It’s not just the insurance industry - everyone wants to know when we’ll see some movement at the federal level on cannabis. I can’t tell you how many of my industry friends feel long depleted by expecting change, and I watch industry media outlets and both retail and institutional investors cling to every word of a new headline. SAFE Banking Act news, rescheduling and descheduling news, large banks coming in and then out of the stock custodian game, on and on.
There are two recent headlines, though, that have sparked my interest perhaps more than at any other time in my cannabis days - and not necessarily for the right reasons. We here at Frontier Risk are as bullish as ever on the long-term potential of the cannabis market, but industry observers should temper expectations on some of the recent news. Let’s take a look at these two events, which are, in my opinion, inextricably linked.
1. HHS Secretary Becerra announces a potential presentation of “an administrative review” of cannabis as a Schedule I substance by the end of this year
Two weeks ago, Becerra, while speaking at an event in Sacramento, gave comment to Marijuana Moment that he aims to present President Biden with a recommendation on how to proceed with cannabis as a Schedule I substance by the end of this year. The FDA (which sits within HHS) is carrying out a multi-step review of cannabis as a Schedule I controlled substance at the directive of Biden, and until now, the timing to completion of that review has been completely nebulous. The commentary only added a timing goal to the already-known information. A lot of investors and industry participants I’ve spoken with were excited and optimistic about such a public comment on timing, indicating things might actually be moving.
It’s important to understand what the potential outcomes of such a review are, if ever completed: Remaining on Schedule I, rescheduling to Schedules II through V, or descheduling altogether. I list these in order of political feasibility - which drives everything in terms of things actually changing.
This is key.
Let’s assume for a moment that the status quo actually does change - it is much, much more politically palatable to the powers that be to reschedule the substance (and according to some, would make logical sense given the psychoactive effects Delta-9 THC can have) than to altogether deschedule the substance. Again, I’m not opining on which option is more helpful, per se, I’m talking about the most important thing: what can actually get done. And most agree that asking Congress to throw cannabis off the Controlled Substances Act altogether (descheduling) is a much, much bigger ask than the “incremental” change of rescheduling. If you want proof that the federal government likes to crawl before it sprints on cannabis, consider the latest version of the SAFE Banking Act, which had many of its promising (and badly needed) social equity provisions stripped back completely in an effort to force through something more incremental. And you may be able to think of one or two other items outside of cannabis that Congress moves slowly on…
Here’s the problem: the choice between rescheduling and descheduling is a false choice, in my opinion. The good news is that means there is one potential outcome instead of two, if you like simplicity. The bad news is the only path is the path that is much harder, politically, to get done. Here’s why:
2. The FDA announces it is declining to regulate CBD
We’re going back a few months further in time. In late January of this year, I saw a headline that, no exaggeration, was the biggest news I had ever heard in the cannabis space. Bigger than news years ago about SAFE Banking tries, bigger than mega-merger announcements between non-cannabis strategics and Canadian cannabis companies, bigger than Jeff Sessions rescinding the Cole Memorandum.
The FDA’s Deputy Commissioner, Janet Woodcock, announced that there were too many unknowns about CBD products to regulate them as foods or supplements under the agency’s current structure and called on Congress to create new rules for the massive and growing market.
Pay close attention to the underlined phrase - it is everything. The FDA admitted, perhaps in its most clear statement on the matter to date, that it is not structurally set up as an agency to regulate CBD.
For many of us in the industry, it confirmed something that we’ve known for a long time: cannabis can’t be regulated by the FDA because cannabis is, chemically, a multi-molecule substance, and the FDA is only set up to regulate single molecules for single therapies, not multiple molecules for multiple therapies (I’m not even talking about the entourage effect here, I’m just talking about multiple molecules as a concept). Many may say “but wait, Epidiolex is a CBD therapy and Epidiolex was approved and is regulated by the FDA”. That’s very different - Epidiolex is a CBD isolate. It is an extremely high dose of CBD because CBD is virtually ineffective as an isolate unless you take a lot (and I mean a lot) of it. Those in the industry marketing cannabis products already know this. CBD is more effective and remains more bioavailable if combined with THC, as all cannabinoids are when ingested with other types of cannabinoids instead of on their own (hence the phrase “entourage effect”).
