United States / Analyst Insights
Regulatory Challenges Affecting the US Cannabis Industry
by Nick Masters, Lead Industry Research Analyst
Nov 19 2019

As it currently stands, the burgeoning cannabis industry in the US is both overregulated and underserviced. From a top-down perspective, federal regulations limit the industry’s access to basic banking services, causing burdensome operational inefficiencies.

Meanwhile, on the state-level, product markups resulting from high compliance costs and taxes have been hindering sales somewhat. Nevertheless, the industry has continued to grow as more states legalize recreational cannabis products in addition to medicinal resources. Most recently, for instance, Illinois (the-sixth most populous state) was the latest to adopt such measures. Thus, as the cannabis industry grows, the disconnect between state and federal regulations will remain its most-significant challenge.

Industry dynamics and a common plight

In actuality, the cannabis industry only loosely constitutes an “industry” in the traditional sense, given its prohibition on the federal level. In turn, the domestic cannabis industry is broadly defined by the 33 states and District of Columbia that have legalized cannabis usage to varying degrees. Of the 33 states, only 11 have legalized cannabis for recreational use. From a regulatory standpoint, the industry defies uniformity as each state-specific industry contends with differing levels of regulation and market characteristics.

The industry’s core challenges are characterized by a lack of access to capital markets, exorbitant tax burdens and the resilience of the black market. These challenges are most prevalent in California, the largest state by population and GDP to legalize recreational cannabis products. The state’s licensed cannabis sales are expected to reach $3.1 billion by the end of the year according to BDS Analytics, a cannabis market research firm, making California the world’s largest legal cannabis market.

Despite its overall fragmentation and market variations, all industry operators share a common lack of access to the banking system, a significant regulatory hurdle. Since the Commercial Banking industry (IBISWorld Report 52211) is regulated at the federal level, banks risk regulatory punishment for doing business with the cannabis industry given its prohibition at the federal level. With banks’ hands tied behind their back, the cannabis industry is largely forced to operate on an all-cash basis. The operational inefficiencies this produces are far-reaching, as some businesses are left with no other option than to pay taxes, salaries and expenses using cash, in addition to bearing the burden of necessary security and logistics costs associated with keeping large sums of cash on-premise.

SAFE Banking Act

However, after much lobbying from both cannabis industry operators and the Finance & Insurance sector (report 52), the Secure and Fair Enforcement Act of 2019 (SAFE Banking Act) serves to allay the industry’s banking problem by prohibiting punitive action upon banks supplying services to the cannabis industry.

The bill also provides specific protections for the Property, Casualty & Direct Insurance industry (52412), as well as other non-depository financial institutions. Introduced in March of this year and passing the House of Representatives in September, the bill is currently under review by the Senate Committee on Banking, Housing and Urban Affairs.

The passage of the SAFE Banking Act will allow for tremendous synergies between the Financial Services sector and the cannabis industry. With proper banking services, the cannabis industry and related businesses will have more-secure financial operations and greater access to capital. Streamlining the operational aspects of the cannabis industry will represent a step in the right direction for lowering the already-high markup on legal cannabis products, thus shifting market share away from the black market and benefitting industry performance moving forward.

 

 

Interested in related industry coverage on North American cannabis production? Check out our recent article on the opportunities and challenges for Canadian cannabis producers on Industry Insider!

 


Edited by Sean Egan

Infographic Design by Victoria Wolak