WASHINGTON — The Drug Enforcement Administration's move to begin a process of rescheduling cannabis may have little immediate impact on the cannabis industry's access to banking services; it may, however, improve prospects for cannabis banking legislation to cross the finish line.
The Associated Press
Tyler Beuerlein of Safe Harbor Financial — a firm that helps cannabis businesses find banking solutions — said one immediate impact on the scheduling change would be to allow cannabis businesses to deduct more of their business expenses from federal tax. Section 280E of the Internal Revenue Code prohibits routine tax deductions by companies "trafficking" in Schedule I or Schedule II substances. A rescheduling of cannabis to Schedule III, he said, would make those businesses more profitable in the short-term.
"Schedule III would eliminate the cannabis industry's exposure to 280E … these businesses should realize a significant increase in both revenues and cash flow [that] will only increase their ability to qualify for lending products," he said. "It should also compel financial institutions serving the cannabis industry to extend additional credit products to cannabis related operators."
Tony Repanich, CEO of Shield Compliance, a firm that aids financial institutions in legal and regulatory compliance, said the change in scheduling won't allow banks to suddenly provide services to cannabis companies because it does nothing to address the discrepancies between state and federal law. While Schedule III drugs have acknowledged medicinal uses, they're still subject to regulation and federal criminal prosecution for unauthorized trafficking.
"It is, however, further indication that we're moving forward not backwards in terms of the federal government's approach to cannabis, [which] might encourage more bankers to enter the space," Repanich said. "There are an estimated 225 banks and credit unions actively serving the market today [and] this rescheduling will surely create conversations in the boardroom and may cause some financial institutions to take the leap."
Banks that do currently provide some banking services to cannabis companies do so under guidelines laid out in a
Cannabis lawyer Vince Sliwoski of Harris Sliwoski notes banks' are increasingly curious about entering the space given the prospect of rescheduling.
"The Fincen guidance could be updated at any point, and if not, banks and especially credit unions are likely to feel less exposure in servicing these clients," said Sliwoski. "We saw a dramatic increase in banks moving into the space in the past 12 months, some of that probably on the heels of the HHS recommendation last August."
The DEA's proposal will have to be approved by OMB before being published. At that point, the proposal will be subject to the traditional notice-and-comment process that all federal regulations must go through to be finalized.
Isaac Boltansky, a policy analyst at BTIG, noted that while the DEA's stated plan marks a major positive development for cannabis, the rescheduling process is fraught and uncertain.
"Even if the Biden administration wants to move at warp speed, which is far from certain in our view, there is a lengthy and murky road ahead," he wrote in a policy note. "An outside party could petition for an Administrative Law Judge to review the proposal, and if the DEA granted that petition the timeline could be extended by as long as a year."
Boltansky also argues the final rule will likely be challenged in court, which could prevent the rule from being enforced for years even after it is finalized.
And all of those timelines are in part dependent on whether President Biden wins re-election in November. While most political opposition to rescheduling cannabis can be found among Republicans, Sliwoski notes the proposal will likely proceed even if Donald Trump wins, though agency turnover could slow implementation.
"My guess is they would leave [the proposal] alone, meaning a Trump Administration wouldn't attempt to unwind the HHS recommendation and DEA decision," Sliwoski said. "That said, things could slow down appreciably if they did the somewhat typical thing of firing and seeking to replace certain public officials relevant to the process."
Even with the uncertainty around the exact timing of a rescheduling of cannabis, the move could have the effect of further relaxing the stigma for banks around having cannabis companies as customers. Even so, bank industry trade groups have said that many banks will remain hesitant to take the plunge without the passage of
American Bankers Association president Rob Nichols issued a statement last week indicating rescheduling won't solve cannabis banking. According to the ABA, only legislation like the
"It's important for policymakers to know that any potential decision to reclassify cannabis has no bearing on the legal issues around banking it [as] cannabis would still be largely illegal under federal law, and that is a line many banks in this country will not cross," he wrote. "Passing that legislation in Congress would address the ongoing legal limbo around cannabis banking, while enhancing public safety, tax collection and transparency."
Sliwoski notes the move won't negate the need for federal cannabis banking legislation.
"The difference [under Schedule III] is that instead of marijuana having a legal status on par with fentanyl (Schedule I), it would have a status on par with e.g. anabolic steroids and codeine (Schedule III drugs)," he said. "Banks couldn't bank businesses that openly traffic in anabolic steroids or codeine, and which sell those drugs at retail to customers. We still need a legislative fix here for banking."
Cannabis banking legislation is unlikely to move in the near term, however. Democrats failed to pass such legislation when they held both Congress and the Presidency, making an agreement in the current divided government appear even more remote.
Nevertheless, a cohort of Democratic Senators including Senate Majority Leader Chuck Schumer are still trying. The Senators Wednesday took the latest legislative effort to legalize cannabis by
While passing the measure is a long shot, banking policy expert Jaret Seiberg of TD Cowen said the bill could assist in making the more modest cannabis banking reforms palatable in comparison.
"We see this as a way for Schumer and other Democrats to get in the cannabis spotlight at the same time that Team Biden is preparing to propose moving cannabis to Schedule III," he wrote in a note. "By making the measure look more modest compared to legalization [it] may help the bill attract the Senate GOP support needed for SAFER to pass the Senate as part of a broader package."
Repanich noted that while cannabis reforms are
"Further destigmatizing cannabis can help to move the needle in Congress," he said. "However, given the current makeup of the House I am not optimistic about passage this year."
While some had hoped the cannabis bill and legislation on stablecoins could be paired and attached to a must-pass bill this year, hopes were recently
Boltansky notes these and other reasons make the bill unlikely to see passage in the near future.
"We are bearish for three reasons: The clock is ticking, and we have yet to see any signs of tangible movement; there is still no agreement on the stablecoin bill; and Senate Minority Leader McConnell, R-Ky., remains opposed to the cannabis banking bill," Boltansky said.
