The world of banking Cannabidiol (CBD) businesses is a chaotic one. Despite the legalization of hemp and hemp-derived products under the 2018 Farm Bill, CBD products for both human and animal consumption remain in a regulatory grey area, leading to a patchwork of varying regulations on local and state levels.
Further, this chaos and uncertainty makes bankers averse to working with CBD companies. This results in a dearth of available banking opportunities for many law-abiding CBD entrepreneurs through no fault of their own.
As Fincann continues to build its network of reliable cannabis- and CBD-friendly banks for these entrepreneurs to partner with, we also look ahead to the future and what might be on the horizon for CBD banking in 2021.
Since the 2018 Farm Bill was signed into law, hemp (and hemp-derived products) have been considered federally legal. Hemp is also considered distinct from “marijuana,” which remains federally illegal. The difference between the two crops hinges on a single number: 0.3%.
The 2018 Farm Bill legalized a domestic hemp industry for cultivation, processing and distribution of cannabis plants containing 0.3% THC content or less. If a cannabis plant contains more than 0.3% THC, it is still considered illegal marijuana.
Oversight of the hemp industry is now under the auspices of two federal agencies: the U.S. Department of Agriculture (USDA) in collaboration with individual state agriculture departments and the Food and Drug Administration (FDA). The USDA is responsible for regulating the cultivation and processingof hemp and hemp-derived products, such as CBD products, establishing standards and rules for licensing. In that regard, hemp regulations are reasonably moving along in many states.
Unfortunately, the regulatory framework is much less clear under the FDA. The primary rule the FDA has established is that brands are not permitted to make health claims for CBD products unless those products were approved by the FDA for those specific purposes. The agency has sent warning letters to brands that failed to meet this standard.
Additionally, the FDA created a distinction between topical formulations containing CBD from ingestible products, opening the topical market to a greater extent. Otherwise, there are few clear federal regulations governing CBD products, which is why patchwork regulations have cropped up across the country.
With no rules and compliance protocols, banking a CBD brand comes down to establishing a set of best practices and hoping for the best. Most bankers are not interested in taking on such a risk. Currently, only about 60 banks across the U.S. support CBD businesses, largely because of these risks. However, it’s worth noting that many of these are large regional banks each have hundreds of branches, so practical access is somewhat better than the number 60 would suggest.
However, in 2021, we could expect to see the FDA deliver some more explicit rules regarding CBD products for human and animal consumption. If the agency were to provide clarity on what constitutes a compliant CBD business along with recently released FinCEN guidance for banking hemp and CBD, we will likely see an increase in banking for CBD businesses.
If the federal government moves to deschedule cannabis in 2021, which it may well do, then forget everything about the FDA establishing clear guidelines for CBD banking. If cannabis is descheduled, all compliance considerations established around CBD and the 0.3% THC threshold will be irrelevant. Additionally, the patchwork regulations that have emerged from the uncertainty surrounding CBD would have to now be reconciled with the federally descheduled cannabis industry.
In other words, all the work done on CBD up to this point might be largely moot. So, perhaps ironically, the best news for CBD banking would be if cannabis descheduling did not occur in 2021.
It may be surprising to learn that cannabis products containing greater than 0.3% THC have a relatively stable regulatory framework around banking, despite remaining federally illegal. Banks working with cannabis businesses are required to adhere to strict anti-money laundering (AML) rules, including the submission of Suspicious Activity Reports (SAR) with the Financial Crimes Enforcement Network (FinCEN) if any “red flags” arise regarding the banking activity. If cannabis were descheduled, cannabis banking focus would shift from anti-money laundering to product integrity, quality and compliance. This shift would need to be accounted for when syncing existing CBD regulations with any new cannabis regulations.
All this regulatory chaos is inevitable. It’s just a question of how soon we have to deal with it.
While it might be easiest for CBD banking to avoid cannabis descheduling in 2021, in the big picture it might be best to get it all out of the way. If descheduling does occur in 2021, we could get past the chaos and develop a stable and lasting regulatory framework for both CBD and cannabis banking. Nonetheless, it will be 3 to 5 years before all this matures and settles down.
The Secure and Fair Enforcement (SAFE) Banking Act has been a hot topic of discussion since the bill first appeared on Capitol Hill. In 2021, the measure is sure to see more debate and, if the stars align, passage and enactment into law.
As written, the SAFE Banking Act would require bank examiners to continue following the guidelines established under the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual, bundled with the 2014 FinCEN Guidance for Banking Marijuana Related Businesses. This is the guiding document examiners from the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and the National Credit Union Association (NCUA) already use. Rather than making any tangible change in terms of how the government regulates or enforces cannabis banking, the bill is largely designed to assuage bankers’ worries about the industry.
The other major provision of the SAFE Banking Act would move the needle slightly, establishing some protections for banks looking to offer commercial lending to the cannabis industry. This would open up some opportunities for lending to cannabis businesses but would have little material effect on banking accessibility. It could, however, avail capital to entrepreneurs looking to start a small business in the cannabis industry.
Beyond this, the SAFE Banking Act essentially codifies the status quo process performed by bank examiners and other agencies for years – a process they have made clear they have no intention to change.
Finally, passage of the SAFE Banking Act could potentially expend the political capital needed to push forward more meaningful legislation, such as the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act or the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act.
The MORE Act would effectively deschedule cannabis, removing it from the U.S. Controlled Substances Act (CSA). It would effectively end the federal prohibition on cannabis altogether and represent nationwide legalization. The U.S. House of Representatives passed the MORE Act on Dec. 4th, 2020, by a vote of 228 to 164. At the time of this writing, it is presumed that the measure will not pass in the Republican-controlled senate.
The STATES Act would codify the federal government’s acknowledgment of state-legal cannabis businesses and prevent future administrations from deciding to pursue legal action against them.
Through the Legislature, that STATES Act would confirm that states had the right to legalize and regulate cannabis industries as they see fit without federal intervention, as opposed to the rescinded Department of Justice memo known as the Cole Memorandum, which offered less but some legal protection to state-licensed medical marijuana entities. The difference, however, is that future administrations would not be able to easily repeal the STATES Act like then-U.S. Attorney General Jeff Sessions unilaterally did in the case of the Cole Memo.
Either the STATES or the MORE Act could provide the same type of assurance to bankers that the SAFE Banking Act would. Indeed, either would acknowledge the right for a legal cannabis industry to exist, whether simply within one state or in a nationwide industry engaged in unrestricted interstate commerce.
Expending the same political capital instead on a much more limited measure like the SAFE Banking Act could potentially delay more meaningful legislative efforts.
There remain many unresolved questions surrounding cannabis and CBD banking, and indeed the whole industry. In 2021, we could see key answers to those questions, including whether CBD businesses will receive clearer guidance from the FDA or whether cannabis will be descheduled altogether by the federal government. With several cannabis-related bills currently moving through Capitol Hill, there is more federal will to act on these questions than ever. For now, we wait and see what the new year will bring; with luck, it will usher in regulatory clarity for banks and businesses alike.
If your CBD business is in need of transparent and banking or financial services, fill out Fincann’s qualification form to see if you’re eligible for a bank account with one of the partners in our Cannabis Banking Financial Network™.