The Green Sheet Online Edition
January 1, 2025 • 25:01:02
Access to cannabis banking going nowhere fast
The elation in some sectors of the economy and members of the public expressed following former President Joe Biden's October 2022 call for a review of federal marijuana law, and the Department of Justice's subsequent move, May 2024, to reclassify marijuana as a less dangerous drug than, say, heroine has been short lived.
An administrative judge with the Drug Enforcement Administration, the DOJ agency that enforces controlled substances laws and regulations at the national level, abruptly cancelled hearings on the matter that had been scheduled to begin on Jan. 21, 2025. The cancellation was blamed on a confluence of factors including allegations the DEA didn't want to see the change, and that it had improperly conferred with groups opposed to the rule change.
The hearing was just one in a series of steps that must be taken before cannabis can be reclassified as a Schedule I drug instead of a Schedule III drug. Schedules refer to how drugs are classified under the federal Controlled Substances Act (CSA).
Schedule I drugs include heroine, peyote and LSD – and are deemed to have no medical use and a high potential for abuse. Schedule III drugs are considered to have moderate to low potential for abuse or dependency, and include, for example, anabolic steroids and testosterone.
It's worth noting that most Americans favor legalizing marijuana for medicinal and recreational purposes. Only about one in 10 U.S. adults believe marijuana should not be legal at all, according to a 2024 report from the Pew Research Center.
That report revealed that 57 percent of adult Americans believe cannabis should be legal for medical and recreational purposes; nearly a third (32 percent) think it should be legal for medical uses only.
DEA slow-walking reclassification
Although the DEA is pursuing reclassification through its rulemaking process, it's unclear how the new presidential administration will view its work.
President Trump, in a post to his Truth Social platform last year, indicated he would vote in favor of a Florida ballot initiative that would allow for adult recreational uses of marijuana. (That initiative, which called for a state constitutional amendment, failed.) But he has given no clear indication that he would approve changes in the way federal law classifies cannabis.
The DEA's action followed a recommendation from the U.S. Department of Health and Human Services, issued in August 2023, to reclassify cannabis as a Schedule III drug. The HHS recommendations is a prerequisite to DEA consideration, and is based on "scientific and medical evaluation," by the Food and Drug Administration, an agency of HHS, along with a recommendation for the appropriate scheduling under the CSA.
The DEA issued a notice of proposed rulemaking last July, opening a 60-day period for public comments on reclassification. According to published reports, the agency received nearly 43,000 comment letters from various stakeholders, including cannabis businesses, individuals for and against rescheduling, medical professionals, state regulators and law enforcement agencies.
In August the DEA announced plans for a hearing on the merits of the proposal before an administrative law judge – a process that is said to resemble a trial and is expected to take several months to complete.
The hearings were halted over what might best be described as legal maneuvering, as some groups that wanted to testify were excluded from the witness list, and others argued the DEA itself should be removed on grounds that it doesn't really support a proposal it is supposed to be defending.
An alternative to this ongoing process would be for Congress to pass legislation calling for a rescheduling of cannabis, but no consensus regarding such legislation on Capitol Hill has emerged, according to a February 2024 blog post by attorneys with the Washington, DC-based law firm Akin Gump Strauss Hauer & Feld LLP.
Most banks shy away from pot shops
Most banks and credit unions are not keen on working with pot shops, for fear of incurring the wrath of regulators. Proposed legislation known as the Safe Banking Act was written to protect financial institutions from running afoul of federal bank regulators when providing banking services to state-sanctioned cannabis businesses.
That legislation has received bipartisan support on both sides of Capitol Hill but has failed to accumulate the votes needed to make it to the President's desk.
While Congress has failed to act, the Financial Crimes Enforcement Network, which is part of the U.S. Treasury Department, and the Department of Justice have issued guidance to FIs that want to work with cannabusinesses.
