Cannabis stocks have been on fire since the November elections, which also coincided with generally positive third quarter earnings reports across the U.S. marijuana industry. The incoming Democratic administration may be more favorable to rolling back marijuana prohibition, although a potentially Republican-controlled Senate might make that more difficult.

Still, even Republican senators and members of House are increasingly coming on board with rolling back pot prohibition. And with pro-marijuana state ballot measures going five-for-five this election year, it's not out of the realm of possibility that cannabis stocks may finally get regulatory relief at the federal level soon.

One of the largest U.S.-based multi-state operators Curaleaf (OTC:CURLF) discussed its own policy predictions on its recent third quarter conference call. While a full descheduling of marijuana is unlikely in the near term, Curaleaf executive Chairman Boris Jordan predicted one particular regulation could be rolled back soon, with another important measure potentially later on in the administration.

A cannabis leaf is held in front of an American flag background.

Image source: Getty Images.

A marijuana banking bill

Jordan said that he thought the industry would see a marijuana banking bill, or the Secure And Fair Enforcement (SAFE) Banking Act, which passed the Democratic-led House of Representatives in 2019. The SAFE Act would indemnify banks against prosecution for doing business with cannabis companies, as cannabis is still illegal at the federal level. That positive 2019 vote passed 321-103 and even included 91 Republican representatives, or around half of the entire minority in Congress.

Yet in early 2020, a Senate version of the bill was held up in committee by Sen. Mike Crapo (R-Idaho), and negotiations were ongoing when the COVID-19 pandemic broke out and the Senate moved on to other matters.

Yet with bipartisan pressure, a clear pro-cannabis sentiment across both red and blue states, and with COVID-19 posing a public safety hazard with a reliance on cash payments, Curaleaf's Jordan sees a banking bill passing soon:

I think that what we probably feel very comfortable saying for the first time is that we're going to get the SAFE Act. So we're going to get a banking act and we're going to get some guidance from the new Treasury Department... it's a bipartisan issue and Democrats and Republicans to get their head around, and it will likely come either in the Heroes Act and or it will come separately over the next year after the inauguration of the new president. So I think we'll get that.

What's the big deal about cannabis banking?

While not as much of a boost as other de-scheduling or de-criminalization measures, allowing pot companies to use mainstream banks would bring several advantages. These include allowing more credit card and debit card payments in lieu of cash, which would both reduce sales friction and help with safety amid COVID-19.

But perhaps the biggest effect would be on marijuana stocks' cost of capital. Currently, if a cannabis company wants to issue debt or rent space, it comes at a very high cost. For instance, in the case of Curaleaf, which is currently sporting some pretty strong revenue growth and margin expansion, the company's most recent Senior Secured Term Loan Facility closed in January 2020 bore an interest rate of 13%. That's incredibly high for a growth business in a time of record-low interest rates. 

If the industry is thus allowed to do more business with banks in the U.S., it would remove some regulatory risk and probably allow the U.S. cannabis companies to refinance or take on more debt at lower rates from mainstream banks themselves.

"I think that that would be a huge step because that would bring down the cost of capital," Jordan added. "And it also has safe harbor language, which would allow a very broad group of investors to participate in the cannabis market."

Beyond banking, could we get a STATES Act?

While a banking bill would be progress, there would still be a ways to go before marijuana businesses would be on a level playing field with other industries. Aside from federal legalization, which may be a bridge too far in the near-term, Jordan did say it was possible to perhaps get the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act passed later in this administration:

I don't expect there to be full of scheduling, but I do think that you could get a STATES Act. But I think that that would probably be in the second part of the next administration. I don't think it will happen right away because I think if we get the SAFE Act, McConnell's being -- or may have marijuana exhaustion and he's not likely to push on the STATES Act. But I do think the STATES Act is a compromise that could be had between McConnell and the Republican Senate, especially with all the pressure coming from the states.

The STATES act would amend the Controlled Substances Act would essentially mean that businesses complying with state laws would not be subject to federal controlled substances regulations. That would be really important for the cannabis stocks because it would rid them of having to comply with Section 280e, which forbids U.S. cannabis companies from deducting huge amounts of expenses for tax purposes.

For instance, last quarter Curaleaf paid $18.7 million in taxes, despite only having $9.8 million in pre-tax income. In fact, Curaleaf had to pay taxes in the year-ago quarter, even when its pre-tax income was negative!

While a banking bill would be nice, the STATES Act will probably be necessary for the U.S. cannabis stocks to really take off. We'll see how the incoming administration handles cannabis policy in a few months, but investors in the space are probaby on the edge of their seats.