As things stand today, the majority of financial institutions, including essentially all major banks, remain reluctant to do business with cannabis, and cannabis adjacent, businesses while the plant remains illegal under federal law. In addition, even when banking services (such as deposit accounts) are available, access to funding for cannabis-related businesses remains constrained. In its current form, the SAFER Banking Act is aimed mostly at expanding access to traditional banking, but it does not extend protections to ancillary capital markets participants that support the broader ecosystem.

There are very real challenges that the SAFER Banking Act attempts to tackle. Many state-legal cannabis businesses have difficulty accessing (or affording) deposit accounts, lines of credit, and other financial services in the cannabis industry, as most major banks remain unwilling to undertake the regulatory burden of complying with FinCEN's requirements (https://tinyurl.com/baup4u5b) for providing banking services to cannabis-related businesses.

Failure to abide by those requirements exposes financial institutions to significant risk under federal law, and most financial institutions have made the decision that providing services to state-compliant cannabis businesses is simply not worth the risk.

The SAFER Banking Act, which has generated support on both sides of the aisle, aims to expand access to traditional financial and banking services by creating broader and less onerous safe-harbor protections. For example, the Act provides a "safe harbor" from certain criminal, civil, and administrative penalties — including criminal, civil, or administrative forfeiture — to financial institutions, lenders, insurers, and others serving the cannabis industry, ensuring they are not penalized for offering services to state-legal cannabis businesses, and extends protections to mortgage lending, payment processing, and more.

The Act also creates common-sense standards for banks and credit unions to maintain customer relationships and to expand access to deposit accounts for underbanked groups, such as state-legal cannabis businesses.

The Act also addresses some of the continued challenges faced by hemp-related businesses, acknowledging that, despite hemp's legalization under the 2018 Farm Bill, some hemp businesses continue to have difficulty gaining access to traditional financial and banking services (especially businesses involved in the sale of hemp-derived CBD products, due to uncertainty about the legal status of some of those products). The SAFER Banking Act requires each federal banking regulator to update guidance related to providing financial services to legitimate hemp-related businesses and hemp-related service providers.

While some banks, credit unions, and other financial services providers currently serve the industry, the majority of state-legal medical or recreational cannabis businesses do not participate in traditional banking and financial services due to cannabis' continued illegality under federal law.

Indeed, only about 10% of all U.S. Banks and about 5% of all credit unions provide cannabis-related businesses with accounts, which, to offset onerous compliance costs, often impose onerous service fees (https://tinyurl.com/4ukaetnf). See, "High & Dry: Banking crisis to further choke funding for cannabis sector," Reuters, March 24, 2023.

Industry watchers anticipate the SAFER Banking Act could address many of these issues by:

•Reducing safety risks associated with dealing with large amounts of cash, which makes cannabis businesses vulnerable to theft, fraud, and violence.

•Increasing access to capital and credit for cannabis businesses, including small and minority-owned business, which often face difficulties in obtaining financing.

•Improving the transparency and accountability of the cannabis industry by enabling financial institutions to track, report, and comply with anti-money laundering laws.

•Stimulating the growth and development of the cannabis industry and its related sectors (such as real estate) by normalizing financial transactions for cannabis businesses and by creating more opportunities for investment, acquisition, leasing, and expansion of cannabis properties.

Despite these potential benefits, there are still important industry-wide issues the SAFER Banking Act does not fully address or resolve. Most significantly, the Act does not affect cannabis' legality under federal law. Rather, the Act only seeks to resolve the tension between federal and state law with respect to banking, lending to, and insuring state-legal cannabis businesses. This means that cannabis businesses and consumers will continue to face legal risks and uncertainties even if the SAFER Banking Act is passed into law.

In addition, while the SAFER Banking Act provides comprehensive protections for banks and credit unions, it does not include specific protections for other capital markets participants and activities that are part of the same ecosystem. As a result, some industry watchers and critics of the Act have raised concerns that it does not go far enough with respect to expanding access to credit and other sources of capital, which is essential given that the state-legal cannabis industry is heavily regulated and, thus, requires a lot of capital.

This is of particular concern to small and minority-owned businesses seeking to compete with much larger multi-state operators (often referred to as MSOs) in states like New York, which contain significant restrictions on who can make investments in social-equity applicant owned businesses, and on what terms. This leaves those operators in a difficult position of having a smaller pool of equity investors while, at the same time, having constrained access to credit.

The crux of the issue is the limited definitions of "financial service" and "depository institution" in the provisions of the Act providing safe-harbor and other protections under federal law. These definitions do not explicitly include Securities and Exchange Commission-regulated businesses or capital markets activities such as investment banking, other broker-dealer activity, non-bank direct lending, asset management, custody of securities, and listings on U.S. stock exchanges, thereby limiting the bill's scope and effect. Therefore, one solution lawmakers could consider in the 2024 version of the bill, would be to define "financial service" and "depository institution" more broadly to include such industry participants.

Although the SAFER Banking Act enjoys bipartisan support, it is in no way universal. A number of obstacles still remain, including the challenges of reaching consensus in the Senate and moving the bill through a Republican-controlled House. It also remains to be seen what impact, if any, the Food and Drug Administration's recent recommendation (https://tinyurl.com/ysuurcpk) to reschedule cannabis under federal law would have on these efforts.