What the FDA said here, not so subtly, is that it would have to completely overhaul its infrastructure to establish the framework, systems, processes, and administration to regulate a substance - cannabis in this instance - that relies on multiple different molecules targeting one therapy, let alone the multiple therapies, that cannabis, regardless of the THC potency, can address. If this was the stance on CBD, it gets exponentially more inflammatory for THC, which, unlike CBD, is a psychoactive substance.
When was the last time you saw a federal agency get completely overhauled and rebuilt from the ground up for a politically palatable reason, let alone a politically controversial reason? Those who push back saying that cannabis isn’t politically controversial anymore are thinking about the opinions of voters, not the intentions and actions of politicians.
So, when we combine items 1 and 2 above together, we have a conflict.
You can’t reschedule a substance if the only agency that regulates that substance can’t accept it as a therapeutic drug on their other, lower schedules. Alas, we are left with descheduling.
Of course, a new federal agency dedicated solely to regulating cannabis could be established. I don’t see that happening anytime soon for the same reason I don’t see the FDA getting completely overhauled happening anytime soon. You could create a 6th schedule - there’s even an aptly named movement aimed at exactly that - but we land in the same place given the agency isn’t set up to handle the unique therapeutic value proposition of multiple molecules to multiple therapies. You create Schedule VI; so what? Which FDA staffers will move into that division if the fundamental, aforementioned structural problem still exists?
I think we’re in for a long road ahead on this. That doesn’t mean that cannabis won’t find a way to thrive in the absence of real federal regulation (or deregulation). But as a student of cannabis politics, I try to focus on exactly which political wheels need to turn to get something to the finish line, and in what order.
I mentioned the SAFE Banking Act at the top of the post, so I’ll share very brief thoughts on the latest (eighth) reincarnation, which is different from the last one in that (i) it is originating in the Senate instead of the House for the first time, and (ii) as mentioned, gets back to bare bones banking language and removes social equity initiatives that were present in the seventh iteration, which failed to pass. I won’t comment on whether or not I think it will pass this time - it’s too early to say, and I don’t think anyone who tells you they have an idea truly knows. Instead, I’ll focus on how helpful it is (or isn’t) to the industry.
My opinion is that the SAFE Banking Act is only marginally helpful to the industry. It solves certain treasury management issues faced by larger multi-state operators (MSOs) and may shorten the amount of time it takes to get a bank account for newer entrepreneurs in the space. It may convince the bulge bracket banks to custodian cannabis equities (stocks) without paranoia. Granted, these are all important things to resolve. With that said, and from personal experience, it is not as difficult to get a bank account as a plant-touching cannabis operator as most people at a cocktail party think it is. Depending on which source you use (I use FinCEN, a division of Treasury), there are between 700 to 1,000 banks, credit unions, or thrifts that bank cannabis companies. That’s more than a little, but still not enough. The number is fuzzy because some banks are credited as “banking cannabis” when they’ve only been in custody of a cannabis security or facilitated a cannabis investment (or dividend from an investment) for a client, triggering a Suspicious Activity Report (how the bank count is measured). Point being, as an operator, it can be more challenging in some states than others, but if you work hard enough at it, you can get a bank account as a cannabis operator. It goes without saying that transporting large volumes of cash is a critical human safety issue that must be resolved.
The general consensus among industry insiders is that SAFE doesn’t matter because it doesn’t fix 280E. That’s what needs to be fixed to unlock the tens of billions of dollars of trapped free cash flow over the next few decades and give operators who are just getting their start a fighting chance. 280E is a Schedule I-specific issue; if cannabis were rescheduled, it would fix 280E (as would descheduling altogether, obviously).
We may see movement on SAFE prior to the 2024 election, but I seriously doubt we’ll see movement on the other issues in that timeframe or immediately after. That reinforces the need for innovative service providers in the areas of insurance, tax, banking, payments, financing, and so on. And of course, no one would be happier than me to see a comment on this post a year from now sarcastically saying “well this post certainly aged well…”
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