The Impact Of The SAFE Banking Act Failure

Key takeaways

• The SAFE Banking Act is a bill designed to allow cannabis companies to access mainstream financial services, as it remains illegal at a Federal level
• The bill has so far failed to pass the Senate three times, making cash management a challenge for businesses in the cannabis industry
• The lack of access to banking is likely to continue to be a drag on the potential gains for cannabis stocks, but that doesn’t mean they’re not worth considering for your portfolio

Cannabis is controversial, but nevertheless it’s become more and more mainstream all the time. 37 states have now legalized the use of cannabis for medical purposes, and 21 of those have also legalized for recreational purposes.

But here’s the rub for cannabis companies.

Cannabis remains illegal at a federal level. That means that businesses operating in the space within jurisdictions that have legalized it are fine, but as soon as they try to go national, they run into some major roadblocks from Uncle Sam.

One of the biggest impacts to business operations is the fact that this means that cannabis companies don’t have access to the mainstream banking system. Banks aren’t able, or willing, to offer services that would allow a company to transfer money made from the sale or production of cannabis, all across the country.

From a federal standpoint, this could be perceived as proceeds of crime and opens up potential criminal implications like wire fraud. For the notoriously risk averse banking system, this is a big nope from them.

So what does this all mean for cannabis stocks? Well, it makes things challenging, but it hasn’t stopped them yet. In fact, many cannabis companies have grown substantially over recent years.

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What is the SAFE Banking Act?

The SAFE Banking Act was first introduced in the United States Congress in 2019. The aim is to fix this problem, by providing a safe harbor for financial institutions that work with state-legal cannabis businesses.

The current status quo is a big issue for these companies and creates difficulty accessing banking services, such as checking and savings accounts, loans, and lines of credit.

Specifically, the bill would prohibit federal banking regulators from penalizing or restricting financial institutions that provide services to cannabis companies, as long as they’re operating in compliance with state laws.

This would allow these businesses to access the traditional banking system, which would help them to better operate, grow and expand their businesses.

The bill has been passed by the House of Representatives in 2019 and 2020, but it has failed to pass the Senate three times now. This is even though two of those occasions saw it included as part of a wider piece of legislation.

How do cannabis companies manage their finances?

So if you’re a cannabis company and you don’t have access to traditional banking services, what do you do? Well, you have to find alternative ways to manage your finances. Here are some of the ways they aim to get around it:

Cash only

Without access to bank accounts, many cannabis companies are forced to conduct all of their financial transactions in cash. This can be a major challenge, as it can make it difficult to track income and expenses, and can also create security risks.

Would you want to haul around your weekly takings in a duffel bag?

Checks and prepaid cards

Some cannabis companies use alternative banking services, such as check cashing services or prepaid debit cards, to manage their finances. However, these services can be expensive and they generally don’t offer all of the features of traditional banking services.

DIY banking solutions

Some cannabis companies have created their own internal banking systems to manage their finances. For example, they may set up a system of internal accounting and record-keeping, or use a system of cash management.

Payment processors

Some cannabis companies partner with third-party payment processors that can handle their transactions, such as credit card or e-check processing. However, these payment processors may charge high fees, and the companies may have to pay a high premium on their transactions.

Not only that, but they have the ability to shut off access to the funds at any time, should they perceive any form of violation or security risk.

Crypto

Some cannabis companies have started accepting and paying with cryptocurrency as an alternative to traditional banking services. Cryptocurrency transactions are decentralized, which makes them difficult to trace, and are also relatively fast and cheap.

All the above methods however, are not without risks and challenges, and some of them may not even be legal in certain states. Crypto companies have to tread super carefully to make sure they stay on the right side of the law.

What does the failure to pass the SAFE Banking Act mean for cannabis stocks in 2023?

The failure of the SAFE Banking Act to pass the Senate isn’t good news for cannabis stocks. The lack of access to traditional banking services is going to continue to be a drag on the pace at which they can grow and expand their businesses.

The failure to pass the act also means that cannabis companies continue to face the risks and costs of operating as a cash-only business, which can lead to increased security concerns and difficulties in tracking income and expenses, as well as legal issues related to money laundering and tax evasion.

For investors, this is a hurdle that makes some understandably nervous to invest in cannabis stocks. Until this issue is sorted, there’s going to be a cap on how much companies in the vertical are able to grow, and therefore how much the stock prices are able to increase.

The bottom line

Cannabis is a real growth industry (geddit?) but it’s not without it’s challenges. Access to mainstream banking services is one of the key hurdles that the sector needs to overcome, if it’s going to fulfill its potential for investors.

The SAFE Banking Act might eventually pass, but it’s also worth considering how the attitudes towards the legalization or cannabis are changing as well. Over time, we may eventually see cannabis become legalized at a Federal level.

If this were to happen, the SAFE Banking Act wouldn’t be required as cannabis companies would be able to access financial services without concern. Still, this is likely not something we’ll see in the short term.

Even so, cannabis stocks represent an exciting industry, and many investors are prepared to look past the downsides and focus on the opportunities.

If that’s you, consider our AI-powered Guilty Pleasures Kit. We use the power of AI to invest in a range of different ‘sin stocks’. Every week our AI predicts the performance for the coming week for a range of different sectors and individual stocks, and then rebalances the portfolio accordingly.

It means you can gain access to investments in companies that might include Tilray Cannabis, Playboy, Lockheed Martin and British American Tobacco. Not only can this provide diversification to your portfolio, but companies like this have a reputation for staying strong during a recession.

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