In the many deep dives published recently on the Department of Health and Human Services’ recommendation that marijuana be moved to Schedule III, few have discussed the potential impact such a move would have on financial institutions and service providers. Particularly those that are currently banking state/territory/tribal legal programs.
Those looking for policy recommendations and clarity on how this would affect state-run marijuana (as it is referred to in governmental discussions such as this) programs will be disappointed to learn the collection of documents released by HHS is well and truly a review of existing research data on marijuana use and potential abuse. It does not concern itself with what kind of legal framework would need to be developed by whatever federal agency is ultimately tasked with running the program. The question for HHS, the DEA, and FDA to consider is whether a strong case can be made to federally legalize medical marijuana. Alongside that, one of the fundamental issues is how the move to a federally-legal medical marijuana framework would affect the state/territorial/tribal programs in place today. Financial institutions will want to know how their relationship with the industry and their customers/members may change, particularly when considering whether or not adult-use programs will survive.
How Federally Regulating Medical Marijuana Could Change Consumption
As the authors of this review point out, there is no real precedent for the use of any raw botanical product in a medical context, and it is clear from anecdote and cited data that smoking minimally-processed marijuana flower is one of the primary ways that people self-administer marijuana. In a federally-legal medical program, this would presumably and most likely be off the table as an option because medications are prescribed based on some consistent measurement in an approved form of dosage, i.e. “ten milligrams of ibuprofen once per day.” Botanical products, i.e. dried flower/herb, do not fit into this methodology, leading some in the cannabis industry to suggest that this will hand the industry over entirely to the pharmaceutical industry so that they can commoditize and package the active ingredients of marijuana (THC, CBD) into traditional forms of medication like pills, capsules, transdermal patches, etc. This is not without precedent as several restrictive medical-only programs, like the one struggling to get off the ground in Alabama, already restrict patients from forms of consumption based on combustion or vaping for that very reason.
This would be incredibly disruptive to those that currently benefit from using marijuana in some kind of combustible form. However, our current cannabis landscape demonstrates that states have been willing to run marijuana-programs that are more liberal than the federal government would allow. It would be highly doubtful that something like a marijuana pre-roll would be available for sale in DEA-registered pharmacies so a state with those intentions would need to maintain their own parallel medical marijuana program and supply chain framework.
It’s possible that we’ll see something like the approach the USDA took to regulating hemp following its removal from the Schedule of Controlled Substances in 2018. In that case the USDA offered to run the program for every state, tribe, or territory with the provision that they could submit a plan for a home-grown program to the USDA for review and approval. The difference there is that state hemp programs have to be as restrictive, if not more, than the federal one. They can’t be less restrictive, like offering a form of medication that is not acknowledged by the DEA as legal under a federal medical program, but one can easily imagine certain states petitioning to run more restrictive ones.
A likely alternative is that states would be required to follow a federally-approved program for medical use but retain adult-use programs to serve the needs of those that would prefer to retain access to botanical cannabis for combustion. True, this is speculation, but in the absence of specifics the one thing we can say for certain is that financial institutions need to start discussing today how they may need to shift their cannabis banking programs tomorrow. Will there be two parallel programs with federally-legal marijuana distributed through traditional pharmaceutical channels on the one hand and adult-use products distributed through a state program on the other? Presumably those would bring a different set of inherent risks, just as Direct and Indirect do today.
Understanding Risk for Financial Institutions
Financial institutions will also have to assess the risk associated with Indirect companies that serve both the federally-legal and state-legal programs if the latter is more permissive than the former. Or if an FI operates in a state that only supports a federally-legal program and doesn’t wish to work with Indirects that serve state-legal programs. Or those that choose to work with both medical and state-legal adult-use programs.
