Cannabis Banking E-Book

Erin O'Donnell

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 389

Veröffentlichungsjahr: 2025

Beschreibung

Unlock the financial potential of the cannabis industry

Cannabis Banking: Legal Frameworks and Practical Solutions for Cultivating Compliance offers a deep dive into a critical issue facing cannabis businesses worldwide: the challenge of accessing essential financial and banking services. Written by a team of experienced finance professionals and entrepreneurs, this guide is tailored to demystify the complex world of banking regulations and present practical solutions for cannabis enterprises.

As the cannabis sector continues to expand at an unprecedented rate, many businesses find themselves hindered by regulatory uncertainties, preventing them from accessing the financial services necessary for growth. Cannabis Banking not only addresses these challenges but also opens the door for finance professionals, entrepreneurs, and investors to explore substantial business opportunities within the industry.

You'll also find:

• Detailed discussions on the pending SAFER legislation that grants safe harbor to banks who do business with cannabis enterprises
• Strategies for maintaining compliance and optimizing fiscal opportunities when banking cannabis firms
• Up-to-date guidance, practical tips, and real-world case studies of cannabis finance and banking

Whether you are a bank and credit union personnel, compliance officer, risk analyst, or fintech professional involved with the cannabis sector, Cannabis Banking is your go-to resource for navigating the complexities of cannabis finance. Equip yourself with the knowledge to foster efficient, compliant financial operations and propel your cannabis business or financial career forward.

Leseprobe

Table of Contents

Cover

Table of Contents

Title Page

Copyright

Dedication

Foreword

Preface

Acknowledgments

CHAPTER 1: Understanding the Cannabis Industry

A BRIEF HISTORY OF CANNABIS

CANNABIS BASICS

ECONOMIC IMPACT

THE CANNABIS INDUSTRY OVERVIEW

CONCLUSION

NOTES

CHAPTER 2: Overview of Banking in the United States

PART 1: BANKING BASICS

PART 2: BANKING SOLUTIONS FOR CANNABIS-RELATED BUSINESSES

NOTES

CHAPTER 3: Compliance and Regulatory Frameworks

REGULATIONS OVERVIEW

THE BANK SECRECY ACT (BSA) AND ANTI-MONEY LAUNDERING (AML) LAWS

PATRIOT ACT AND KNOW YOUR CUSTOMER (KYC)

PATRIOT ACT COMPLIANCE

CHALLENGES IN KYC FOR CANNABIS BUSINESSES

THE ROLE OF THE FEDERAL RESERVE AND FDIC

OVERVIEW OF STATE LEGAL VARIATIONS

BANKING GUIDELINES FOR CANNABIS-RELATED BUSINESSES (CRBs)

UNDERSTANDING THE COLE MEMO

PRACTICAL CHALLENGES IN CANNABIS BANKING

FUTURE OUTLOOK AND LEGISLATIVE CHANGES

CONCLUSION

NOTES

CHAPTER 4: Understanding Cannabis Businesses

CANNABIS BUSINESS OVERVIEW

THE CANNABIS INDUSTRY

KEY MARKET SEGMENTS

SEED-TO-SALE: THE CANNABIS LIFE CYCLE

CULTIVATION AND GROWING TECHNIQUES

PROCESSING AND EXTRACTION

MANUFACTURING AND PRODUCT DEVELOPMENT

DISTRIBUTION AND SUPPLY CHAIN MANAGEMENT

RETAIL AND DISPENSING

CONCLUSION

NOTES

CHAPTER 5: Risk Management for Cannabis Bankers

INTRODUCTION

INTERNAL CONTROLS AND AUDITS

COMPLIANCE WITH POLICIES AND PROCEDURES

CUSTOMER DUE DILIGENCE (CDD) AND ENHANCED DUE DILIGENCE (EDD)

