CARERS Act Set to Open Bank Doors to Legal Cannabis

August 5, 2017

If passed, the bill will give medical cannabis distributors access to proper financial services, removing a major obstacle to widespread industry expansion.

The spotlight on the legal cannabis industry has rarely been brighter. According to a Brightfield Group analysis of data released by the Colorado Department of Revenue, the state’s “most ambitious social experiment of the 21st century” (as dubbed by the governor) has shown a growth potential strong enough to capture the attention of even the most risk-averse investors, raking in $680 million in 2014 alone after the first full year of legal medical and recreational cannabis sales. With recreational marijuana now legalized in four states plus the District of Columbia, and several additional states expected to launch medical marijuana dispensary systems in 2015, the industry is gaining momentum on an unprecedented scale.   

Much excitement has circulated around the March 10 introduction in the Senate of the Compassionate Access, Research Expansion, and Respect States (CARERS) Act. If passed, the bill would “extend the principle of federalism to State drug policy”, officially allowing State laws pertaining to medical cannabis to supercede those of the federal government. A post-CARERS landscape would transform the role that financial institutions have to play in ways that will not only stimulate investment, but greatly streamline operations for existing medical cannabis businesses, freeing up capital for expansion.

Seed capital unleashed

A recurring complaint among small, successful cannabis companies is that they have found it impossible to expand, add additional branches or move to larger facilities without proper financing. Access to credit will allow chains to develop, creating economies of scale and bringing a higher level of professionalism to the industry. It will also allow new entrepreneurs to enter the industry without the need to expend large amounts of their own capital up front.

While some startups such as Eaze have been able to obtain financing through cannabis-focused venture capital or investment groups, this is the exception rather than the rule. Many “cannabusiness” owners finance the setup of their operations with multiple credit cards or by emptying out their personal savings, leaving them financially vulnerable and subject to exorbitantly high interest rates. Increased competition drives prices down for the consumer, and will provide extra outlets for growers to unload their surplus product, further diminishing the ever-present temptation to supply the black market.

Additionally, an end to the cash-only system currently forced upon vendors will allow them to significantly decrease the amount of company profits allocated towards enormously expensive security measures, freeing up large amounts of capital to re-invest into their businesses. This will lead to greater expansion, more frequent upgrading of and demand for sophisticated processing machinery, more comprehensive product testing, less corruption, and the creation of thousands of new jobs both for dispensaries and for businesses providing ancillary goods and services. Trends like these will go a long way towards improving the overall public perception of the industry.

Still a risky game

The banking sector is eager to begin serving cannabis clients in the event that the CARERS Act becomes law, and is largely unhindered by moral objections in doing so. This is evidenced by a willingness to do business as usual in other sectors that profit from distribution proceeds, such as security, machinery, software, marketing, web hosting, and inventory tracking, all of which will benefit greatly from the passing of the bill. The legal risks, on the other hand, are quite a different matter. At the moment, banks and other depository institutions are subject to federal prosecution if they are found to be doing business with cannabis distributors, regardless of legalization at the State level. A handful of small banks, such as Oregon's MBank, have boldly attempted to service this untapped market in the current regulatory environment, but have found it nearly impossible to do so. MBank was seemingly successful for nearly a year, but was forced to scrap its expansion plans into Colorado in January 2015, and in April announced it would be closing all its cannabis accounts. 

In a February interview with the New York Times, Don Childears, chief executive of the Colorado Bankers Association, said that according to federal law “the very receipt of a deposit is the definition of money laundering.” Money laundering is punishable by up to twenty years in prison, and a potential life sentence awaits those convicted of conspiracy to distribute marijuana. This is in addition to the millions in fines that federal regulators can impose for a host of other related offenses. Though the U.S. Treasury and Justice Departments have issued a set of guidelines under which banks were permitted to do business with cannabis distributors, the obligations imposed on the banks to oversee the legitimacy of all transactions were excessively burdensome and did little to alleviate the ever-present threat of prosecution.

It is little surprise then that banks have been eager for a definitive statement on what is legal and what is not. If CARERS passes, State law will officially reign supreme regarding medical marijuana and the industry will be legitimized as never before. Before this happens, however, the bill faces a tough uphill battle in the United States Congress. Such a prospect is rarely cause for excessive optimism.