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Federal banking law hinders a blossoming industry

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Despite cannabis being legal in some form in a majority of these United States (33 so far), business owners face an uphill battle due to the flower's felonious status as a narcotic on par with heroin at the federal level.

As a result, the proprietor of your local state-sanctioned MMJ dispensary deals with discriminatory banking regulations and an archaic tax code that hinders growth and reinvestment into business and community.

Legal on a state level, cannabis's federal designation as a Schedule I drug means legitimate business operators encounter barriers to expansion—and even basic functioning—that can have a crippling effect on those wishing to cash in on a quickly expanding market that has the potential to be worth $200 billion worldwide within the next decade, according to Motley Fool, an online investment and analysis firm.

Cannabis is a Schedule I drug via the 1970 Controlled Substances Act. That means possession is technically a Class 6 federal felony for Arizonans, although the federal government has taken a hands-off approach to states that allow medical or recreational use.

But while individuals haven't been hassled by federal agents, conflicting jurisdictional issues between state and federal regulations means that banking institutions are loathe to provide loans or capital for fear of scrutiny from the federal government, as well as a concern about their image.

"There's liability and a reputation risk," said Aari Ruben, owner of Bloom Dispensary in Tucson. "Institutions that handle cannabis money get snickered at and are viewed as less professional. They are also worried, because there are billions of dollars in circulation from drug cartels. Also, other clients in powerful positions are not quick to change."

Ruben added that the cost of providing services for the cannabis industry also contributes to banks not wanting to get involved.

"It cannot be done with software, so you have to have staffing," he said. "It's a business decision."

One result of the mishmash of legality is that legitimate businesses are forced to work on a predominantly cash-only basis, which is why MMJ patients need to either bring a wad of cash to get their medicine or use an ATM in the lobby of their favorite dispensary.

To get around those problems and make transactions more convenient, a dispensary might work around regulations by purchasing an ATM and filling it with cash or figuring a way to hide the nature of their transactions through various means. Some of these transactions are illegal and considered money laundering by the federal government.

In order to legitimately offer an ATM, the dispensary must lease space to a private ATM operator.

"The sticking point to do a credit card or debit transaction [is that] you need a bank involved and a FDIC (Federal Deposit Insurance Corporation) number to complete the electronic portion of the transaction," Ruben wrote in a recent email. "Since it's a federal banking system and [MMJ is] a federally illegal product, there is no legitimate way to make these two ends meet."

Additionally, since interstate transport of cannabis is illegal, a dispensary that wants to expand beyond state borders must create redundant grow and processing operations for each state where they operate. The result caps growth and increases operating expenses, creating costly expenses that only the wealthiest operators can afford.

It also opens up the U.S. cannabis industry to foreign-based companies with more coherent laws and access to legitimate sources of capital, said Downtown Dispensary owner Moe Asnani.

"Foreign companies from Canada, the Czech Republic or Australia where it's been legalized for adult use have access to markets—NASDAC and the NYSE—and capital that companies based in America do not have." Asnani said. "They are also not subject to U.S. tax laws and they have better access to capital. [They are incorporated] using federal laws of their own countries."

Investment opportunities are hindered by the situation as well, since "U.S. companies only have access to second-rate market exchanges and we can't be in 401Ks," according to Asnani.

Despite the current atmosphere in national politics, there are solutions to the banking problem working through the system. But partisan posturing has stalled a cure in the Senate, where Republican lawmakers—and a few conservative Democrats—don't want to appear to be "soft on crime."

The Secure and Fair Enforcement Banking Act of 2019 would enable banks to offer loans and other banking services to cannabis businesses, including contractors and vendors who never touch the plant, but are subject to the same regulations.

SAFE became the first standalone cannabis bill to be passed in the House, receiving bipartisan support with nearly half of House Republicans joining the near-unanimous support from Democrats.

The Republican-controlled Senate has refused to act on the legislation, but the most recent attempt to get it passed is attached to the next round of COVID stimulus—H.R. 6800, The HEROES Act. While that package has passed the House of Representatives, it has stalled as of press time in the U.S. Senate.

The SAFE Banking Act protects banking institutions from being penalized for providing services to legitimate cannabis-related industries. It does not require the banking institution to provide services and there are provisions included to report suspicious banking activity to the government.

Even members of the banking industry are ready for a change in part to reap the profits of a rapidly expanding source of revenues.

The American Bankers Association, a Washington, D.C.-based trade association for the U.S. banking industry founded in 1875, has lent its support to the bill.

"We continue to support the bipartisan SAFE Banking Act which would help resolve the current conflict between state and federal law when it comes to banking cannabis businesses in states where it is legal," ABA spokesperson Blair Bernstein wrote in a recent email. "It's up to members of Congress to determine the right moment to advance this legislation, but we know it would enhance public safety, transparency and tax collection. The bill has already cleared the House twice, and we continue to encourage the Senate to consider the legislation as soon as possible."

This is part one of a two-part series. Part two will focus on tax laws that hinder growth in the cannabis industry.

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