TRANSACTION MONITORING

REPORTING AND FILING

MANAGING HIGH-RISK BANKING

REPORTING AND RECORDKEEPING OBLIGATIONS

CONCLUSION

NOTES

CHAPTER 6: Understanding the Payments Landscape in Cannabis Banking

INTRODUCTION TO CANNABIS PAYMENTS

THE BASICS OF CANNABIS TRANSACTIONS AND PAYMENTS

PAYMENT METHODS AND RISK CONSIDERATIONS

BUSINESS-TO-CONSUMER PAYMENTS

BUSINESS-TO-BUSINESS PAYMENTS

CONCLUSION

NOTES

CHAPTER 7: Cannabis Lending

DESCRIBING THE CURRENT LENDING NEEDS

TYPES OF LOANS AVAILABLE TO CANNABIS BUSINESSES

OVERVIEW OF THE LENDING LANDSCAPE

CONCLUSION

NOTES

CHAPTER 8: Marketing Strategies for Cannabis Bankers

IMPORTANCE OF MARKETING IN CANNABIS BANKING

UNDERSTANDING YOUR MARKET

DIGITAL MARKETING TECHNIQUES

NETWORKING AND PARTNERSHIPS

EDUCATIONAL MARKETING

EVENT MARKETING AND SPONSORSHIPS

COMPLIANCE-CENTRIC MARKETING

ANALYZING AND ADAPTING TO MARKET TRENDS

CONCLUSION

NOTES

CHAPTER 9: Competition

INTRODUCTION

COMPETITIVE STRATEGIES OF TRADITIONAL BANKS

THE RISE OF FINTECH COMPANIES

COMPETITIVE CHALLENGES AND OPPORTUNITIES

NOTES

CHAPTER 10: Indigenous Tribes – Challenges, Opportunities, and Financial Access

REGULATORY LANDSCAPE FOR TRIBAL NATIONS

FINANCIAL ACCESS AND BANKING CHALLENGES

LEGAL CHALLENGES

TRIBAL CANNABIS OPERATIONS

ECONOMIC AND SOCIAL IMPACTS

CURRENT ENVIRONMENT AND BANKING CHALLENGES

CONCLUSION

NOTES

CHAPTER 11: Cannabis Insurance and Its Impact on Bankers

INSURANCE OVERVIEW

UNDERSTANDING CANNABIS INSURANCE

REGULATORY LANDSCAPE

THE ROLE OF INSURANCE IN RISK MANAGEMENT

INSURANCE CONSIDERATIONS FOR BANKERS

CHALLENGES FACED BY BANKERS

CONCLUSION

NOTES

CHAPTER 12: Innovations and Future Trends

INTRODUCTION

CRB TECHNOLOGY OPTIONS

INTERNET OF THINGS (IOT)

CLOUD COMPUTING

OPEN BANKING APIs

CRYPTOCURRENCIES AND BLOCKCHAIN

ARTIFICIAL INTELLIGENCE

MISCELLANEOUS SOLUTIONS

INTERNATIONAL CANNABIS BANKING TRENDS

POTENTIAL FEDERAL LEGALIZATION EFFORTS

PREDICTIONS FOR THE FUTURE OF CANNABIS BANKING

NOTES

About the Authors

Index

End User License Agreement

List of Illustrations

Chapter 1

FIGURE 1.1 Flowchart of the cannabis plant and its primary components.

Chapter 2

FIGURE 2.1 Top-line comparison of banking institutions and credit unions acr...

FIGURE 2.2 New account opening for higher risk cannabis‐related businesses r...

Chapter 4

FIGURE 4.1 Total impacts projected to US economy from sales revenue and exte...

FIGURE 4.2 Estimates and projections of medical cannabis sales.

FIGURE 4.3 Overall industry outlook from practitioners remains strong.

Chapter 5

FIGURE 5.1 Decision hurdles bankers confront about banking cannabis.

Chapter 7

FIGURE 7.1 Actual and projected annual cannabis revenues (in billions).

Chapter 8

FIGURE 8.1 Actual testimonial from financial institution banking cannabis.

Guide

Cover

Table of Contents

Title Page

Copyright

Dedication

Foreword

Preface

Acknowledgments

Begin Reading

About the Authors

Index

End User License Agreement

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Cannabis Banking

Legal Frameworks and Practical Solutions for Cultivating Compliance

ERIN O’DONNELL

J. MICHAEL BEIRD

MERIDITH BEIRD

Copyright © 2025 by John Wiley & Sons, Inc. All rights reserved, including rights for text and data mining and training of artificial intelligence technologies or similar technologies.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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ISBN 9781394276264 (Cloth)ISBN 9781394276288 (ePub)ISBN 9781394276271 (ePDF)

Cover Design: WileyCover Images: © Macrovector/Shutterstock, © diane555/Getty Images

This book is dedicated to all the cannabis bankers who have taught us that innovation and perseverance can transform even the most challenging situations. Your commitment to navigating complex regulations, advocating for fair practices, and ensuring financial inclusion for cannabis businesses has paved the way for a more equitable and sustainable industry. We also dedicate this to the minority and female-owned businesses across the cannabis industry. Thank you for your courage, resilience, and unwavering dedication to breaking new ground. The Association for Cannabis Banking (ACB) is dedicated to supporting these important businesses through educational programs and scholarships.

Meridith’s Dedication

I’d like to dedicate this book first and foremost to my family: my parents, Mike and Daria, and to my sister, Allyssa. Their constant encouragement and guidance have led me to where I am today. I’d also like to dedicate this book to Jon Blome, whose love and support continue to inspire me.

Michael’s Dedication

I dedicate this book to my mother, Joyce, who taught me how to face adversity, pain, and challenges with perseverance and determination, not pity or capitulation. I also dedicate it to my wife, Daria, and my daughters, co-author Meridith and Allyssa, my Ninja Warrior daughter, who have collectively tolerated my consulting life for decades. Finally, I could not dedicate this book without acknowledging my brothers, Kermit and David, along with my sister-in-law, Lovie Beird, who have always inspired me by just being themselves.

