Growing pains plague cannabis market: the journey to cannabis regulation

It’s the world’s most popular illegal drug, but change is in the air for cannabis. Investors, researchers, doctors and manufacturers are riding a legalisation wave to develop a multi-billion-dollar industry that cuts across multiple sectors from consumer goods to pharmaceutical, cosmetic, food and drink and beyond. But why is cannabis not becoming mainstream in US financial markets, and how far are we from cannabis regulation?

There are currently 19 US states where cannabis use is fully legal. By contrast, there are now only six states where using cannabis for either recreational or medicinal purposes is illegal. Some 39 states, plus the District of Columbia, Guam, Puerto Rico and the US Virgin Islands regulate cannabis for medical use.

It’s been quite a turnaround for the country behind the War on Drugs, which for so long led the global fight against black-market cannabis cultivation, smuggling and trade, in seeking to protect its own borders from criminal enterprises.

It’s a long, complicated story, but the globalisation of America’s drug policy led to the formation of an international treaty that gave countries around the world a broad skeleton for their own anti-drug laws, and a broad agreement between nations that everyone would follow the rules.

That United Nations accord, from 1961, is still in place, but rapidly unwinding as a growing number of US states and indeed entire nations such as Canada, Uruguay, South Africa, Mexico, Malta, break away and legalise adult recreational use of cannabis.

Personal freedom and the changing attitudes of populations are often cited in the referendums that have triggered the status changes, but for governments, it all comes down to money; US states have collected over $10bn in taxes in just a handful of years.

The ‘green’ gold rush

During the 2021 lockdown, legal sales in the US grew 40% to $25bn, according to Bank of America researchers, as New York, Virginia, New Mexico, and Connecticut were added to the list of states legalising adult use.

Analysts expect Delaware, Oklahoma, Maryland, Pennsylvania, Ohio, and Rhode Island as the states most likely to pass marijuana legislation this year, with legal sales projected to top $28bn. Industry experts BDSA forecast US sales to reach $46bn in 2026.

The numbers are significant, presently accounting for more than 80% of the entire global market.

On the surface all seems rosy; during the pandemic the industry bucked trends by adding jobs where almost every other sector saw jumps in unemployment, and a November 2021 Gallup poll found that 68% of Americans support cannabis legalisation, an increase of six percentage points from the previous survey.

‘High’ compliance burden

For all of the optimism, the regulatory picture is complex, diverse, and comes with enormous compliance challenges for businesses looking to get a foothold in either the recreational or medicinal markets.

In the US, presently the largest global market, cannabis remains illegal at federal level in its classification as a Schedule I narcotic. Despite rapidly evolving enforcement policies, there remains significant legal uncertainty over conflicts between federal and state treatment of cannabis.

The laws and regulations inside each state differ regarding the commercialisation of the drug, and for parties with no “plant touching” experience, namely private funds and investment houses with no intent on growing or selling cannabis, the regulations can be difficult to comprehend.

Critically, banks and insurance companies are reluctant to provide services to a sector which is still considered illegal at federal level. Operators have been unable to get loans, and they cannot scale beyond their own state given moving the drug across state lines would essentially be considered smuggling.

For all the progress at state level and maturation within the sector itself as it moves away from black market underground operations, legal movement has been slow.

Major consumer packaged goods companies are likely to remain frozen out until federal legalisation or de-scheduling occurs, and multi-state operators are still locked out of the US banking system. This has not stopped tobacco, beverage, and retail businesses expanding into cannabis via investments, mergers and acquisitions worth multiple billions, but the short-term picture looks bleak.

Joe Biden’s administration has shown little appetite to move the industry forward given the steps made under President Trump, who signed a bill into law legalising the (regulated) production of hemp.

“While most legal cannabis attention of late has focused on the high rewards of mega deals, the risks associated with state law noncompliance remains as high as ever,” said Lloyd Pierre-Louis of law firm Dickinson Wright.

When? Not ‘if’, but ‘how’ for cannabis regulation

For the last two years, all eyes have been on the passage of the Secure and Fair Enforcement (SAFE) Banking Act. The legislation would stop banking regulators from punishing financial institutions for providing services to cannabis companies and amount to legalisation by the back door; even if cannabis remained an illegal narcotic at federal level, the financial system would be allowed to process transactions and business would get the green light.

The Bill has stumbled and endured multiple rewrites, however, and industry experts are pessimistic of its chances of making it through the Senate.

“Are we going to get comprehensive reform? No. Could we get an incremental reform? The numbers are there,” said Michael Correia, director of government relations for the National Cannabis Industry Association.

State treasures from across the US recently met to discuss federal cannabis banking reform, where the talk is “when”, not “if”. Washington State Treasurer Mike Pellicciotti said he’s “committed to doing everything my office can do to urge Congress to legalise cannabis banking this year”.

“Legal retailers must be allowed out of the cash business to stop the inequities and traumatic daily robberies taking place in Washington state and around the country due to a decade of congressional inaction,” Pellicciotti said.

Although a US issue, given the central importance of Wall Street to the global financial system, this ongoing regulatory dilemma holds the key to the entire cannabis industry.

“Big issues are clients who are trying to navigate deals and need to find capital and financing and banking services,” said Duane Morris partner and head of the firm’s cannabis practice Seth Goldberg. “That’s a key issue. You really need to have some loosening of the banking restrictions. And from a sort of global standpoint it’s really continuing to push the market forward in terms of getting the regulatory structure changed.”

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