One of the biggest questions on the mind of analysts and observers in the cannabis industry is just when exactly will it be viable for businesses in this area to enlist the services of banks in a legal manner. A new request from a bipartisan group of attorney generals throughout the U.S. may spark a reevaluation on this topic.
On Tuesday (Jan. 16) California Attorney General Xavier Becerra joined a multistate grouping of 18 state attorneys general requesting Congress to create a policy that would allow for the banks to fully interact with cannabis companies in the states where it may be legal.
In terms of developments in the cannabis market, the financial institutions are incomparable to companies already in the space, due to the unclear legalities surrounding the overall industry.
“The future of small and local licensed businesses has been clouded by the Trump Administration’s relentless attacks on progress, in conflict with the will of voters,” Attorney General Becerra said. “Congress has the power to protect a growing $6.7 billion industry and the public safety of our communities.”
The letter from the group addressed to several member leaders of Congress, asked for legislation that would remove the risk factor preventing banking institutions from entering this burgeoning area. “This risk has significantly inhibited the willingness of financial institutions to provide services to these businesses,” the letter read.
The letter from the state attorneys general continued, stating the decision from Sessions to take away the Cole Memo made it more urgent for Congress to step in and “get the cash generated by this industry into a regulated banking sector.”
The recommendations from the letter would make changes to the SAFE Banking Act, allowing the ability for the law enforcers to keep an eye on the transactions in the legal cannabis world.
“Compliance with tax requirements would be simpler and easier to enforce with a better-defined tracking of funds,” the letter said. “This would, in turn, result in higher tax revenue.”
Legality in the U.S. amount to a lot of risk for banks to engage with cannabis companies
As investors know, marijuana is an illegal drug at a federal level in the US under the Controlled Substance Act. Despite, this eight states and Washington, DC have legalized recreational use of the drug.
The growing trend of US states legalizing cannabis in some form or another was backed up by the Cole Memo. The memo, which is a government guidance that created some protections for companies operating in this space, was implanted by former Deputy Attorney General James Cole during the Obama Administration.
Now, current Attorney General Jeff Sessions rescinded the memo and allowed federal units to follow through as best they saw it fit in implementing the federal law. This change in policy hasn’t sparked targeted approach to companies dealing with cannabis in legal states, but it did add a new level of uncertainty in the market.
One bank avoiding legal issues in a legal state
In Maryland, Severn Savings Bank has been offering cannabis businesses with banking services, despite the legal problems this would cause to other banks, according to a report from The Washington Post. The report indicated the accounts pay substantial fees, can’t write checks or ask for loans with them.
Unlike other legal states, Maryland allows cannabis businesses to pay employees through an automatic debit system and can use debit services for other transactions.
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Canadian banks slowly entering the industry
Across the border in Canada, the federal government is on the path to full legalization, slated for summer 2018. The development of companies focused entirely in this space has been fueled in large part by some of the financing done through alternative financial institutions focused on researching the space, the banks haven’t exactly embraced the industry with open arms.
However, that public shun from the banks could be changing soon. In October, Bloomberg wrote the Bank of Montreal and Toronto-Dominion Bank had provided business accounts to at least 21 cannabis companies
“There could be a significant first-mover advantage to the financial institutions that are getting involved with the legal cannabis industry already,” Basem Hanna, chief executive officer of TerrAscend (CSE:TER) told Bloomberg.
The report said the Bank of Montreal already had active accounts for Aphria (TSX:APH; OTCQB:APHQF) CannTrust Holdings (CSE:TRST), Invictus MD (TSXV:IMH; OTC:IVITF), Cannabis Wheaton (TSXV:CBW) and CannaRoyalty (CSE:CRZ; OTCQX:CNNRF).
At the Lift Cannabis Expo in Vancouver recently, a panel of analysts was asked about the potential of various services banks could provide starting to roll out once recreational cannabis became legal in Canada.
John Medland, a partner at Blair Franklin Capital Partners answered first by explaining the banks haven’t jumped into the industry because of the risk factor it provides to their U.S. interests.
“They worry about it impacting the US business, and they are highly regulated in the States, so they worry about the exposure from that standpoint… they worry about their board members getting stopped at the border,” Medland said.
He predicted the banks will be part of the lending market but he didn’t expect them fully banking the companies or raising money for them, yet.
Everett Knight portfolio manager at Matco Financial added the two big Canadian markets will evaluate the industry later since they are taking a “dip a toe” approach right now.
Uruguayan cannabis market sidetracked because of US banks
Last year, Uruguay was on a rampant path regarding the business of cannabis. Pharmacies with legal marijuana stands were selling out each day. Consumers were excited to acquire legal cannabis products. But then the industry was sidetracked by warnings from U.S. banks.
In August 2017, The New York Times wrote on the effect these letters had on the local officials, who were then forced to change their new cannabis laws.
“American banks, including Bank of America, said that they would stop doing business with banks in Uruguay that provide services for those state-controlled sales,” the Times wrote. This warning trickled down to Uruguayan banks that were forced to threat them saying their accounts would be dismissed.
It will be key for banks to participate and provide a boost to the cannabis companies trying to expand the reach of the industry. Investors should keep an eye on the situation developing in Canada between the major banks making an attempt at entering this space at the moment and how much reception the letter from the US attorneys general gets in Congress.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Invictus MD is a client of the Investing News Network. This article is not paid-for content.