Erin’s Dedication

This book is dedicated to my children – Madeline, Connor, and Aidan Handel – and to my parents, Cornelius and Patricia O’Donnell. To my family: Carolyn, Kathleen, Brian, Jeff, Melissa, Scott, and Liam, as well as the Colleano clan. Also, to Lisa Gilliard Bonn, who was taken from us way too early, as not a day passes that I do not think of you. Finally, for Tiger, our special kitty, and Ginger, our sweet 16 golden retriever, who will live in our hearts forever.

Foreword

THE IMPORTANCE AND VALUE of this book is not predicated on your stance on cannabis.

As you read this, the state in which you reside either allows medical or recreational marijuana (or both) or is likely to in the coming years. More than half the states have made the legislative decision to allow its denizens access to cannabis products. But perhaps you feel that cannabis products are a dangerous drug that deserves its Schedule I federal designation, no different than fentanyl. You may feel that cannabis is just a gateway drug to harder, more dangerous drugs like cocaine or heroin (which is ironic since those drugs are Schedule I narcotics, the same designation as marijuana, so they can hardly be deemed “more” dangerous …). There are studies that support this view of cannabis, and it is not for me to opine on the veracity of those claims.

Perhaps your view is that cannabis, with proper oversight and regulation, can have beneficial recreational or therapeutic benefits. Parkinson’s and glaucoma patients can certainly attest to their own results in using cannabis products to effectively manage the negative effects those diseases have on their bodies. For every study on the dangers of cannabis, there is one (or more) studies that highlight the medical and recreational benefits. Can cannabis be abused? Of course. But so can alcohol (or chocolate for that matter). The main issue is that certain states have deemed cannabis products to be legal in their state and yet, as of this writing, cannabis is still a Schedule I drug according to the Drug Enforcement Administration (DEA). It is a federal crime to grow, possess, sell, or distribute cannabis products with a tetrahydrocannabinol (THC) greater than 0.3%. This places everyone in the entire ecosystem of cannabis at risk of being completely legal in their state and yet completely illegal according to federal law. And there is no greater example of that than in how financial institutions are limited in their ability to provide basic banking services to anyone associated with the seed-to-sale process of growing, processing, and selling cannabis.

This book examines and provides valuable insight on this most important issue: how cannabis businesses and those that want to provide financial services to them navigate the current environment where state and federal laws run counter to each other. In those states where cannabis is legal, it is feasible that a cannabis business cannot have access to a bank account and perform legitimate transactions or have access to the same payment rails that convenience or liquor stores have. A farmer wishing to grow cannabis for hemp or THC products should have access to an ag production loan, no different than a tobacco farmer receives today. A dispensary selling THC products should not have to pay their employees in cash; especially since that cash is unlikely to be able to be deposited into a financial institution due to its obvious marijuana odor. Consider that a farmer that grows cannabis, a manufacturer that converts the plants into edibles, or the dispensary that sells the edibles to consumers cannot hire a plumber to come and fix the toilet. And why not? Because when the plumber accepts the cash paid for the service and deposits it in their bank account, they are written up as a possible criminal enterprise, as required by federal banking regulation, and subsequently finds their bank account closed. This is not hyperbole: there are many examples of this kind that occur in those states that have legalized cannabis.

Financial institutions are already well versed in how to properly bank high-risk businesses. They have robust controls to monitor high-cash businesses such as convenience or liquor stores. They have the expertise in managing agricultural loans where restrictions are placed on its cultivation, such as tobacco. They have expertise in payment processing for organizations that perform telemarketing and other high-risk enterprises. They are experts in understanding and managing government regulations and are regularly monitored to ensure that they are following all the rules. The financial institutions simply need to understand the cannabis business from seed-to-sale, the associated risks in providing banking services for cannabis organizations, and finally, what the state and federal regulations are governing their cannabis banking activities. This book provides a deep understanding of the cannabis business to bankers. And it provides cannabis businesses a look into the unique challenges that financial institutions face in delivering lending and deposit services to cannabis businesses.

Each financial institution can decide whether they will take on cannabis businesses as customers. Even if all state and federal laws were aligned, there are still some FIs that might choose to not bank any cannabis-related customers. And that is totally fine. It is no different than a bank who elects to not finance any hotels or offer checking accounts to grocery stores. It’s a business decision. But some banks are experts in servicing agribusinesses. And they would be well positioned to provide banking services to cannabis farmers. The same with banks that focus on manufacturing, or retail stores. Cannabis manufacturers and retailers should be a focus for them. Even still, there are banks operating that appear to be solely focused on cannabis, enabling the entire ecosystem from seed-to-sale. These are all business decisions, made with strategic plans and with the full oversight of their board of directors. The main issue is whether any financial institution that wants to bank cannabis businesses should be able to provide banking services and follow the associated regulations without fear of having federal regulators pulling the rug out from under them.

