Over the long run, the cannabis industry has the makings of being a big-money business. Worldwide legal marijuana sales have more than tripled between 2014 and 2018 to almost $11 billion, and most analysts on Wall Street predict that legal weed could generate anywhere from $50 billion to $200 billion a year by the time 2030 rolls around.
But the fact is, the near-term continues to be challenging for the marijuana industry and pot stock investors. This is especially true in the United States, where marijuana firmly remains a Schedule I substance (i.e., entirely illegal, prone to abuse, and not recognized as having any medical benefits).
Image source: Getty Images.
Marijuana's U.S. scheduling is causing all sorts of problems
Although 33 states have been able to legalize cannabis in some capacity, this Schedule I classification has led to a number of problems.
For one, profitable cannabis businesses are being exposed to Section 280E of the U.S. tax code. Implemented in the early 1980s to keep drug dealers from writing off their business expenses on their federal income taxes, 280E today disallows businesses that sell a federally illicit substance from taking any normal corporate income tax deductions, save for cost of goods sold. Ultimately, this leads to profitable pot companies paying very high effective tax rates.
Vertically integrated multistate operators (MSO) in the U.S. are also unable to transport product between states. This means if MSOs want to have a retail presence in a given state, they'll also need to secure cultivation and processing facilities. This need to have redundant operations, sometimes in bordering states, is an inefficiency for U.S. MSOs.
And, of course, who can forget the financing issues. Because marijuana is illegal at the federal level, and financial institutions are insured by a federal agency, they fear criminal and/or financial repercussions if caught offering basic banking services to the industry. This has led some pot companies to deal strictly in cash, which is a growth inhibitor and a safety concern.
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The SAFE Banking Act could be a potential game-changer...
However, we witnessed marijuana history in September when the first major cannabis reform bill, designed to address these banking concerns, hit the congressional floor for vote and passed by a 321-to-103 vote in the House.
The Secure and Fair Enforcement (SAFE) Banking Act, which was first introduced in July, is designed to end the federal prosecution of financial institutions that offer basic banking services in legalized states. In other words, it'd open the door for banks to offer lines of credit, checking and savings accounts, and traditional loans, to U.S. marijuana businesses without the fear of criminal or financial penalties.
Whether you realize it or not, some well-known banks are already providing financial services in legalized states. According to online journal American Banker, 34% of medical marijuana companies in Massachusetts were banking with one of the four major U.S. banks -- Bank of America (BAC +1.21%), Wells Fargo, JPMorgan Chase, and Citigroup -- between June 2015 and September 2016. At the time, Bank of America was the most popular choice among medical marijuana operators in Massachusetts, with a little over half of all operator having an account with BofA.
Then again, data from the Financial Crimes Enforcement Network shows that a mere 723 depository institutions were offering financial services to marijuana-related businesses at the end of September 2019. That's only 8.4% of all depository institutions in the United States, albeit the big names, like Bank of America, do seem to be getting involved.
Senate Majority Leader Mitch McConnell speaking, with President Trump flanked to his right. Image source: Official White House Photo by Shealah Craighead.
... But Senate Republicans have no intention of passing it
The hope had been that the bipartisan passage of the SAFE Banking Act in the House would lead to the bill's approval in the Senate as well. But the grim reality is that the SAFE Banking Act has virtually no chance of becoming law in 2020.
While the SAFE Banking Act could be a game-changer, the first obstacle it'd have to overcome is Senate Majority Leader Mitch McConnell (R-Ky.). McConnell is perhaps the most ardent opponent of marijuana reform on Capitol Hill, and he's previously denied attempts by senators to add cannabis legislation (in the form of a rider) to existing bills. There's a really good chance that McConnell wouldn't allow banking reform legislation to even reach the Senate floor for vote.
Secondly, the SAFE Banking Act would have to contend with a Republican-led Senate. Although Gallup's national poll has shown a slow but steady improvement over the past decade in how self-identified Republicans view cannabis, the consensus is still mixed. This is to say that while Democrats and Independents overwhelmingly favor the idea of legalizing marijuana at the federal level, Republican support tends to be right around the 50% mark. This makes any sort of cannabis reform no sure thing in the Senate to reach the required number of votes for passage.
Third and finally, a little more than a week ago, Senate Banking Chair Michael Crapo (R-Idaho) made it clear that the existing version of the SAFE Banking Act wouldn't fly. Crapo listed a number of concerns in a released statement, which include marijuana companies' marketing tactics to adolescents, the fear of potential money laundering, and the need for strict interstate commerce regulations to ensure that marijuana doesn't leave the state where it's grown. Most important, Crapo called for a 2% limit on tetrahydrocannabinol (THC) potency. THC is the cannabinoid that gets users high, and a 2% limit would exclude a vast majority of the products on dispensary shelves today, including edibles and concentrates.
Suffice it to say that you're not going to see your local Bank of America advertising to cannabis businesses anytime soon. However, the 2020 elections could have a big say on what happens with cannabis banking reform in 2021 and beyond.
