Key learning points
- The SAFE Banking Act is a bill designed to allow cannabis businesses access to mainstream financial services as it remains illegal at the federal level
- The bill has failed the Senate three times to date, making cash management a challenge for cannabis industry companies
- The lack of access to banking is likely to continue to hamper the potential gains for cannabis stocks, but that doesn’t mean they aren’t worth considering for your portfolio
Cannabis is controversial, yet it is becoming more and more mainstream. 37 states have now legalized the use of cannabis for medical purposes, and 21 of those have also legalized it for recreational purposes.
But here’s the problem for cannabis companies.
Cannabis remains illegal at the federal level. That means companies operating in the space within jurisdictions that have legalized it are fine, but once they try to go national, they run into some major Uncle Sam roadblocks.
One of the biggest business implications is the fact that this means cannabis businesses cannot access the mainstream banking system. Banks are unable or unwilling to provide services that allow a company to transfer money earned from the sale or production of cannabis nationwide.
From a federal standpoint, this can be viewed as proceeds of crime and opens up potential criminal implications such as wire fraud. For the notoriously risk-averse banking system, this is a big no from them.
What does all this mean for cannabis stocks? Well, it makes things challenging, but it hasn’t stopped them yet. In fact, many cannabis companies have grown significantly in recent years.
At Q.ai, we include cannabis stocks in our Guilty Pleasures kit, along with other “vice stocks” such as alcohol, tobacco, guns, and sex-positive companies. Interested? Download the Q.ai app for free to try it out.
What is the SAFE Banking Act?
The SAFE Banking Act was first introduced in the US Congress in 2019. Its goal is to solve this problem by providing a safe haven for financial institutions that work with state-legal cannabis businesses.
The current status quo is a major problem for these companies and creates difficulties in 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 limiting financial institutions that provide services to cannabis companies, as long as they operate in accordance with state laws.
This would allow these companies access to the traditional banking system, which would help them to better function, grow and expand their business.
The bill was passed by the House of Representatives in 2019 and 2020, but has now failed to pass the Senate three times. This is despite the fact that on two of those occasions it was included as part of a wider piece of legislation.
How do cannabis companies manage their finances?
So if you’re a cannabis company and don’t have access to traditional banking services, what do you do? Well, you need to find alternative ways to manage your finances. Here are some of the ways they aim to get around it:
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 it can also pose security risks.
Would you like to carry your weekly intake in a duffel bag?
Checks and prepaid cards
Some cannabis companies use alternative banking services, such as check cashing or prepaid debit cards, to manage their finances. However, these services can be expensive and generally do not offer all the features of traditional banking services.
Do-it-yourself banking solutions
Some cannabis companies have created their own internal banking systems to manage their finances. For example, they can set up a system of internal accounting and administration, or use a cash management system.
Some cannabis companies work with third-party payment processors that can handle their transactions, such as credit card or e-check processing. However, these payment processors can charge high fees and the companies may have to pay a high premium for their transactions.
Not only that, but they have the option to cut off access to the funds at any time should they perceive any kind of breach or security risk.
Some cannabis companies accept and pay with cryptocurrency as an alternative to traditional banking services. Cryptocurrency transactions are decentralized, making them difficult to trace, and relatively fast and cheap.
However, all of the above methods are not without risks and challenges, and some may not even be legal in certain states. Crypto companies need to be super careful to make sure they stay on the right side of the law.
What does not passing the SAFE Banking Act mean for cannabis stocks in 2023?
The Senate’s failure to pass the SAFE Banking Act is not good news for cannabis stocks. The lack of access to traditional banking services will continue to hinder the pace at which they can grow and expand their businesses.
Failing to pass the law also means that cannabis companies will still face the risks and costs of operating as a cash-only company, which could lead to greater security concerns and difficulties tracking income and expenses, as well as legal issues related to money laundering and tax evasion.
For investors, this is a hurdle that understandably makes some nervous about investing in cannabis stocks. Until this issue is resolved, there will be a cap on how much companies in the vertical sector can grow, and therefore how much stock prices can rise.
it comes down to
Cannabis is a real growth industry (geddit?), but it’s not without its challenges. Access to mainstream banking services is one of the major hurdles the industry must overcome if it is to fulfill its potential for investors.
The SAFE Banking Act could eventually pass, but it’s also worth considering how attitudes toward legalization or cannabis are changing. In time, we may eventually see cannabis legalized at the federal level.
If this happened, the SAFE Banking Act would not be necessary, as cannabis companies would have worry-free access to financial services. Still, this is probably not something we’ll see anytime soon.
Still, cannabis stocks represent an exciting industry, and many investors are willing 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 various sin stocks. Each week, our AI predicts performance for the week ahead for a range of different sectors and individual stocks, rebalancing the portfolio accordingly.
It means you can access investments in companies such as Tilray Cannabis, Playboy, Lockheed Martin and British American Tobacco. Not only can this diversify your portfolio, but companies like these have a reputation for staying strong during a recession.
Download Q.ai today for access to AI-powered investment strategies.