Until that day, it’s a bit of a minefield of contradictory rules and regulations between states and the US government. That is why this book is so important: it illuminates the landscape enabling the successful negotiation of that minefield. Whether you are a banking regulator, a banker, a cannabis business, or just someone who has taken a gummy and wants to settle in for some educational reading, you will find the information complete, well sourced, and supremely beneficial.

—David L. Peterson

Entrepreneur, author, and speaker David Peterson has inspired leaders to rethink how innovation happens in their organization. He helps business leaders foster a culture of innovation that ignites enterprise-wide creativity driving measurable growth. As the founder and CEO of Goldleaf Technologies, he brought electronic payments to community banks to power their business customers. David is also the author of Grounded: Anchor Management for Strategic Leadership and Effective Decision-Making. David currently serves as Chief Innovation Officer of First National Bankers Bank, a correspondent bank serving community banks throughout the Southeastern US. He serves on the board of several industry-related companies and associations. He is a serial entrepreneur, powering start-ups in retail and professional services.

Preface

OVER THE PAST DECADE, the United States cannabis industry has experienced growth and change. As more states legalize cannabis, businesses related to cannabis have flourished, playing a role in the growth of economies around the globe. Despite this progress, navigating cannabis banking remains complex and misunderstood due to regulatory hurdles and financial uncertainties. This book addresses the pressing need for guidance on cannabis banking, offering insights for financial professionals operating in this dynamic field.

This book aims to provide insight into cannabis banking, helping institutions that are either already banking cannabis or curious about how to possibly begin. By delving into banking practices, compliance standards, risk management, and market strategies specific to the cannabis industry, this book seeks to empower financial professionals in making informed choices. It also seeks to simplify banking procedures for those in the cannabis industry by educating and assisting them in accessing services.

This book was written for students, teachers, financial institutions, and regulatory bodies overseeing the banking aspects of the cannabis industry, and cannabis entrepreneurs seeking guidance on banking choices and a greater understanding of the regulatory framework of the cannabis banking industry.

It’s important to note that during the course of writing this book, cannabis was being considered for rescheduling by the US Drug Enforcement Agency; however, this decision has not yet been finalized. Therefore, throughout the book, we assume that cannabis is still a Schedule I drug. However, we do discuss implications in the cannabis industry should it become a Schedule III drug.

The text has been organized into 12 chapters. The first four chapters set up an introduction and baseline knowledge of the cannabis industry and the banking industry. The next seven chapters dive into more nuanced topics like risk management, payments, lending, marketing, competition, indigenous cannabis, and insurance for cannabis-related businesses, which will help financial professionals understand the issues beyond regulatory compliance and gain advanced insight into the industry. The final chapter discusses future trends in the industry and technologies that are currently being developed and our take on the innovations that are forthcoming and might create change in this industry.

Finally, the objective of this book is to share our practical knowledge, showcase areas that are currently changing, and create a framework for banking cannabis. This knowledge is not currently taught by formal education or training and that is why we thought this is an important book to write. However, practical knowledge on this subject doesn’t end here; in fact, it’s constantly evolving as the industry itself struggles to find the right balance between innovation and regulation, knowledge and curiosity. For consistency throughout the book, please note that we use the term “banking” to define transactional and operational processes including deposits, payments, lending, and other financial activities as a general, catch-all term, and apply these activities to all financial institutions, such as credit unions, thrifts, community banks, and fintechs, in addition to commercial banks.

Lastly, here are five websites that readers should bookmark in order to stay up to date on legislation and regulatory changes affecting the cannabis industry:

Marijuana Policy Project (MPP) (

https://mpp.org

)

Congressional Research Service (CRS) (

https://www.loc.gov/crsinfo

)

Network for Public Health Law (

https://www.networkforphl.org/?s=cannabis

)

Association for Cannabis Banking (ACB) (

https://the-acb.org/industry-news

)

National Conference of State Legislatures (NCSL) (

https://www.ncsl.org

)

Acknowledgments

AFTER SO MANY YEARS devoted to serving the financial services industry in many different roles, naming individuals that have contributed to the content, thoughts, and opinions in this book would take another book altogether. Dedicating the last two decades to educating professionals who work for institutions, and those who support the industry peripherally, has been a true labor of love for us. We believe that the knowledge that we have gained through hosting thousands of webinars, live streaming dozens of events and conferences in the US and Europe, and consulting directly with thought leaders in the industry every day, has likely equaled or exceeded what our students have learned.

First and foremost, a special note of gratitude to Kirsten Trusko, Founder – Emerging Markets Coalition (EMC), a partner of the Association for Cannabis Banking (ACB) and co-resident in New Mexico. Kirsten and the EMC provided a wealth of knowledge, research, and contacts critical for this book. Thank you also to Alicia Greer, CPA and Partner at Berndt Associates, and Jeffrey Storch – Attorney at BoardmanClark in Madison, Wisconsin. Your unparalleled support and advice over the years have made the path to this book possible. Thanks to Christy Olsen and Kevin McLauchlin of Cadence SEO. We never understood the importance of having solid marketing and SEO technical support until we needed it from Cadence to help keep the lights on.

