Cannabis Rescheduling Vs. Descheduling: The Supply Chain Edition
The essence of the cannabis industry comes down to growing, manufacturing, transporting, and distributing marijuana.
This is otherwise known as the supply chain. By now, most of you know that the Drug Enforcement Administration (DEA) has accepted the Department of Health and Human Services (HHS) recommendation to move cannabis from Schedule 1 in the Controlled Substances Act (CSA) to Schedule 3.
My last column focused on the process of rescheduling, all the steps the law stipulates are needed to get to a final rule change in the federal registrar, and how long that process might take. As advocates push for descheduling instead of rescheduling, it’s worth looking at the supply chain in each framework. In this column, I asked a few cannabis professionals across the industry (and country) to weigh in on what the supply chain might look like in a rescheduled or descheduled environment.
This isn’t easy to predict, as legal weed supply chains are relatively new in America and are regulated on a state-by-state and jurisdiction-by-jurisdiction basis. Most people in the industry agree the regulatory frameworks in every state are flawed right now (i.e., they didn’t get it right the first time), let alone what might occur with a change in federal designation (as the feds try to get it right the first time).
The potential differences in the supply chain under Schedule 3 versus descheduling will be significant—almost everyone agrees on that. How they might differ is subject to a variety of viewpoints. No one has a clear crystal ball into the future of any industry let alone cannabis so laying out the differences may be one way to clear up the looking glass for everyone.
To put it simply, rescheduling keeps weed illegal at the federal level and descheduling does not. Schedule 3 drugs like ketamine are licensed and regulated by the FDA and DEA, among other federal agencies. If you try to manufacture a Schedule 3 drug without a license, the DEA may pay you a visit. Descheduled drugs like alcohol and tobacco are licensed and regulated by federal and state agencies but not the DEA, and citizens can brew their own beer and make their own cigars without criminal penalties (as long as they don’t sell them to anyone).
The supply chains for cannabis would be much different in a Schedule 3 world versus a descheduled world. The largest variation deals with interstate commerce, which would only be allowed under descheduling, unless the feds work with states otherwise (not likely at first). No one I spoke with predicted interstate commerce under Schedule 3 right away.
“Under Schedule 3, the supply chain will likely remain largely unchanged,” said Vince Ning, co-founder and co-CEO of the California distributor, Nabis. “The industry will continue to operate on a state-by-state basis, relying on state- and locally-regulated cultivators, manufacturers and distributors. While rescheduling may bring some changes to the regulatory landscape, the fundamental structure of the supply chain is expected to remain intact, with each state maintaining its own unique set of rules and regulations governing the production, distribution and sale of cannabis products.”
It’s also anticipated that a descheduled supply chain would allow small, medium, and craft producers to access a larger market and help level the playing field against larger companies. This is largely because interstate commerce would open up under descheduling. Small producers could sell their products in all 50 states and small retailers would have many more choices by which to build their offerings.
Vladimir Bautista is the owner and operator of lifestyle and dispensary brand Happy Munkey in New York. He advocates for descheduling.
“Schedule 3 would impose more federal regulations and oversight, potentially favoring larger corporations,” said Bautista. “In contrast, descheduling would create a more open and competitive national market, allowing smaller businesses to flourish by reducing barriers to entry and fostering a more dynamic and diverse industry.”
The descheduling advantage for small businesses will not come without red tape, according to Terrence White, CEO of Monko, a luxury cannabis experience in Washington D.C.
“The FDA, DOJ, and DEA will need to establish the infrastructure for the new supply chain and interstate commerce,” said White. “Alternatively, states may need to collaborate with the feds to determine manifests, chain of command, and taxation policies.”
None of these measures are expected to be simple or affordable regulations to comply with, even if larger markets are available to small producers. Taxes at the state and federal levels are another wild card for which no one has any insight in a descheduled world, or a rescheduled one. Governments at the state and local levels have taxed cannabis robustly, often to the detriment of the legal industry (by empowering underground markets).
On the other hand, medications approved by the FDA are not taxed at all. And all drugs listed in Schedule 3 (or descheduled) are not subject to IRS tax code 280e, which has dogged the industry for years. Taken together, most leaders I spoke with felt that tax relief was one big upside to either rescheduling or descheduling.
Kris Krane is one of the founders of 4 Front Ventures and a current board member. He articulated the difference between the two supply chains succinctly.
“For the current legally regulated cannabis industry, this move to Schedule 3 should have little to no impact on supply chains,” said Krane. “The state-licensed businesses will still be illegal under federal law since none will have a DEA license to manufacture or distribute a Schedule 3 substance, and rescheduling does not open up interstate commerce, so the current state-by-state markets should continue largely unchanged.”
For descheduling, Krane offered additional details that are instructive. “Descheduling would eventually result in a major change to current supply chains, as it would upend the current state-by-state market system for one that allows for interstate and likely international commerce for cannabis and cannabis products,” he said. “This should allow companies to produce at a much larger scale in parts of the country more suitable for cannabis cultivation and ship their products across state lines. You may also see cheaply produced cannabis biomass and extract imported from countries like Mexico and Columbia for use in consumer packaged goods products produced in the United States.”
Whenever the status quo is changed in any industry, it can be disruptive, particularly the fragile status quo that the cannabis industry enjoys today. If cannabis goes into Schedule 3, large companies and Big Pharma may be able to adjust to the regulatory frameworks better, raise additional funds, and recalibrate their supply chains accordingly. Their tax burdens would dramatically decrease, freeing up cash, and their shareholders may open their wallets to invest anew. Small companies and craft producers would not have these advantages.
In a descheduled world, smaller businesses may have larger markets to sell to, and may be able to engage consumers directly (instead of going through a dispensary), but would also be competing with the rest of the world trying to get into the American market. Craft growers in places like California may be able to outcompete these players—the world loves California cannabis—but the competition will be intense nonetheless. It may be prudent for these producers to form cooperatives, get advice from seasoned advisors, and try to pull resources together in order to differentiate themselves with authenticity (instead of scale).
No one can predict the future but everyone seems to have hope for a better one. The current status quo of cannabis as a Schedule 1 drug may finally be coming to an end. While the final rules have not been decided, advocates and operators are optimistic that the freeze may finally be starting to thaw for the legal cannabis industry.
