The SAFE Banking Act passed overwhelmingly – what happens next

Over the past three years, marijuana has taken Wall Street by storm. Even though cannabis stocks haven't been doing so well for six months, many metrics are higher among the industry's biggest names than they were three years ago, as legal marijuana sales are expected to reach between 5 and 18 times current global sales of 10.9 billion by the end of the next decade. US dollars in 2018 will be.

A Schedule I drug brings with it a certain number of problems

The only big uncertainty in these growth forecasts is still the United States. Despite being the most lucrative cannabis market in the world, the U.S. federal government has so far stuck with classifying marijuana as a Schedule I substance. This classification means that marijuana is on par with heroin and LSD, i.e., completely illegal, prone to abuse, and not recognized as medically effective.

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Although marijuana is classified as a Schedule I drug, that hasn't stopped 33 states from legalizing medical marijuana since 1996, with 11 states also legalizing adult use. These 33 states currently trail Canada as the only industrialized country in the world with legal recreational use, based on revenue, thanks to the U.S. federal government's low-key approach to state regulation.

Yet there are clearly defined consequences for Congress, which continues to insist on classifying cannabis as a Schedule I substance.

For example, profitable businesses operating in the U.S. marijuana sector will be subject to Section 280E of the tax code, which was introduced in the early 1980s to prevent drug smugglers from writing off "business expenses" on their taxes. Simply put, marijuana companies are therefore unable to take any deductions on their federal income taxes except for the cost of goods sold. For profitable businesses, this could mean an effective tax rate of 70% to 90%, leaving little profit for reinvestment and new hires.

U.S. cannabis companies also have minimal access to basic banking services, including loans, lines of credit and even checking accounts. Because financial institutions report to the Federal Deposit Insurance Corporation (FDIC) and the FDIC is a government-created agency, banks and credit unions fear potential financial and/or criminal consequences if they engage with cannabis businesses. This has made marijuana a cash-dominated industry, posing both a security problem and a limitation on its ability to expand.

Some members of Congress, however, believe they have a solution to this latter problem.

The SAFE Banking Act passes with a clear majority vote

The Secure and Fair Enforcement (SAFE) Banking Act was introduced in the House of Representatives earlier this year as a means to permanently protect financial institutions in states with marijuana legalization that want to offer basic banking services to marijuana businesses.

Since 2014, there have been protections for cannabis businesses in legalized states through contract components that must be passed in each subsequent fiscal year. However, the SAFE Banking Act represents the first stand-alone cannabis bill to be voted on in Congress. If that were to happen, Congress would no longer have to pass annual legislation, as the law itself would protect banks and credit unions from being targeted by the federal government if they provide services to the marijuana industry.

On Wednesday, 25. September, the House of Representatives officially voted on the SAFE Banking Act through a process known as "suspension of the rules". This process is typically reserved for noncontroversial legislation and is used when lawmakers want to pass a bill particularly quickly. Of course, you can't do this if you only get a simple majority vote. Instead, a two-thirds majority (290 or more votes out of 435) is needed for passage.

When the gavel came down, members of the House of Representatives voted overwhelmingly to pass the SAFE Banking Act: 321 for, 103 against. A majority vote was certainly expected, as the bill had already been introduced in advance by 206 cosponsors. The 321 yes votes, however, are above expectations and show that cannabis banking reform has become a bipartisan issue.

The big question is: what now??

What's next for the SAFE Banking Act?

Now that the SAFE Banking Act has passed the lower house of Congress, it moves to the Republican-controlled Senate for a vote. The problem is that the Republican party has historically had a more negative view of marijuana than Democratic party members or independents, making it less likely that the banking reform legislation will get the votes needed to pass in the Senate.

In addition, it is becoming apparent that while Senate Republicans are open to a discussion and vote on bank reform measures, the level of support is not exactly predictable, as was the case in the House of Representatives. In order to convince Senate Republicans to pass the bill and vote for reform, it may be necessary for certain concessions to be made, such as protections for hemp and cannabidiol (CBD) companies, as well as possible provisions that federal agencies should not be able to regulate certain industries without just cause, such as the gun industry.

Even the Democrats in the Senate may reject the SAFE Banking Act. Similar to the minority opposition in the House, some Senate Democrats believe it is not wise to consider reforming cannabis banking laws before broader federal marijuana reforms are addressed.

And of course, there's still Senate Majority Leader Mitch McConnell. While it is conceivable that McConnell will agree to a vote on the SAFE Banking Act to win votes for the 2020 elections, it is more likely that McConnell will aim to block a vote on the bill, as he has done on other forms of cannabis legislation.

According to Senate Banking Committee Chairman Mike Crapo (R-Idaho), the House will vote on cannabis financial services legislation before the end of the year. Unfortunately, it is impossible to say if and, if so, when we can expect the Senate to vote on a full bill. While industry fans and investors remain cautiously optimistic, signs still point to no agreement on banking reform in the near future.

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