The guidance primarily focuses on required reporting, such as Suspicious Activity Reports and monitoring clients for compliance with the Bank Secrecy Act, as well as the need for robust internal controls
These requirements, along with long-held federal prohibitions on manufacturing, selling and using cannabis have kept most banks out of the running to serve cannabusinesses.
The Treasury Department reported that just over 830 financial institutions had filed paperwork with the federal government in the third quarter of 2024 acknowledging their relationships with licensed cannabis businesses. That's 30 more than there were in 2023, but just a fraction of the estimated 9,000 federally regulated banks and credit unions doing business in the United States. None of this is apt to change if marijuana is classified as a Schedule III drug.
"Financial institutions that are newly interested in banking [marijuana-related businesses] should note that the proposed [reclassification] rule itself would not likely impact related legal risks, including the risk of liability for money laundering. This is especially true because recreational marijuana would remain illegal under federal law," the law firm Morrison & Foerster wrote in a July 2024 brief.
Over $100 billion in cash last year
Because of its precarious legal status, cannabis has become an industry laden with cash. A lot of cash. Last year, according to MJBiz, consumers spent an estimated $15.2 billion at retail pot shops; by 2028, the estimated spend could reach nearly $171 billion. And most of that money is transacted in cash. Needless to say, this is not the most efficient way to run a business.
"Not only do cash payments fail to provide the most convenient and modernized customer experience, but they also create public safety concerns and invite increased criminal activity," the law firm Goodwin wrote in a March 2024 blog post.
Some ISOs and agents have sought to find ways around this problem by, for example, setting up these businesses with cashless ATMs, also known as point-of-banking terminals. In this scenario a dispensary sets up a payment device that's registered as an ATM. Customers then use their debit cards to pay for transactions, rounded up to the nearest whole dollar.
It was a good workaround while it lasted. But then both Visa (in 2021) and Mastercard (in 2023) issued warnings to banks that cashless ATMs installed at pot shops violated their rules, and they threatened enforcement action against acquirers and banks supporting these arrangements.
Goodwin, in its blog post, suggested that ACH payments are "generally permissible in the context of cannabis sales. We recommend that merchants consider collaborating with payment providers that support ACH processing at the point of sale," the law firm wrote.
CanPay, based in Littleton, Colo., is one example of a company using this bank-to-bank payment scheme. It reports that more than 300,000 consumers nationwide use its mobile debit app to facilitate ACH payments to 1,100 dispensaries.
But CanPay appears to be the exception among providers of bank-to-bank payments. Ron Herman, founder and CEO of Sionic, an Atlanta-based company that built a bank-to-bank payment solution, has been working with Jack Henry & Associates to support bank-to-bank payments using The Clearing House's RTP network and FedNow, which is operated by the Federal Reserve. Neither network would be open to moving transactions tied to cannabis businesses due to the regulatory risks tied to federal laws, Herman said.
Sionic was working with Toronto-based Canadadac to provide payment systems for cannabis businesses, but it hit the pause button on that. Herman insisted that Sionic will stay clear of the cannabis market absent federal legalization. "Pay-by-bank won't be an option until that occurs," he said.
Boarding CBD shops also a headache
It's really all about risk. Banks, as a rule, are risk averse. Some smaller banks and credit unions that are higher risk takers, if marijuana is decriminalized, may jump into the market, Herman suggested. "But that's a level of risk Sionic is not willing to take on."
ISOs and agents looking to board CBD merchants face similar obstacles. Dustin Magaziner, a partner at PayBright, a Raleigh, N.C.-based ISO, said on a recent Merchant Sales Podcast that he's been boarding CBD merchants, but it's not been easy lining up sponsor banks.
"A big part of it is the sponsor bank and what they're comfortable with," Magaziner said, noting that many aren't comfortable underwriting high risk businesses, and smoke shops and CBD businesses are among those considered most high risk.
"It's not just about getting an approval upfront, but what happens later on if and when there's a bank audit," Magaziner added.
"We've all seen instances where the processor approves a merchant, and the sponsor bank comes along and they don't like what they see, and they shut it down." 
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink.
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