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Is the passing of the SAFE Banking Act a Precursor to the Legalization of Marijuana?

01 Oct Is the passing of the SAFE Banking Act a Precursor to the Legalization of Marijuana?

The U.S House of Representatives passed a landmark legislation namely Secure And Fair Enforcement (SAFE) Banking Act (H.R 1595), which will provide access to banking and financial services to the cannabis industry, in spite of Marijuana still being a schedule A illegal substance under federal law. Sponsored by the members of the House Financial Services Committee, Congressmen Ed Perlmutter of Colorado, Denny Heck of Washington, Steve Stivers of Ohio and Warren Davidson of Ohio, the bill was passed by a vote of 321-103 and will now move to the U.S senate.

This vote is great news for the cannabis industry as it will now have access to banking and financial service, on par with other regular businesses, eliminating the need to deal only in cash. Banks hitherto were liable to face criminal and civil persecution, for providing services to even legally operating, state-approved cannabis businesses. This led to rise in illegal practises such as money laundering, tax evasion and growing store thefts. The passage of the bill would provide a safeguard to banks and financial institutions in their dealings with cannabis-related companies.

As House Majority Leader Steny Hoyer commented

“This must be a first step toward the decriminalization and de-scheduling of marijuana, which has led to the prosecution and incarceration of far too many of our fellow Americans for possession,”

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Marijuana – A burgeoning billion dollar industry
The Global legal marijuana market is likely to reach over USD 66.3 billion by the end of 2025, as per a report by Grand View Research, Inc, growing at a CAGR of 23.9%. There is a growing acceptance of the curative effects of cannabis, with some countries such as Canada and certain states of U.S legalizing the use of Marijuana for medical and recreational use. Research has time and again shown that cannabinoids (CBD), extracted from the cannabis plant, have varied medical uses with minimal side effects, making it a sought after alternative to traditional pharmaceutical options.

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The U.S, where the use of cannabis has only been legalized in 33 states for medical use and 11 states for recreational use, is one of the largest untapped markets for Marijuana, with an estimated value of over USD 11.9 billion in 2018, which is likely to grow at a CAGR of 24.1% from 2019 to 2025.

Currently 33 states in the U.S along with Washington, D.C. have legalized medical marijuana while 10 states (plus D.C.) permit recreational cannabis. 2018 was a great year for CDB industry, not only was the Farm Bill passed that allowed for the sale of hemp and hemp-based cannabidiol products, but the FDA also approved its very first cannabis-derived drug Epidiolex for treatment of seizures.

The call for reform for legalizing marijuana at the federal level is gaining momentum with research proving time and again the many benefits of cannabinoids in treatment of various physical and neurological conditions. There is a growing acceptance of cannabis as pointed out by a survey by Gallup in October 2018, which saw two out of three adults now favor legalizing weed nationally. 

A Time to Celebrate?
The news has been met with commendations from the players in the cannabis market, as access to banking services will stimulate growth, and provide further impetus to the industry. In addition it eliminates the risk associated with high-risk cash only transactions.

Marijuana is a schedule I drug, which is considered illegal and unlawful, and any direct and indirect (conspiracy and aiding abetting) violations carry stiff criminal and civil penalties, including forfeiture, under the controlled substance act. Furthermore the banking secrecy act clearly states that banks cannot undertake financial transactions involving unlawful activities, especially that can lead to money laundering. In 2014, the FinCEN guidance laid down grounds for providing financial assistance to cannabis –related business, by complying to stringent due diligence obligations, and laying down a new category of suspicious activity reporting (SAR) for marijuana-related businesses.

However, banks are wary of conducting business with companies dealing with marijuana or even ancillary industries engaged in supporting the marijuana industry. According to the FinCEN, as of March 2019, only 633 of the 8,700 FDIC insured or supervised financial institutions are providing assistance to companies engaged in marijuana -related businesses.

This leads to serious repercussions as companies are pushed to borrow money from lenders at high rates of interest. Other drawbacks include the lack of proper record-keeping, incorrect accounting systems and the non-payment of taxes. There is a lack of insurance coverage for these establishments and their products, and more importantly an absolute lack of transparency.

The Act in a Nutshell
The SAFE banking act mandates that FinCEN revise its SAR requirements, to be consistent with the purpose and intent of the safe-banking act, and in no way hinder the rendering of financial services to a cannabis-related legitimate business or service provider. Additionally the bill provides protections to banks and other financial institutions from not only being held liable for prosecution for providing services to cannabis-related businesses, but also ensuring that their insurance is not limited or terminated. This will encourage them to offer regular services such as processing of credit card transactions, the maintenance of operating and payroll checking accounts to companies dealing in cannabis-related businesses as well.

Furthermore the bill also extends protection to ancillary business such as accountants, lawyers, internet service provider, who may receive funds from a through a transaction with a cannabis-related business.

The passing of the bill will bring in more investment into the cannabis industry and make it easier to operate the business. The bill also serves as a validation of the industry and may result in an influx of cannabis-related IPOs registrations on the NASDAQ and NYSE according to some analysts. A report by Viridian Capital Advisors states that the cannabis industry raised an estimated $13.8 billion in financing in 2018. The next big hurdle, however, will be to get the senate to approve the bill. This may not prove to be easy as the marijuana industry still suffers from negative perception and social stigma.

However, with the increasing awareness about its benefits and the slow but steady efforts to get a regulatory framework and infrastructure in place, it may seem that the legalisation of cannabis may not be a distant dream anymore.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any position within the next 72 hours.

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