We are especially grateful to the Board of Directors at the ACB for their guidance, support, and involvement in this rapidly growing industry. These valuable people include: Danielle Boyle, Dart Bank; Amanda Carbajal, Minerva; Dana Chaves, FinResults; Scott Dance, Primo Payments; Justin Fisher, RiskScout; Jennifer Germano, ICS Consulting; Radhika Lipton, RADD; Melissa Maranda, Lighthouse Biz Solutions; David Peterson, First National Bankers Bank; Tony Repanich, Shield Compliance; Alex Rodriguez, Conduit GR; Jennifer Salazar, Dart Bank; and Yamil Santiago, BCB Bank.

Special thanks go out to Ethan Kratt and Kristin Parker of RiskScout, without whose help we couldn’t have published our most recent research on what cannabis bankers are thinking. Thanks also to Lisa Ackerly, one of our many friends at Dart Bank. And a special thank you to our new friends in cannabis banking in New Mexico: Rep. Andrea Romero, a major force in advancing the legal cannabis industry in Santa Fe; Ben Lewinger, Executive Director – New Mexico Cannabis Chamber of Commerce; and David Swope, President/CEO – Better Business Bureau, New Mexico and Southwest Colorado. We can’t forget our editor at Wiley, Judith Newlin, for approaching us with the idea for this book and for her constant support throughout the process. And to the team at Wiley, Stacey Rivera, Delainey Henson, and Deborah Williams – for walking these authors through our first book. It’s been a pleasure working with all of you.

Thank you to my long-time friend, Dr. Caitlin Courtney, who allowed me the chance to learn about holistic medicine and see the medicinal effects of cannabidiol (CBD) and tetrahydrocannabinol (THC) firsthand. The opportunities you afforded me gave me the confidence and knowledge needed to step into the cannabis industry.

Special note of appreciation to Tom Brown, CEO – SecondCurve Capital and BankStocks.com, who has stood as a special mentor and friend over the decades. Your ongoing support and insights have always been a cornerstone of our careers, and for that, we thank you. Thank you also to Sue Harnett, leading executive advisor in financial services and former consulting client while CEO of Citibank, Germany. Your constant support has been a source of strength when we needed it most. To the Fuchsia House Honeys, friends and family in Allentown, Pennsylvania, and to the women of CannaChix, an ACB gathering of women interested in the cannabis industry, whose discussions gave us inspiration to dig deeper into all aspects of the business.

To our special speakers, family and friends, Jo Chern, Christina Dumlao, Marla Ellerman, Tammy Nagarajan, Cindy Orozco, Elizabeth Robillard, Reagan Sands, Terri Sands, Lisa Beck Schuck, Chris Van Dyck, and so many others. Your professionalism with personal flair has always been a major driver behind great customer feedback year-over-year, but more importantly it’s the friendships we share.

CHAPTER 1Understanding the Cannabis Industry

A BRIEF HISTORY OF CANNABIS

Before we jump into the rules and regulations surrounding cannabis banking, it is important to look at the basics. What is cannabis exactly, how have the political and social relationships with cannabis changed over the years, and where does cannabis currently stand in the eyes of the government? Let us get started!

The cultivation and use of the cannabis plant is not a new phenomenon. In fact, evidence of cannabis use dates back to around 2700 bce in China by Emperor Shen Nung, whose teachings and medical practices with the plant were passed down for generations by word of mouth before being recorded in a book on herbal remedies, written around the second century CE.1 Over time, the plant spread throughout Asia, into Europe, and by the sixteenth century, Spanish and English settlers were bringing it across to the Americas.

Within the United States, the cannabis plant has a long and complex history, with the first hemp law enacted in 1619. However, instead of a law banning the plant, which is more in line with what we see in the country today, this law actually required every farm in the colonies to plant hemp. At the time, hemp was a critical crop for the colonists, used for things like clothing, rope, paper, and even as a legal currency for some time in the colonies of Virginia, Pennsylvania, and Maryland.2 Hemp production eventually lost out in popularity to cotton, which provided a softer clothing option; but by that time, marijuana, as an extract of the hemp plant, was already commonly used in medicines and tinctures. It wasn’t until around the 1920s that a more recreational use for marijuana began to develop, the practice of which was primarily introduced by Mexican immigrants. With the initial rise in price of alcohol, followed shortly thereafter by prohibition, marijuana became a cheaper and more readily available alternative to drinking. Throughout the next decade or so, marijuana use became increasingly associated with Mexican immigrants – who the public resented due to the lack of jobs available during the depression – and the lower class, who were often seen as perpetrators of crime and violence. With the social stigma of marijuana now tainted, it wasn’t long until the government stepped in.3

