Moving Towards Cannabis Rescheduling: What It Means for Financial Institutions and Cannabis Lending

Name: Moving Towards Cannabis Rescheduling: What It Means for Financial Institutions and Cannabis Lending
Uploaded: 2025-09-25T13:02:53.000Z
Duration: 2 h 10 min 53 s

Introduction to the Webinar

Welcome and Housekeeping

Thank you for joining the webinar; it is expected to last an hour.

Chris Van Djk introduces Bob Hovind, noting their previous connection from 12-13 years ago.

Participants are encouraged to submit questions in the chat throughout the discussion. Raphael from the business development team will assist with managing questions.

Introducing Bob Hovind

Background and Achievements

Bob Hovind has been a significant figure in the cannabis industry for over 16 years, influencing policy and legal frameworks globally.

Recognized by Forbes in 2022 as one of the top 42 cannabis industry power players, he has advised numerous governments and businesses on cannabis market strategies.

He serves as a professor at UNLV's Cannabis Policy Institute and has developed curricula at various universities while hosting an award-winning podcast, "Hoben Minute."

Chris Van Djk's Experience

Professional Background

Chris shares his experience as a financial regulator for eight years, focusing on cannabis banking guidance issued during his tenure.

Transitioned to become general counsel and chief risk officer for a financial institution that pioneered cannabis banking programs, significantly contributing to profitability.

Currently offers legal services focused on advising financial institutions regarding cannabis banking compliance and efficiency improvements.

Key News on Cannabis Reclassification

Discussion of Recent Developments

Bob reveals important news regarding President Trump's consideration of reclassifying cannabis, which could impact its legal status significantly.

The distinction between descheduling versus rescheduling is highlighted as crucial for understanding potential changes in cannabis regulation under U.S law.

Understanding the Rescheduling and Descheduling of Marijuana

Current Status of Marijuana in Medical Applications

Marijuana is classified as a Schedule I substance, indicating it has no recognized medical use and a high potential for abuse.

The discussion focuses on the implications of rescheduling marijuana rather than its current classification.

Rescheduling vs. Descheduling: Key Differences

Industry advocates argue that rescheduling (e.g., moving to Schedule III) offers limited benefits, primarily tax relief without addressing state-based regulatory pathways.

Rescheduling would still keep marijuana under federal oversight, while descheduling would remove it from the Controlled Substances Act entirely.

Implications of Descheduling

If marijuana were descheduled, there would be no federal prohibition on its use or distribution, allowing states to regulate based on their police powers.

States could implement regulations similar to those for alcohol and tobacco, which are not controlled substances but are regulated at both federal and state levels.

Logistical Considerations for Banks

Descheduling is seen as a more practical approach since existing state systems can manage regulation without needing to classify cannabis strictly as medicinal.

The White House may lean towards descheduling, aligning with certain Republican ideologies that favor less government intervention.

Banking Perspectives on Regulation Changes

A shift to reschedule might reduce perceived risks for banks but also create a regulatory vacuum that could complicate compliance.

Understanding FinCEN Guidance on Cannabis Banking

Overview of FinCEN and Its Guidance

FinCEN, the Financial Crimes Enforcement Network, is a bureau within the US Department of Treasury that issued guidance in 2014 regarding cannabis banking.

The guidance is permissive but cautionary, indicating that banks and credit unions must make risk management decisions when choosing to bank cannabis businesses.

This guidance was influenced by the Cole Memorandum, which advised federal attorneys not to prioritize enforcement against state-legal cannabis businesses.

Criticism and Compliance Challenges

Critics argue that FinCEN has not updated its guidance despite cannabis being legal in many states, leading to compliance burdens for financial institutions.

The lack of clear definitions and official commentary in the guidance creates uncertainty for banks regarding regulatory expectations for cannabis banking.

Impact of Descheduling on Cannabis Banking

If descheduling occurs, it may encourage more financial institutions to enter the market due to perceived reduced risks associated with cannabis.

There are concerns about the requirement for banks to file suspicious activity reports (SARs), even without actual suspicious activity, potentially flooding FinCEN with unhelpful data.

Future Implications of Regulatory Changes

Even with potential descheduling or rescheduling, elevated risks will likely remain for cannabis-related business accounts due to ongoing state regulations.

Banks will need to pay closer attention to state-level regulatory regimes if descheduling happens, increasing their compliance responsibilities.

Market Dynamics Post-Regulatory Change

Increased competition from more financial institutions entering the market could lead to better pricing for cannabis companies under financial pressure from compliance costs.

Understanding the Banking Landscape for Hemp and Cannabis

Regulatory Framework and Banking Decisions

The law explicitly states that hemp is no longer scheduled, leading banks to take risks by banking hemp businesses despite varying state regulations.

If marijuana is descheduled, banks may rely on state-based systems for regulatory compliance, but uncertainty remains about future developments.

Lending Challenges in the Cannabis Industry

Banks are criticized for not truly banking unless they engage in lending; many charge high fees for cannabis-related deposit accounts without offering loans.

