Time to go back to the drawing board on cannabis banking

Cannabis farm
A worker inspects cannabis hanging in a drying room at the Hudson Cannabis farm in Hudson, NY. Stalled legislation that would clear the way for banks and other investors to access the cannabis industry may create an environment for Congress to think carefully about what a post-prohibition future might look like.

Bloomberg News


Wanda Sykes had a joke from 20 years ago that strikes me as very prescient: Bemoaning the turmoil from the dot-com bubble and Enron scandal, Sykes said she’d lost confidence in Wall Street. 

“I called my broker, I was like, ‘Hey, put all my money in weed,'” she said to uproarious laughter. “Price of weed never goes down. That’s a real blue chip right there!” 

Explaining jokes never makes them more funny, but it’s telling that the reason this was so funny in 2003 is the absurdity of a broker devising a cannabis investment strategy. But today there are dozens of firms doing precisely that. What a difference a couple of decades makes.

Despite that investment enthusiasm, cannabis as a consumable commodity is in its infancy — unlike the Prohibition era, there was not a large cannabis market in place before it was banned in the 1930s, notwithstanding the considerable market for hemp. And for better or for worse, the growth of cannabis as an investment vehicle has been stymied by its illegality at the federal level; banks, particularly large banks, can’t deposit ill-gotten gains, credit cards can’t process illegal transactions, and the bulk of the investment world won’t put money into ventures that could easily go up in smoke. 

That isn’t to say that the cannabis business is struggling — while Sykes was wrong to assume that cannabis prices don’t go down, there is still healthy demand out there. And some smaller banks and financial firms have developed workarounds to the federal prohibition problem by dealing in cash, using point-of-sale debit card transactions or using other means of making the ends meet. And those workarounds appear to be working fairly well.

On the surface, this arrangement seems a little silly — I myself said so in a column around this time last year. Cannabis has been legal in some states for more than a decade, and the results were promising enough that more and more states have decided to take the plunge. But this product is either legal or it’s not, and the wink-and-nod arrangement that has evolved does nothing to discourage the use of cannabis and doesn’t seem to really serve a purpose. 

But just as these payment workarounds have evolved in this emerging gray market economy, the federal prohibition of cannabis may have evolved a purpose as well — namely to keep Wall Street out of the cannabis business — and that’s a benefit that we shouldn’t be too hasty to part with. 

One might expect that if either federal prohibition ends or Congress passes the Secure and Fair Enforcement Act — the bill that would allow banks and credit card networks to serve cannabis businesses — the result would give the industry a boost. One might also expect that the small banks and credit unions that have to this point been the only players in the cannabis service space would suddenly find themselves crowded out by larger competitors. Investors might take Sykes’ dated advice and put all their money in weed — handing their savings over to firms that will use those savings to build out more infrastructure, ramp up production and increase brand awareness. Does the idea of cannabis commercials during the Super Bowl seem weird? How about a cannabis company’s name on a sports stadium — or a maternity ward at the hospital?

Consider for a moment how the widespread legalization of sports betting and casino gambling has played out. Almost every podcast I listen to is brought to me by one sportsbook or another, as is some portion of almost every commercial break on TV. Maybe that doesn’t matter that much to you or me, but it matters to someone who might have a problem, and there are more people with gambling problems now than ever before.

I realize this sounds prudish, and perhaps it is. I know myself well enough to know that I don’t have a well-founded opinion about the public health benefits or harms of cannabis legalization, but to the extent that there is harm, at the very least those harms can be mitigated with laws and regulations — much the way they are mitigated with respect to alcohol and tobacco. But all of that starts with the assumption that cannabis isn’t the same as Pepsi, and the investment world should be restricted in its ability to create new customers — or entice old customers to keep using.

The cultural acceptance of cannabis in the United States has grown over the course of the 20th century without any help from advertising and capital markets. But right now we’re in this moment when the cannabis genie is halfway out of the bottle, and Congress has a chance to determine what kind of sensible restrictions might be put in place to keep legal cannabis from being overdone. The SAFE legislation makes sense in that it ends a meaningless Kabuki theater that has arisen to facilitate pot sales, but if Congress wants to enact meaningful policy, it’s going to have to try harder.

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