Did the US Government Inadvertently Just Fund the Cannabis Industry?

Although federal regulations make providing banking services to the legal cannabis industry a regulatory burden, some banks have opted to offer financial products to regulated cannabis businesses. One such institution was Signature Bridge Bank, which was seized by federal regulators earlier this year after suffering a liquidity crunch tied in part to investments in the cryptocurrency market.

On March 12, 2023, the New York State Department of Financial Services took possession of Signature Bridge Bank to protect depositors and appointed the Federal Deposit Insurance Corporation (FDIC) as the bank’s receiver. The FDIC, in turn, transferred all the deposits and nearly all the assets to Signature Bridge Bank, a full-service bank operated by the FDIC, while it looked for potential bidders for Signature Bridge Bank.

On March 19, the FDIC announced Flagstar Bank, a wholly-owned subsidiary of New York Community Bancorp, as Signature Bridge Bank’s acquiring institution for almost all deposits and some loan portfolios. Around $60 billion in loans remained in the FDIC receivership and the FDIC said it would cover about $4 billion in deposits related to digital banking assets.

Mina Mishrikey, head of the investment team at Merida Capital Holdings, a private equity firm investing exclusively in the cannabis and hemp industries, noted on the Alpharoot podcast that the seizure put the federal government in the business of providing financial services to the cannabis industry, despite the continued illegality of marijuana at the national level.

“The irony is that the US government is now banking cannabis, whether they know it or not, because they took over Signature Bank,” Mishrikey said.

Highlighting the Importance of the SAFE Banking Act’s Passing

Congress has returned its attention to a cannabis banking bill that would clear the way for financial institutions to provide banking services to marijuana businesses operating legally under state law. After being re-introduced in April, the Secure and Fair Enforcement (SAFE) Banking Act received its first Senate committee hearing in May. Senate leaders say the bill will face a vote in the committee soon and anticipate the legislation will advance to the Senate floor for further consideration.

First introduced in 2019, the SAFE Banking Act has been approved by the House of Representatives seven times but failed to advance in the Senate each time. The latest version of the bill was introduced again in the House for the 118th Congress on April 27 by Rep. Earl (D-OR) and Rep. Dave Joyce (R-OH). Companion legislation was introduced in the Senate on the same day by Sen. Jeff Merkley (D-OR) and Sen. Steve Daines (R-MT). The bill enjoys strong bipartisan support in both chambers of Congress, with more than three dozen senators and eight members of the House signed on as co-sponsors.

Under current federal rules, financial institutions that provide services to legal cannabis businesses face strict regulatory and reporting requirements put in place to prevent money laundering. As a result, few banks will serve the regulated cannabis industry and businesses are forced to operate largely in cash, making businesses, their customers and their employees more vulnerable to crimes, including armed robbery.

“As it stands, the federal government has denied state-legal cannabis companies the same access to financial services as every other legal business across the Buckeye State and our country,” Joyce, co-chair of the Congressional Cannabis Caucus, said in a statement when the bill was re-introduced in Congress. “Not only does this distort the market in a growing industry, but it also forces businesses to operate in all cash, making them and their employees sitting ducks for violent robberies. The bipartisan SAFE Banking Act will allow cannabis businesses to operate legally without fear of punishment by federal regulators, making our communities safer.”

The SAFE Banking Act would protect banks that choose to offer financial services to cannabis companies operating legally under state law by preventing federal banking regulators from prohibiting, penalizing or discouraging such services. The bill provides the same protections for associated businesses providing services to state-sanctioned cannabis businesses such as attorneys and landlords. The legislation also prohibits federal banking regulators from terminating or limiting a bank’s federal deposit insurance because the bank is providing services to legal cannabis businesses and from recommending or incentivizing banks to halt or reduce services to companies in the cannabis industry or taking any action on a loan to an owner or operator of a cannabis-related enterprise.

The cannabis banking bill also provides a safe harbor from criminal prosecution, civil liability and asset forfeiture for banks that provide financial services to cannabis businesses, including the banks’ officers and employees. For the first time, the latest version of the legislation extends similar safe harbor protections to Community Development Financial Institutions (CDFI) and Minority Depository Institutions (MDI), which serve underserved communities that face challenges in accessing capital and provide affordable access to financial services, to ensure they can also serve cannabis businesses.

“Montanans should be able to conduct their small business without fearing for their safety,” said Daines. “My bipartisan bill would provide the security and peace of mind that legal Montana cannabis businesses need to freely use banks, credit unions and other financial products without a fear of punishment. This bill will help keep our Montana communities safe, keep crime off the streets, support Montana small businesses and bolster local economies.”

The SAFE Banking Act is supported by dozens of state attorneys general, trade groups for the banking and insurance industries and leading labor unions including the International Brotherhood of Teamsters.

SAFE Banking Act Gets First Senate Committee Hearing

In May, the Senate Banking, Housing and Urban Affairs Committee held a hearing on the SAFE Banking Act, marking the first time the legislation was taken up by a Senate legislative panel. Although the committee did not vote on the bill, the senators on the panel heard testimony in favor of the cannabis banking bill from labor leaders and representatives of the cannabis and banking industries.

“The cannabis landscape looks far different than it did a few short years ago,” Senate Banking Committee chairman Sherrod Brown (D-OH) said in his opening remarks for the hearing. “Cannabis has been legalized or decriminalized in almost every state. States and localities have established licensing and social equity programs to ensure that small businesses and communities impacted by the War on Drugs are part of the growing legal cannabis industry.”

“Banking, of course, is critical for small cannabis businesses who already face hurdles getting their businesses off the ground,” he added. “I’m glad we’re building on the progress we’ve made over the years. I look forward to continuing these conversations.”

After the hearing, Senate Majority Leader Chuck Schumer (D-NY) said that he hoped to continue progress on the bill, saying the committee hearing was a “big step” for the legislation. The majority leader added that he expects the Banking Committee to advance the bill to the Senate floor for consideration.

“We’ve made a lot of good, bipartisan progress on SAFE Banking last Congress, and after today’s hearing we hope there will be a markup on this bill in the near future,” Schumer said after the hearing. “We’re really moving forward in a record way on a very important issue.”

With more comprehensive legislation to legalize marijuana at the federal level unlikely to pass during the current legislative session, some lawmakers including Schumer, would like to see restorative justice provisions that address the harms caused by years of marijuana prohibition added to the SAFE Banking Act. Topping the list is measures to expunge records of past minor marijuana offenses, building on pardons granted by President Joseph Biden last year. Schumer added that Congress has a “moral responsibility” to repair the harms inflicted by the failed War on Drugs. Last year, legislation that paired the cannabis banking bill with restorative justice provisions dubbed Safe Banking Plus was considered in Congress, but the measure failed to advance.

Merida Capital Holdings’ Mishrikey sums it up: “Whether the SAFE Banking Act passes during this congressional term or not is open for debate; but the irony is the federal government, at least temporarily, was itself a bank for the industry.”