A looming "debt wall" exists as many cannabis companies face significant repayment obligations due soon, with interest rates sometimes exceeding 40%.

Future of Lending in Cannabis Banking

The potential impact of rescheduling could create a more favorable lending environment, yet banks remain hesitant to refinance existing debts without clear signals from regulators.

Questions arise about whether banks will wait for formal rescheduling or proactively address the debt wall to capitalize on lending opportunities.

Risk Management and Compliance

Financial institutions must navigate both financial and non-financial risks when considering cannabis lending; compliance with BSA obligations is crucial.

Only around 800 banks currently serve cannabis-related businesses (CRBs), with very few offering lending services—indicating a missed opportunity.

Strategic Considerations for Banks

There’s a significant opportunity for banks already involved in cannabis banking to expand into lending; boards should consider this risk management decision seriously.

Understanding Cannabis Banking Risks and Opportunities

Incremental Decision-Making in Financial Institutions

Decisions within financial institutions regarding cannabis banking are made gradually, reflecting the complexity of the environment.

Ongoing discussions about lending to cannabis-related businesses (CRBs) are crucial, even if immediate actions like rescheduling do not materialize.

Sentiment Among Banks Regarding Lending

Many banks remain hesitant about lending to CRBs due to perceived risks that may be difficult to quantify.

Concerns include potential legal repercussions such as RICO violations or aiding and abetting federal law violations when dealing with Schedule I substances.

Legal Risks Associated with Cannabis Banking

The speaker emphasizes that legal risks for banks already exist when providing depository services to cannabis businesses.

Historically, no bank or credit union has faced prosecution for banking cannabis, suggesting a low risk of legal action against them.

Public Policy Reasons for Banking Cannabis

There are significant public policy arguments supporting the banking of cannabis, including public safety and fiscal responsibility through proper money management.

Federal prosecutors recognize these arguments, which contributes to their reluctance to pursue cases against banks involved in cannabis banking.

Evolving Perspectives on Digital Currency in Cannabis Banking

Questions arise regarding how digital currency and blockchain technology intersect with the cannabis industry; many view this combination as risky.

The Trump administration's stance on digital currency is noted, along with banks' growing willingness to engage with it despite initial reservations.

Future Considerations for Banks Embracing Digital Currency

Understanding business models involving digital currency is essential for compliance departments within financial institutions.

Global Cannabis Supply Chain and Banking Challenges

International Transactions in the Cannabis Industry

Discussion on international transactions within the global cannabis supply chain, highlighting a lawful transaction between a German company and Colombian suppliers.

Explanation of how digital currency platforms facilitate instantaneous currency conversion for international payments, including exchange fees involved.

Mention of complexities arising from digital accounts that may not be deposited into Colombian banks unless the account owner decides to do so, potentially creating taxable events.

The Global Market Potential

Emphasis on the significance of international discussions regarding cannabis, with projections estimating a $400 billion global market by Whitney Economics.

Noting approximately $50 billion in lawful international cannabis transactions outside the U.S., and how rescheduling or descheduling could signal U.S. participation in this global economy.

Banking Readiness for Cannabis Transactions

Inquiry about whether banks are prepared to handle both domestic and international cannabis banking as regulations evolve.

Acknowledgment that many banks have not considered the implications of global cannabis supply chains, reflecting their cautious approach to risk management.

Opportunities and Risks in Capital Markets

Discussion on potential capital opportunities arising from descheduling cannabis, affecting both debt financing and capitalization strategies.

Recognition that while risks exist with integrating cryptocurrency into cannabis banking, significant opportunities also arise from these developments.

Compliance Issues in International Banking

Observation that even legal transactions (e.g., between Morocco and Czech Republic) face banking hesitance due to fears surrounding U.S. affiliate bank repercussions.

Question raised about whether U.S. banks can impose compliance standards based on current Schedule I classifications when dealing with legitimate international transactions.

Tax Implications of Rescheduling Cannabis

Transition back to discussing 280E tax implications; rescheduling is seen as a potential relief for businesses burdened by high taxes under current laws.

Understanding 280E and Its Implications on Cannabis Businesses

The Applicability of 280E

The statute 280E applies specifically to Schedule I and II substances, meaning it does not apply to Schedule III substances by definition.

A question arises regarding the implications of 280E for cannabis businesses operating under state law if cannabis is classified as a Schedule III substance but the operator is not registered with the DEA.

Legal Perspectives on Rescheduling

There is uncertainty about whether rescheduling cannabis would eliminate 280E implications for compliant operators, especially without a regulatory framework from the FDA or DEA.

Even with potential rescheduling, businesses may still operate in a "cloudy sphere of illegality," which could pose risks for financial institutions involved.

Financial Institutions and Compliance Risks

Financial institutions face ongoing risks when dealing with cannabis-related businesses (CRBs), even if they are compliant under state laws due to lingering legal ambiguities.

The notion that eliminating 280E might retroactively forgive unpaid debts is challenged; the IRS typically does not relinquish booked revenue.

