We’re closer than ever to banking reform related to the cannabis industry

Regular Digest readers know that we believe legal marijuana is one of the biggest investment opportunities of this generation. A new wave of legalization has already — and will continue to — create massive stock winners. Over the last several quarters, we’ve seen piling evidence that this investment trend is only getting bigger. Many of these stories we’ve bought to you here in the Digest.

Matt McCall is our resident marijuana expert and the editor of the newsletter Investment Opportunities. Here’s what he wrote to his subscribers about this wave of bullish news:

If you’ve been reading our work for more than a few months, you know the domino theory is alive and well in the legal marijuana business. Every few months, another domino falls in the direction of widespread marijuana legalization and huge gains for us as investors. Thanks to the sea change in how people view marijuana, legalization all over the world is an unstoppable trend … and one of our “core” long-term investment themes.

***Another key domino involving banking appears to be tipping over — and this one would be huge

In our January 23rd Digest, we pointed toward a key issue affecting the marijuana industry: how marijuana’s illegal status under federal law prevents the industry from being able to access the traditional banking system. From that Digest:

… there’s one major headwind facing legalized marijuana — the U.S. government. Marijuana is still illegal on the federal level. In fact, the feds treat marijuana as a controlled substance equal to heroin.

Now, you might read that and say, “Well, what does that matter? Marijuana stock-prices are climbing. States are legalizing. So what impact does the federal government have anyway?”

A huge impact.

You see, with marijuana still illegal under federal law, getting banks to accept deposits from marijuana-related companies is extremely difficult. That’s because any bank that does business with marijuana companies could be charged with “aiding and abetting” — which is a federal crime.

… in order for the marijuana industry to make its next quantum leap, banks need to be in on the game.

***This banking challenge is finally being addressed. Today, the House Financial Services Committee is holding a hearing to examine the challenges that marijuana businesses face when trying to access banking services

Titled, “Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses,” the hearing is happening today before a subcommittee of the House Financial Services Committee. More than likely, it will be the first in a series of committee-level actions on marijuana reform that are addressed by the House.

The discussion will in part focus on the fears held by many financial institutions — namely, that they’ll violate federal money laundering and drug laws if they work with marijuana companies. This concern has prevented the big banks from servicing the marijuana industry in any reasonable way up to this point. The result as been all-cash operations for many marijuana companies.

For instance, look at California …

The state legalized cannabis in 2016. However, most traditional banks in California won’t touch the roughly $5 billion a year from legal marijuana transactions that occur within the state. For the big banks, the risk of federal charges simply isn’t worth the potential profits.

So, marijuana companies have had to find other solutions — one of which has been credit unions. These not-for-profit organizations are more community-focused and are more willing to accept the risks that come with servicing cannabis companies. Presently, there are only five credit unions in California that work with marijuana clients. However, they’re all closed to new customers and have long waiting lists.

On the national level, a total of 486 facilities now accept deposits from cannabis businesses. That’s up from roughly 100 in mid-2014. But even with this increase, the overall lack of banking access has been a significant headwind for the marijuana industry.

***But as today’s hearing suggests, real banking reform could be just around the corner

We’re eager to learn what news comes of today’s hearing. Yet whatever the outcome, we anticipate reform will be coming — and potentially soon.

Last week, Forbes reported on recent comments from Rep. Denny Heck (D-WA):

“When we introduced this bill six years ago, we warned that forcing these businesses to deal in cash was threatening public safety. No hearing was given,” Rep. Denny Heck (D-WA) said in an email, referring to marijuana banking legislation he and Rep. Ed Perlmutter (D-CO) have filed for the past several Congresses.

“Chairwoman Waters has made it one of her first priorities to address this urgent and overdue issue, demonstrating that she understands the threat to public safety and the need for Congress to act,” Heck said of the committee’s new leader. “We have a bipartisan proposal to allow well-regulated marijuana businesses to handle their money in a way that is safe and effective for law enforcement to track. I am eager to get to the work of refining it and passing it into law.”

This isn’t the only example of the increasing federal support of, or request for clarification on, the relationship between banking and marijuana. For instance, last year, Treasury Secretary Steven Mnuchin suggested before a House committee that he supports letting marijuana businesses hold profits in banks.

Then, there’s Federal Reserve Chairman Jerome Powell saying that gap between state and federal marijuana laws (which is growing more glaring as an increasing number of states legalize marijuana) “puts federally chartered banks in a very difficult situation … It would great if that could be clarified.”

And third, last month, Joseph Otting, the Comptroller of the Currency, called on Congress to “act at the national level to legalize marijuana if they want those entities involved in that business to utilize the U.S. banking system.”

***All of this support seems to be pointing toward one eventual outcome — the passing of the STATES Act

From Matt’s February issue of Investment Opportunities:

STATES is short for Strengthening the Tenth Amendment Through Entrusting States, and the Act is a bipartisan bill put together by Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA). The legislation was introduced last June. If passed, it would amend the Controlled Substances Act.

This is big because the federal prohibition would be eliminated in states that legalize marijuana. As long as residents follow their state’s laws on marijuana, the federal government would not be able to intervene.

There are a number of reasons this bill is so important. One of the biggest is that it will likely give U.S.-based marijuana companies the ability to bank just like all other legal businesses. Instead of having to sit on hordes of cash or pay astronomical fees to the few banks that allow marijuana checking accounts, companies will have access to traditional banking.

The odds of the bill getting passed this year are very high. I think it is almost a done deal. And it would be the first major step toward federal legalization of marijuana.

If you’re a marijuana investor, we suggest you pay attention to news from today’s hearing. It could be that we’re witnessing the beginning of the push that finally makes banking accessible to the cannabis community. When that happens, it will be a watershed moment for marijuana, and by extension, cannabis investors. It appears we’re closer than ever to that happening.

Have a good evening,

Jeff Remsburg