- The SAFE Banking Act is a bill designed to allow cannabis businesses access to major financial services, as it remains illegal at the federal level.
- So far, the bill has failed to pass the Senate three times, making cash management challenging for companies in the cannabis industry.
- Lack of access to banking is likely to continue to be a drag on potential earnings from cannabis stocks, but that doesn’t mean they aren’t worth considering for your portfolio.
Cannabis is controversial, but nonetheless, it has become more and more popular all the time. 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 rub for cannabis companies.
Cannabis is still illegal at the federal level. That means companies operating in the space within jurisdictions that have legalized it are fine, but as soon as they try to go national, they run into some major Uncle Sam roadblocks.
One of the biggest impacts on business operations is the fact that this means that cannabis companies do not have access to the conventional banking system. Banks are unable, or unwilling, to offer services that allow a business to transfer money earned from the sale or production of cannabis across the country.
From a federal point of view, this could be perceived 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 for them.
So 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 substantially 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 free Q.ai app to try it out.
What is the Safe Banking Law?
The SAFE Banking Act was first introduced in the United States Congress in 2019. The goal is to fix this problem by providing a safe harbor for financial institutions that work with state legal cannabis businesses.
The current status quo is a big problem for these businesses 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 restricting financial institutions that provide services to cannabis businesses, as long as they operate in compliance with state laws.
This would allow these companies to access the traditional banking system, which would help them to better operate, grow and expand their businesses.
The bill passed the House of Representatives in 2019 and 2020, but has now failed the Senate three times. This is despite two of those occasions seeing it included as part of broader legislation.
How do cannabis companies manage their finances?
So if you’re a cannabis business and don’t have access to traditional banking services, what do you do? Well, you have to find alternative ways to manage your finances. Here are some of the ways they intend to prevent it:
Without access to bank accounts, many cannabis businesses are forced to conduct all of their financial transactions in cash. This can be very challenging, as it can make it difficult to track income and expenses, and it can also create security risks.
Would you like to transport your weekly earnings in a duffel bag?
Checks and prepaid cards
Some cannabis businesses use alternative banking services, such as check cashing services 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.
DIY Banking Solutions
Some cannabis companies have created their own internal banking systems to manage their finances. For example, they may set up an internal accounting and record keeping system, or use a cash management system.
Some cannabis companies partner with third-party payment processors that can handle your transactions, such as credit card or electronic check processing. However, these payment processors can charge high fees and businesses may have to pay a high premium on their transactions.
Not only that, but they have the ability to close access to the funds at any time, should they perceive any kind of breach or security risk.
Some cannabis businesses have started to accept and pay with cryptocurrencies as an alternative to traditional banking services. Cryptocurrency transactions are decentralized, making them difficult to trace, and they are also relatively fast and cheap.
However, all of the above methods are not without their risks and challenges, and some of them may not even be legal in certain states. Crypto companies have to exercise great care to ensure that they stay on the right side of the law.
What does the failure to pass the SAFE Banking Act mean for cannabis stocks in 2023?
The fact that the SAFE Banking Act does not pass the Senate is not good news for cannabis stocks. The lack of access to traditional banking services will continue to be a drag on the rate at which they can grow and expand their businesses.
The lack of passage of the law also means that cannabis businesses continue to face the risks and costs of operating as a cash-only business, which can lead to heightened security concerns and difficulties in tracking income and expenses, as well as related legal issues. with the money. money laundering and tax evasion.
For investors, this is a hurdle that makes some understandably nervous about investing in cannabis stocks. Until this issue is resolved, there will be a limit to how much companies can grow in the vertical, and therefore how much stock prices can rise.
The bottom line
Cannabis is a real growth industry (geddit?) but it is not without its challenges. Access to mainstream banking services is one of the key hurdles the sector must overcome if it is to realize its potential for investors.
The SAFE Banking Act could eventually pass, but it’s also worth considering how attitudes towards cannabis legalization are changing. Over time, we may finally see cannabis become legal at the federal level.
If this were to happen, the SAFE Banking Act would not be necessary, as cannabis businesses would be able to access financial services without worry. Still, this is likely not something we see any time soon.
Still, cannabis stocks represent an exciting industry, and many investors are prepared 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 a variety of different ‘sin stocks’. Each week our AI predicts next week’s performance for a variety of different sectors and individual stocks, then rebalances the portfolio accordingly.
It means you can gain access to investments in companies that may include Tilray Cannabis, Playboy, Lockheed Martin, and British American Tobacco. This can not only provide diversification to your portfolio, but companies like this have a reputation for staying strong during a downturn.
Download Q.ai today to access AI-powered investment strategies.