Will that lack of alignment mean that there won’t be any more problems getting access to bank accounts and other financial services? Will that affect the willingness of credit card companies and lenders to engage with the space? Will they do so by putting up hard and fast barriers to make sure that only companies, both Indirect and Direct, that follow federal rules have access to their networks and resources? It’s certainly possible but that would introduce additional compliance oversight on their part and they will have to decide if the proverbial juice is worth the squeeze based on the size of the market.
Regardless of what happens with adult-use, one has to assume that the federal legalization of medical marijuana would warrant a repeat of the guidance we received from FinCEN in 2020 following the legalization of hemp. The agency explained that since hemp was no longer the same legally as marijuana, compliance officers were no longer obliged to file the three special “marijuana SARs” on those companies and individuals. At the very least I would assume that FinCEN would do the same for federally-legal Direct medical marijuana businesses. As that is one of the most labor intensive parts of a cannabis compliance program, removing part of that burden would significantly drive down the compliance costs associated with cannabis banking. Financial institutions would be able to offer lower fees to respond to market pressures in a way that remains profitable.
Understanding Opportunities for Financial Institutions
For lending, one of the advantages would be that federally-compliant medical businesses and operators would have traditional credit scores; something that would be immensely helpful for financial institutions. This would provide consistent inputs that would lead to commonly-accepted underwriting models, which would then result in decreased compliance costs making lending more profitable to the financial institution and more accessible to cannabis operators and entrepreneurs. Imagine being able to apply for a cannabis-related loan as quickly as you can for a credit card: name, address, and social security number are all that stand between you and a line of credit.
Further, federal legalization means for the first time there would be a true regulated interstate market and it would be much easier for a financial institution to take their program national if they solely focused on federally-legal medical companies due to the consistency of regulations. Today, if a financial institution wants to move into another state they need to get familiar with the local rules and understand that what looks suspicious in one market might not actually be in another. Post-rescheduling there would be no such additional work. If you build a program once then you can (field of membership restrictions or target markets notwithstanding) go anywhere in the US, its territories, or tribal nations. Further, considering federal legalization in Canada, we could see international cannabis-related commerce at scale for the first time. That might have a knock on effect of encouraging Canadian financial institutions to engage with their own markets as they currently remain somewhat reluctant based on marijuana’s current Schedule I status in the US.
Regardless of Timelines, Financial Institutions Must Look Ahead
It’s important to note that the DEA is not obligated to accept the recommendation from HHS, and even if they (hopefully) do, we still have no timeline for when such a change would go into effect. We also have to acknowledge that it’s going to take a significant amount of time for any new federal program to be drafted and go through an open comment period before we get final rules. It took two years for the USDA to come up with their program for hemp and the FDA still to this day has not come up with their program for hemp-derived cannabis products intended for consumption by humans or animals.
Current state/territory/tribal-run marijuana programs are not going to disappear tomorrow. It will undoubtedly take a significant amount of time to unravel the myriad puzzles associated with such a process, like transferring state licenses over to federal agencies, establishing guidelines around growing, processing, and distribution, building a pharmaceutical supply chain, and building some kind of infrastructure to run the entire thing on the federal level. Rescheduling will be disruptive socially immediately but from a financial institution’s point of view, it’s doubtful that things will change overnight.
At the end of the day, financial institutions are in much the same position they are when their state/territory/tribe first legalizes marijuana. It always takes a while for the details to get filled in. Timelines aside, this is on the horizon, so they need to start serious internal discussions about how they would treat federally-legal medical programs and whether they will start, continue to work with, or even exit local medical or adult-use programs based on a new risk landscape. The best way to get ready is to start banking marijuana now because existing growers, labs, and processors will likely be at the front of the line for federal licenses. The outlook for dispensaries and consumption lounges is far less clear as neither of those really have precedent in a medical environment so those may not have as rosy an outlook in a strict federal medical program, though there’s no requirement that states dissolve their adult-use programs.
If you’d like to discuss what rescheduling will look like for your financial institution based on your existing state/territory/tribal rules and market don’t hesitate to reach out to us!