enticingly lucrative opportunity for large corporations to enter the market. But there’s a critical need to establish policies that protect and nurture small businesses, ensuring a diverse and competitive market landscape. 

Big corporations obviously have substantial financial resources, experience, and economies of scale that could dominate the market. This could potentially stifle local and small-scale operators. However, small businesses are pivotal for promoting innovation, diversity, and localized economic growth. For instance, in states like California and Colorado, there have been concerted efforts through licensing systems to ensure small-scale operators can enter the cannabis market. 

Fostering a competitive, diverse marketplace through careful crafting of policies can help ensure that the economic benefits of cannabis legalization are broadly distributed. Taking this approach at both the state and potentially federal level as well will support small business owners nationwide, help to fuel local economies, and contribute to both consumer choice and product diversity. 

Proposed Changes to Safe Banking and Their Potential Impacts 

 The SAFE Banking Act 

The Secure and Fair Enforcement (SAFE) Banking Act, proposed in the U.S., represents a critical legislative effort to mitigate financial risks and barriers encountered by cannabis-related businesses. Currently, the interplay between federal and state laws creates a precarious financial terrain for these businesses. Introduced in March 2019 by U.S. Rep. Ed Perlmutter, as H.R. 1595, full title Secure and Fair Enforcement (SAFE) Act, and as of 2023 the Secure and Fair Enforcement Regulation (SAFER) Banking Act, the bill specifically seeks to prohibit federal banking regulators from penalizing banks and other financial institutions for providing services to legitimate cannabis-related businesses and service providers in states where cannabis has been legalized, providing much-needed financial security and legitimacy to the cannabis industry as a whole. 

At its introduction, the bill had broad bipartisan support, with more than a third of the entire house cosponsoring it at the time of committee vote, and was ultimately passed by the house on September 25, 2019. While it continued to face hurdles in both the 116th and 117th Congress, the new version of the bill was introduced by senators including Majority Leader Chuck Schumer in the 118th Congress on September 20th, 2023. The bill was passed by committee on September 27th, clearing it for a Senate floor vote. 

 Financial Inclusivity  

The Act intends to mainstream cannabis businesses into the financial domain, ensuring they can access banking services without the fear of legal repercussions. This means transparent transactions, secure environments, and a departure from a predominantly cash-based industry. Rescheduling cannabis could further loosen the restrictions faced by the banking sector in dealing with cannabis-related businesses, allowing for more straightforward financial transactions and services. 

Financial institutions have been reluctant to serve state-legal cannabis businesses because of the federal ban on the drug, contributing significantly, alongside section 280e of the tax code, to impairments holding expansion and growth of the industry at bay. The SAFER Banking Act would ultimately give federally regulated banks and credit unions legal protections and allow them to take cannabis dispensaries and growers as customers. 

In a written statement to The Hill, American Bankers Association spokesperson Jeff Sigmund stated, “We’re optimistic that we will see movement on the SAFE Banking Act in the coming weeks and urge the Senate to get this bipartisan, commonsense legislation that will enhance public safety across the finish line.” 

The rescheduling of cannabis from Schedule I to Schedule III would likely impact the taxation of marijuana businesses significantly. Currently, cannabis enterprises operating legally under state law face tax burdens due to restrictions on tax deductions. However, if rescheduled to Schedule III, these businesses would be able to deduct costs like payroll, rent, and advertising for federal income tax purposes, furthering the financial inclusivity of cannabis businesses alongside the SAFER Banking Act. 

Risk Management 

Intrinsically linked to safe banking is the facet of risk management. Including the cannabis industry into the formal banking sphere allows regulators to exert better oversight, ensuring ethical practices and minimizing fraudulent activities and safeguarding the financial system from potential exploitation for illicit activities. Because of the fear of legal repercussions, including money laundering charges and violations of federal drug laws that cause banks to be reluctant to take cannabis businesses as clients, many businesses are forced to operate as cash-only, which creates significant physical and financial risks.  

Financial institutions are subject to strict regulations and oversight, including know-your-customer (KYC) and anti-money laundering (AML) rules. They must report suspicious activities to the Financial Crimes Enforcement Network (FinCEN), helping to detect and prevent illicit activities like fraud, tax evasion, and illegal drug trafficking. 

Additional risks associated with cash-only and cash-heavy businesses are intuitive. Stealth Monitoring works with cannabis industry clients in the United States and Canada to help meet security compliance standards and protect the business, its assets, property, and employees with live video monitoring that works in real time.  

While the cannabis industry faces many challenges, one of the most challenging in the day-to-day operation of a dispensary or grow operation is asset protection. Detailed regulations, which currently vary from state to state in the US, outline cannabis security requirements that businesses must follow in order to maintain their ability to operate legally. In many states, that means effective surveillance cameras on site. 

For more about how Stealth Monitoring can help your cannabis business meet state compliance regulations, you can read here: 9 Things You Need to Do for Cannabis Security or here: Here’s What You Need to Know About Cannabis Compliance. For more details, contact us and speak with a cannabis security specialist for a free quote.

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