History of the Regulation of Hemp and Marijuana

Hemp, and by extension marijuana, was largely regulated as any other plant for many years in the US. And while the social stigma had taken a hit, it wasn’t until the end of prohibition that it came back into the legal and political spotlight. With alcohol no longer being banned, the focus shifted to marijuana. By the early 1930s, the drug was being outlawed in cities all over the country, and states quickly started following suit – by 1931 it had been banned in 29 states. Federally, the US was hesitant to outlaw marijuana partly due to the medicinal uses of the drug being used and researched, and also partly due to the lucrative business coming from the hemp plant at large. However, there was no denying the shifting political focus and so the Marihuana Tax Act was passed in 1937. This act criminalized marijuana and created a tax on hemp, requiring official Marihuana Tax Act stamps for the importation and exportation of the plant. The aim of this act was to lessen or stop the use of marijuana for recreational purposes, but it resulted in some unintended consequences for the rest of the industry: the growth and exportation of hemp became much more difficult and expensive, leading to a decrease in production. Additionally, this all but stopped scientific studies on both the plant and the drug.4

Much like with prohibition, this did not stop the spread and use of marijuana, it simply got pushed underground and into fringe cultural groups. In the 1950s, marijuana became popular with the Beat generation, who favored a more Bohemian lifestyle; it also became connected with jazz enthusiasts following the song “Reefer Man” by Cab Calloway. In the 1960s and 1970s, marijuana was a common drug of choice for the hippy subculture as they saw it as a way to push back against the mainstream lifestyles.

Introducing the Controlled Substance Act (CSA)

In 1969, the Marihuana Tax Act was deemed unconstitutional after the court case of Leary v. United States.5 Leary argued that his registration to purchase tax stamps would be self-incriminating (and therefore a violation of the fifth amendment) due to the fact that the sale and transfer of the drug was illegal, so having to register for intent to possess or use the drug would be an immediate red flag for authorities. For a short time, that meant there was technically no federal regulation for marijuana. However, the US shortly thereafter passed the Controlled Substance Act of 1970, which once again made marijuana illegal nation wide, and it classified marijuana as a drug that is considered as hazardous and addictive as others such as heroin, peyote, and LSD (Lysergic Acid Diethylamide).6 Alongside promotions such as Nancy Reagan’s “Just Say No” campaign, marijuana was deemed a dangerous drug and one we needed to keep away from the public at all costs. However, in the 1990s, that ideology began to shift.

In 1996, California became the first state to adopt a medical marijuana program. Set up under the Compassionate Use Act, this new legislation allowed people with certain medical ailments to obtain and use marijuana as a treatment with medical supervision.7 Colorado followed suit just a couple of years later in 2000, and since then there has been a snowball effect of states opening their doors to the cannabis market. In 2013, marijuana again found itself in the headlines when the Deputy Attorney General at the time, James Cole, issued a memorandum (hereafter known as the Cole Memo) that essentially allowed for states to make their own decisions about the sale and distribution of marijuana and cannabis. The essence of the Cole Memo was this: the federal government has an interest in the bigger picture of marijuana, and as long as their main focus and goals are not impeded, states were henceforth allowed to implement programs for legal marijuana sales and distribution, if they so choose to.8 (We will be talking about the Cole Memo in depth in Chapter 3.)

Since 2013, individual states have regularly been voting to adopt cannabis programs, whether for medical or recreational use. 2013 was also the first year that public support for cannabis legalization surpassed 50%, according to Gallup poll findings. And their research has shown that support has only continued to grow – as of October 2023, the nationwide support for cannabis legalization was up to a whopping 70%. More importantly, these numbers are reflected in the population regardless of demographics or current state legality. While self-identified conservatives and Republicans are the groups with the lowest percentages in favor, even these groups now show majority support for the cause (with 52% and 55%, respectively).9

Health Benefits of Marijuana

Additionally, more health studies are being conducted and are educating on how marijuana can be used for certain health ailments, such as epilepsy, Alzheimer’s, Amyotrophic Lateral Sclerosis (ALS), chronic pain, and more. These are critical for marijuana’s path to legislation for one simple reason: marijuana is still classified as a Schedule I drug by the Drug Enforcement Agency (DEA). This means that under federal law, marijuana is found to be a substance with a high probability of addiction and containing no medicinal benefits. While we know that the hemp plant has been used for medical treatments for centuries, it is crucial for the drug to be studied and measured against today’s health standards and best practices. In early 2024, the Department of Health and Human Services sent a letter to the DEA recommending that they consider rescheduling marijuana to Schedule III. By definition, this category of drugs has a much lower potential for dependence and abuse, with examples such as Tylenol with Codeine, Anabolic Steroids, and Testosterone.10 While this would be a critical step for the eventual legalization of marijuana on a federal level, it is just that – a step. This is not meant to magically open doors for dispensaries around the country but is instead a way to change the way that marijuana as a drug is viewed in the eyes of the law.

CANNABIS BASICS

What do we mean when we talk about “cannabis”? The term is colloquially used as a more acceptable substitution for the word “marijuana,” which still has a slightly negative connotation in today’s society. However, there is a scientific difference between these terms, and it is vital to understand how they differ. Dissecting the cannabis plant into its individual components may seem like a tedious task, but it is crucial when discussing federal and state legalities.