Legislative Context and Banking Regulations

If cannabis were to be reclassified as Schedule III, banks would still need to comply with Bank Secrecy Act (BSA) obligations, which include enhanced onboarding and ongoing monitoring of CRBs.

Current guidance from FinCEN remains unchanged until revised or rescinded, maintaining compliance burdens for banks regardless of any changes in cannabis scheduling.

Future Considerations: Descheduling vs. Rescheduling

The Safer Banking Act aims to clarify responsibilities for banks but does not alleviate existing compliance requirements related to BSA obligations.

Descheduling requires legislative action or coordinated executive initiative; this process involves multiple agencies and has been complicated by political dynamics in Congress.

Administrative Processes Involved

Rescheduling involves an administrative review process initiated under President Biden, including notice and comment periods leading up to final rule implementation.

FDA Oversight and Rescheduling of Cannabis

The Process of Rescheduling

FDA oversight and the role of federal agencies are crucial in the rescheduling process, indicating that it is not a simple or immediate action.

Rescheduling cannabis has a lower procedural threshold than descheduling, which can be achieved through rulemaking with or without notice and comment.

There exists a provision in the Controlled Substances Act allowing for potential executive order by Trump to direct rescheduling within 60 days.

Bankruptcy Implications for Cannabis Businesses

If cannabis is rescheduled or descheduled, businesses may gain access to bankruptcy protections, which have been largely unavailable at the federal level until now.

Banks may view bankruptcy protection as both a risk and an opportunity when lending in a rescheduled environment; their approach will depend on creditor hierarchy and collateral considerations.

Risk Mitigation Strategies for Banks

Banks entering cannabis lending will prioritize being high on the creditor priority chain and will focus on conservative financial ratios to mitigate risks.

Tools like CRB (Cannabis Regulatory Board) offer risk mitigation opportunities for banks by identifying potential issues before they escalate.

Receiverhip vs. Bankruptcy

Receiverhip serves as an alternative to bankruptcy, where a court-appointed trustee oversees business operations, but achieving this can be complex due to internal disagreements about transparency.

Capital Markets Access Post-Rescheduling

The discussion highlights how capital markets could open up following rescheduling or descheduling events, potentially increasing investment interest in the cannabis sector.

The industry is described as cash-starved due to compliance costs and tax implications under Section 280E of the IRS code, raising questions about automatic capital market access post-rescheduling.

Future Insights on International Aspects

Investment bankers are showing increased interest in entering the cannabis space with anticipated changes from rescheduling or descheduling events.

International Commerce and Cannabis Regulation

The Impact of Federal Authorization on Cannabis Trade

Discussion on how federal authorization of cannabis could enable materials sold intrastate to cross state lines, potentially opening up global commerce.

Uncertainty remains regarding how U.S. banks will perceive federally authorized cannabis, with expectations that changes may come sooner than anticipated.

Research Opportunities in Medical Cannabis

Rescheduling cannabis could enhance research opportunities in educational institutions, building on previous expansions initiated by past administrations.

Despite potential for expanded studies, challenges persist as researchers like Sue Sisley face delays or lack of action on grant applications.

Banking Perspectives and Risk Management

Chris offers his expertise to banks and credit unions interested in entering the cannabis lending space, dispelling misconceptions about regulatory scrutiny.

Emphasis on the importance of risk management in cannabis banking; regulators assess risks similarly to other banking sectors.

Tools for Assessing Cannabis Credit Risk

Introduction of CRUS's credit scoring system for businesses and a complimentary consultation offered by Catrust to help banks establish lending programs.

Highlighting the unique role of Cress as an agency providing standardized evaluations of risk within the cannabis industry.

Starting a Cultivation Business: Challenges Ahead

Addressing the complexities involved in starting a cultivation business without an established financial track record; financing can be difficult.

Cannabis Industry Insights and Social Justice Implications

Funding Challenges for Startups in the Cannabis Sector

The current landscape shows that startups in the cannabis space struggle to secure funding, requiring a proven track record to attract investors.

Historically, there was a time when funding was more accessible; however, now it often relies on family and friends for initial capital.

Political Perspectives on Cannabis Legalization

There is skepticism about whether social justice initiatives related to cannabis will benefit those still incarcerated, particularly as this issue does not seem to be a priority for Republicans.

Democrats typically frame their arguments around social justice concerning cannabis, while Republicans focus on state rights and individual freedoms.

State-Level Actions and Federal Inaction

The responsibility for releasing individuals incarcerated for cannabis-related offenses has largely fallen on local leaders like mayors or district attorneys rather than federal mandates.

President Biden has prioritized addressing these issues but progress remains slow due to lack of cohesive federal action.

Institutional Hesitance Towards Cannabis Investment

Many financial institutions have been hesitant to engage with the cannabis industry due to ongoing federal restrictions, despite some companies moving forward under hemp regulations.

A significant number of businesses are waiting for clearer federal authorization before they commit resources or investments into the cannabis sector.

Closing Remarks and Future Engagement

The discussion wraps up with gratitude expressed towards participants, highlighting the importance of continued dialogue on these topics.