The SAFE Banking Act's potential impact on the Marijuana Industry
The Secure and Fair Enforcement (SAFE) Banking Act, a proposed legislation aimed at allowing banks to do business with companies operating legally within states that have legalized marijuana, had the potential to change the way the marijuana industry operates.
Despite widespread support, the bill failed to pass in Congress, leaving communities at risk of crime and cannabis businesses operating solely with cash. But what could have been the impact of this legislation on the industry?
The SAFE Banking Act was not approved by Congress in December, leaving communities at risk of crime and forcing cannabis businesses to operate solely with cash. Additionally, these businesses will continue to lack access to financial services from banks and other institutions.
What is the SAFE Banking Act?
The SAFE Banking Act is a proposed legislation aimed at allowing banks to do business with cannabis companies operating legally within states that have legalized marijuana.
Currently, traditional financial institutions do not facilitate cannabis-related transactions due to marijuana's federal illegality.
The measure would prohibit federal regulators from punishing financial institutions for providing services to cannabis companies, their owners, and employees. It would also clarify that funds obtained from state-regulated and compliant cannabis businesses would not be considered as proceeds from illegal activity and provide protection against federal liability for banks, insurers, and other financial institutions that work with such companies.
In 2022, the SAFE Banking Act was close to being voted on in the Senate but ultimately did not pass during the lame-duck session. The bill had already passed seven times in the House, but the Senate did not give it a vote. The limited time available during the lame-duck session, where must-pass bills such as the National Defense Authorization Act (NDAA) and the Fiscal 2023 appropriations bills were prioritized, prevented the SAFE Banking Act from being passed as a standalone bill or as a rider on one of those bills. Despite the efforts of supporters, the bill did not make it to the Senate floor due to a lack of time and competing priorities.
Despite this setback, some industry experts argue that the practical impact of the SAFE Banking Act would have simply formalized the existing, albeit limited, connections between financial institutions and marijuana-related businesses.
Financial institutions already bank marijuana-related businesses
Peter Su, SVP at Green Check Verified, one of the leading cannabis banking software and consultancy in the industry, explained that the approval of the SAFE Banking Act would not have affected the industry significantly.
"The SAFE Banking Act would probably be a huge boon to my business as I work with banks and credit unions that want to bank cannabis. However, I do not think it would have a huge impact on the cannabis industry. According to the Financial Crimes Enforcement Network (FinCEN), about 755 financial institutions are currently banking cannabis, but insiders believe the number is closer to 250. But the point is, there are already hundreds of financial institutions banking cannabis today," he said.
The existence of hundreds of financial institutions currently banking cannabis businesses, despite the lack of specific legislation, suggests that a de-facto situation similar to what the SAFE Banking Act would establish has already been set but on a smaller scale.
FinCEN issued guidance in 2014 to clarify the expectations for financial institutions under the Bank Secrecy Act (BSA) when providing services to marijuana-related businesses. This guidance helps financial institutions comply "with their BSA obligations and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities." In simple words, this guidance helps banks know how to handle transactions with marijuana-related businesses, and it helps the government track any suspicious activities.
Su explained that the SAFE Banking Act could increase the number of financial institutions that provide services to marijuana-related businesses, creating competition and giving businesses more options for banking. This could lead to better pricing and terms for marijuana businesses and increase their access to banking services.
Alternatives to cash for cannabis transactions
As marijuana becomes increasingly legal across the United States, dispensaries have faced a unique challenge: access to financial services.
Because marijuana remains illegal at the federal level, traditional banks have been hesitant to offer services to dispensaries, leaving many to deal exclusively in cash. However, innovative solutions have emerged to address this issue. Cashless ATMs and PIN debit options have become increasingly popular among dispensaries, providing customers with a secure and convenient way to purchase cannabis products without the need for cash. These solutions not only increase revenue and streamline the checkout process, but they also provide dispensaries with a way to reduce the risks associated with handling large amounts of cash.
However, Su argues that these options have not been popular among consumers as they tend to prefer the convenience of using credit cards.
"Consumers are hesitant to use cashless options because it is more work than what they are used to. As a result, consumers are opting for cash instead of these cashless options, even when they are available in the store," he said.
However, handling cash can be dangerous for dispensaries as it increases the risk of violent crimes such as burglary and robbery. The SAFE Banking Act could help reduce this risk, but it is not a complete solution, even in countries where marijuana has been legalized nationwide, such as Canada, where dispensaries and marijuana-related businesses often have difficulty accessing the banking system.
Despite the legalization of marijuana in Canada, dispensaries and manufacturers continue to struggle to obtain bank accounts due to concerns from banks about working with marijuana-related businesses.
Su explained that this highlights the fact that even though something may be legal, banks and credit unions may still be hesitant to work with these businesses, and specialized programs and experts are needed to help them navigate the complex regulations and laws.
What's next for the SAFE Banking Act?
The failure of the SAFE Banking Act resulted in a decline in marijuana stocks, with many companies experiencing double-digit percentage drops. The industry is facing challenges from the current economic environment and regulatory uncertainty, a stark contrast to the high demand for cannabis stocks in 2018-2019.
A change in the capital markets, such as listing a cannabis company on a U.S. stock exchange, would open up a whole new world of possibilities.
From a Mergers and acquisitions (M&A) perspective, it's a similar consideration and concern.
Currently, listing on the Canadian Stock Exchange is the norm, leading to a high number of SPACs, but the results have not always been favorable.
However, this is not solely due to regulations but also the downturn of the cannabis industry in general. Listing on the Nasdaq or New York Stock Exchange would make a significant impact, according to Su.
The future prospects for the SAFE Banking Act, which aims to provide safe access to banks for cannabis companies, are uncertain. Despite support for the Act, which has the potential to decrease crime, promote diversity and boost the economy, it failed to pass this year. However, there is a belief that it will be brought forward again this year.
"I was shocked that the SAFE Banking Act did not pass. I thought there was a lot of positive talk about it passing. I assume it will be brought forward again. I hope it will pass because it would be great for the industry. Politics can be like a game of chess, where the Act needs to be captured. There is a lot of support for it because it makes logical sense for tax-paying businesses to have the same banking rights as anyone else. I assume it will be brought forward again this year," Su said.
