Cannabis and Crypto Industries Face Similar Banking Hurdles, Despite Growing Market Caps

Any connection between banks and the financial industry with cannabis businesses poses legal and regulatory risks. The cannabis industry still faces significant banking challenges

The cannabis industry in the United States is facing a banking problem despite the global cannabis market being valued at around $64 billion. As the market continues to expand, more states are legalizing cannabis use. However, restrictions on facilitating financial transactions persist due to the Controlled Substances Act (CSA).

The federal ban on cannabis has blocked the use of debit and credit cards for payments to cannabis dispensaries. In 2021, VISA released a memo reiterating that using their payment channels for cashless ATMs is against company rules and violates regulatory prohibitions under the CSA. Similarly, in 2023, Mastercard prohibited all cannabis transactions through its channels.

While the popularity and usage of digital wallets are growing rapidly—with more than half of people in the US using them more often than traditional payment methods—cannabis businesses remain left behind in offering easy payment alternatives due to banking constraints. Moreover, these businesses must maintain secure physical cash storage.

Cashless payment methods could significantly help cannabis businesses improve customer transactions, monitor cash flow and accounting, and make tax payments easier while enhancing business safety. However, with no support from card or banking companies, most cannabis businesses must rely on cash or find workarounds. An industry operating on a cash-only basis attracts both thieves and tax cheats.

Reclassifying Cannabis to Make it Regulated

While more states have been legalizing cannabis, federal law still considers it illegal. Federal anti-money laundering (AML) laws have created a gridlock with state marijuana laws, denying cannabis businesses equal access to banking.

Under federal AML laws, banks are required to monitor and report proceeds from unlawful and illegal activities, including cannabis retail, as it remains federally illegal. The Bank Secrecy Law (BSA) further requires banks to implement policies ensuring their customers do not engage in unlawful activities, including cannabis sales.

Last year, in August, in an attempt to level the playing field, federal agencies recommended reclassifying cannabis from Schedule 1 of the Controlled Substances Act (CSA) to Schedule III.

Schedule 1 of CSA includes substances like heroin and LSD, which have a high potential for abuse and no accepted medical use. Meanwhile, under Schedule III, Schedule III includes substances like ketamine, which are accepted for medical use and have a low potential for physical and psychological dependence.

So, this move does not legalize cannabis at the federal level but changes its status from being prohibited to regulated.

After the Department of Health and Human Services (HHS) recommended reclassifying cannabis, the Drug Enforcement Administration (DEA) has started reviewing it before a final decision is made.

According to US Rep. Earl Blumenauer (D., Ore.), cannabis is likely to be rescheduled before the year ends. In an interview with WSJ, Blumenauer said these changes could give state-legal cannabis businesses better access to banking services.

This rescheduling of cannabis, according to him, “is perhaps the single most significant development in the last five years,” and its process is “soon to be completed… before the next calendar year. That is amazingly significant.”

The move will have a great impact on the cannabis industry, ranging from easing restrictions on scientific research into its medical benefits and risks to potentially expanding medical cannabis programs and prescriptions. According to Michael Johnson, CEO of Metrc, which makes cannabis supply chain tracking software:

“For years, pharma and biotech companies have viewed cannabis as a market with enormous potential. With rescheduling, investment firms that previously had clauses precluding them from investing may reconsider their stance.”

Additionally, cannabis businesses will be able to claim standard tax deductions under Section 280E of the IRS code, unlike Schedule I and II substances, which are prohibited from certain tax deductions.

Cannabis businesses currently can't deduct their regular, normal operating expenses for tax purposes, meaning “virtually all of the state-legal enterprises are money-losing,” said Blumenauer.

Freeing businesses from the 280E tax provision will also allow them to list on major US exchanges.

Rescheduling cannabis to a less restrictive drug could further accelerate movement in the Senate to pass the Safer Banking Act. This would allow cannabis businesses to accept debit card payments, get small-business loans, and open accounts at federally insured banks.

The Safer Banking Act is “very, very popular,” and “there's increasing pressure to be able to take advantage of this,” said Blumenauer. He is the co-founder and co-chair of the Congressional Cannabis Caucus and has been pushing for liberalizing cannabis laws throughout his political career.

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