Components of Cannabis

Cannabis, while often used as a catchall term, is also the name of a plant genus under the Cannabaceae family. The species of Hemp and Marijuana are found within the Cannabis genus. Cannabis plants are made up of around 80–100 cannabinoids, or chemical compounds, with the two main ones being cannabidiols (CBD) and delta-9 tetrahydrocannabinols (THC). While both CBD and THC have calming effects on the body, THC is the cannabinoid strain that produces a psychoactive effect. This is why CBD is less regulated as a product – because there is no “high” associated with it. The biggest difference between the hemp and marijuana plant is the amount of THC produced – hemp contains less than 0.3% THC by weight, whereas marijuana contains more than 0.3% THC11 (Figure 1.1).

FIGURE 1.1 Flowchart of the cannabis plant and its primary components.

Source: Association for Cannabis Banking, 2024

The plant production does not stop there, though. Other strains of cannabinoids have started to hit the market as well: delta-8 THC, CBG (Cannabigerol), CBN (Cannabinol), and CBC (Cannabichromene), just to name a few (to learn more about cannabinoids and their specific effects on the body, we suggest talking with your local budtender or with a certified herbalist). With all these acronyms flying around, it’s easy to see how this space can seem confusing and convoluted. While hemp-based CBD is legal at the federal level, it is important to note that states still have the final say over what they sell and the restrictions imposed. For example, as of 2024, Idaho only allows hemp-derived CBD products containing 0% THC.12 This is in contrast to most other states that allow CBD products as long as they contain less than 0.3% THC, as dictated by federal allowance.

Hemp has historically been used for many products, including textiles, fabrics, paper, ropes, seeds, etc. However, its production and sale were greatly limited by the Marihuana Tax Act of 1937 and eventually it became federally outlawed under the Controlled Substance Act of 1970 as a Schedule I substance. It wasn’t until the Farm Bill passed in 2014 that hemp was allowed to be grown, as long as it was for research purposes by a higher education institution or the state department of agriculture.13 Four years later, the passing of the 2018 Farm Bill saw hemp removed from the list of controlled substances altogether, legalizing hemp growth within the US once again.14

When discussing cannabis in legal terms, it is important to understand these key differences and the laws that are in place, both federally and within individual states. These distinctions and the laws that are constantly being changed or updated are one reason why so many financial institutions are hesitant to bring on customers from cannabis-related businesses (CRBs). For those that do bank CRBs, it is critical for them to understand the basics of cannabis and keep up to date with their state laws and allowances.

ECONOMIC IMPACT

Cannabis legalization poses many questions of risk vs. reward for states. One of the biggest selling points for states is that recreational cannabis industries open up job opportunities, and job opportunities create taxable enterprises. A congressional report published in November 2023 listed four categories for job potential within recreational cannabis businesses: cultivators and producers, manufacturers and processors, testers, and retailers. The impact that these jobs create in local communities is not insignificant. Additionally, they argue that industries such as commercial real estate could also benefit from recreational cannabis as these businesses could rent spaces that were previously sitting empty – a phenomenon enhanced by the pandemic.15 While we do not know all the ways that this new industry can or will impact auxiliary industries, it is crucial to note that the creation of a recreational cannabis market does not happen in a vacuum. It is important to keep this in mind when discussing what a federal legalization of cannabis might look like, as it could have effects – positive or negative – on other industries that we have not yet seen or anticipated.

Taxation of Recreational Cannabis

Even though taxation of recreational cannabis has brought in substantial money for each state, it is not an easy, one-size-fits-all solution for fundraising. Since there is no federal oversight for cannabis sales, it is up to every state individually to decide on a taxation scheme to use. This will likely be upended if and when cannabis becomes legal at the federal level. While states would still be able to impose their own sales tax, a level of uniformity will be needed to ensure fair distribution and limit the cannabis sales across state lines. This has also been a difficult amount to establish for states. The taxation and economic benefits have been primary driving factors for states introducing a recreational cannabis program. But if the taxes are too high, they run the risk of customers turning to illegal black-market marijuana that has no sales tax, or they risk turning away canna-curious customers who are intimidated by the lofty price tags. The novelty of this industry poses many challenges for those involved, and for some states these unknown factors are too much of a risk. For those who have taken on that risk, the reward seems to have proven its worth, at least so far, as the industry continues to grow year over year.

The legalization of marijuana has been a lucrative business for the states that have taken this step. In 2014, Colorado’s first year selling marijuana recreationally, the state brought in more than $70 million just from taxation alone.16 Since then, the revenue brought in from recreational cannabis sales has continued to grow, and each state that has entered the market has also seen how beneficial these sales can be. From the onset of recreational sales in 2014 through the end of 2022, the total tax revenue brought in nation wide surpassed $15 billion.16 And money alone is not the only positive outcome. Between 2017 and 2023, marijuana-related jobs within the US more than tripled, according to a 2023 Congressional report. They also suggest, however, that these numbers are largely due to new markets being opened in states around the country. In contrast, older markets, such as those in Colorado or Oregon, have recently seen a slight decline in job production and income.15 Additionally, it is important to note that federal economic data does not include federally illegal jobs, so the job growth reports being researched and created are likely understated.

THE CANNABIS INDUSTRY OVERVIEW

Every cannabis business falls into one of three categories: Tier 1, Tier 2, or Tier 3, as created by Steven Kemmerling. There are no hard lines distinguishing these tiers, and there is some debate around which tier certain types of businesses would fall under. But generally speaking, the tiers are defined as such:

Tier 1: Direct

Tier 1 CRBs are the businesses that are plant-touching and tend to be licensed operators. Some examples of Tier 1 businesses could include:

Cultivators (plant growers)

Processors (those who take the raw plants and turn them into marketable products)

Dispensaries (the brick-and-mortar stores that sell cannabis products)

Testing laboratories (ensuring the safety of cannabis products and adhering to quality standards)

Tier 2: Indirect

Tier 2 CRBs are indirectly associated with cannabis, though they still tend to receive substantial income from the cannabis industry and other Tier 1 businesses. However, it is not typically necessary for Tier 2 businesses to be licensed, as is common for Tier 1. Some of the examples within this tier include:

Hydroponic suppliers (those who produce the products necessary for plant growth)

Packaging manufacturers (those who produce tamper-proof packaging in accordance with regulations in the market or in the individual state)

Security services (those who sell security systems to Tier 1 businesses or provide security officers to be on location)

Marketing consultants (who work with Tier 1 businesses to help build their marketing strategy while maintaining compliance with both state and advisory regulations)

Tier 3: Auxiliary

The most indirect of the CRB tiers is Tier 3. These businesses may have some ties to the cannabis industry, but they do not make the majority of their income from Tier 1 businesses, as those in Tier 2 might. Some Tier 3 businesses might include:

Lawyers/accountants/educators (these companies may take on CRB clients, either Tier 1 or Tier 2, but their practices likely contain clients from a plethora of industries, and therefore any income made from cannabis is minimal)

Property management companies (those who rent space to dispensaries or factories for production and sale of cannabis products)

Utility companies – water, electricity, waste removal, etc. (similar to product management companies, utility companies are also connected to the growth and sale of cannabis, though they do not represent the bulk of income for said utility companies)

As previously stated, these tier distinctions can be pretty blurry, especially between Tiers 2 and 3, and there can be a fair number of businesses that could fall into either category. For example, until cannabis becomes federally legal, financial services could fall into Tier 2 or Tier 3. Their designation would depend on the services the individual company offers. For example, some smaller banks and credit unions are taking on CRBs as customers as they see the potential within this space and are willing to do the due diligence required to take on the risk associated with CRBs. These financial institutions could then be categorized as Tier 2, depending on how involved they are, what products and services they are offering Tier 1 businesses, and how much income they are subsequently earning from the dispensaries, growers, etc. However, larger banks are not as keen to jump into this space and do not want to be associated with cannabis at this point in time. While they may bank customers indirectly related to the cannabis industry, such as law firms who may have a dispensary as one of their clients, they do not work with the CRBs directly and will not take them on as customers. These banks would then fall under the Tier 3 distinction.

While these tiers tend to be defined by the amount of income earned from working with plant-touching (Tier 1) businesses, another way to distinguish them is based on their perceived risk. For Tier 1 businesses that work with plants or products that are illegal at the federal level, there is a high risk associated with these businesses. As you move further away from the cannabis plant itself, the perceived risk diminishes. This is a primary reason why many financial institutions refuse to work with Tier 1 CRBs, but they may work with Tier 2 or 3 CRBs. There is much less risk associated with a marketing firm than there is for a dispensary.

CONCLUSION

The captivating history of cannabis spans across thousands of years, various cultures, and different parts of the world. It started with Emperor Shen Nung’s use in China around 2700 bce and traveled through Asia, Europe, and eventually made its way to the Americas by the sixteenth century. Cannabis has held a place in shaping the history of the United States; its story is intricate and ever-changing. Initially an essential crop for the newly founded colonies, hemp served purposes from clothing to currency. However, over time there was a shift toward focusing on the recreational aspects of cannabis rather than industrial hemp. This change led to a series of adjustments and social adaptations.

The legal environment surrounding cannabis in the United States has been turbulent, to say the least. While early colonial laws mandated hemp cultivation, attitudes shifted drastically by the mid-twentieth century due to marijuana being associated with immigrant communities and lower socioeconomic classes – resulting in its prohibition. The Marihuana Tax Act of 1937 marked a turning point as it introduced regulations that significantly impacted both industrial hemp production and cannabis research. Despite these challenges, cannabis continued to be used, gaining importance within various subcultures over time.