Unveiling the pitfalls of proposed cannabis rescheduling and banking protections

In a landmark development for the cannabis industry, the Department of Health and Human Services (HHS) recommended in August that the Drug Enforcement Administration (DEA) reschedule cannabis from Schedule I to Schedule III under the Controlled Substances Act (CSA). The rescheduling recommendation reflects an ongoing trend in the evolving federal viewpoint on cannabis, which has been categorized for over 50 years on the CSA as having accepted medical use and a high potential for abuse.

HHS’ recommendation was soon followed by another historic development, as the Senate Banking Committee approved the Secure and Fair Enforcement Regulation (SAFER) Banking Act in September. The event marked the first time a stand-alone cannabis bill received a “yes” vote in the Senate, signaling a potential shift in legislative perspectives.

Both developments marked watershed moments for the cannabis industry in demonstrating the extent to which federal viewpoints have evolved regarding cannabis. Yet both are preliminary measures, needing further action to become law, and the fate of each is uncertain.

The DEA’s consideration of rescheduling cannabis from Schedule I (which includes heroin, LSD and ecstasy) to Schedule III under the CSA could have major implications for the industry. The process for rescheduling involves a comprehensive review by the DEA. In assessing HHS’s medical and scientific evaluations, the DEA is bound by law to defer to HHS on matters of science and health, but the DEA has discretion in assessing questions of law and policy regarding the classification determination.

The timeline for DEA’s determination remains unclear, and will likely include a 30-60 day public-comment period. Implementation of any determination would likely be further delayed due to lawsuits opposing any ruling.

If DEA accepts HHS’s recommendation and reschedules cannabis to Schedule 3, the move would statutorily recognize that cannabis has medical potential and lower abuse risk. Rescheduling would also remove major tax impediments that currently prohibit operators from taking many deductions that are available to businesses in other industries.

The move would ease some regulatory burdens, but would not fully legalize cannabis at the federal level. Schedule III substances (which include ketamine and Tylenol with codine) are less restricted than Schedule I, but are still heavily regulated, typically requiring FDA approval and made available only in DEA-licensed pharmacies. Since the industry currently does not meet these requirements, cannabis would remain illegal under federal law.

For the SAFER Banking Act, the path forward is also far from clear. Having passed the Senate Banking Committee, it now needs to be approved on the Senate and House floor, and be signed into law by the President. Hurdles such as competing legislative priorities, an ongoing election season, and the challenges of securing at least 60 affirmative Senate votes cast uncertainty on its future. Senate Majority Leader Chuck Schumer’s initial optimism for bringing the bill to the Senate floor has been tempered by these challenges.

If passed, the measure would provide safe harbor protections to financial institutions serving state-legal cannabis businesses, despite the ongoing illegal status of cannabis under the CSA. For example, the bill would prohibit federal regulators from terminating or limiting deposit insurance covering bank deposits solely because the financial institution services state-legal cannabis businesses. The Act would also establish that state-legal cannabis sales are not “proceeds from unlawful activity,” exempting them from certain anti-money laundering regulations.

The Act’s impact on the cannabis industry, while symbolically significant, is practically limited. Its financial protections protect bankers in creating safe harbors, but do not directly protect cannabis operators whose businesses would continue to remain federally illegal.

Since 2014, when the Financial Crimes Enforcement Network (FinCEN) issued guidelines, banking services have been accessible to the industry, albeit at a higher cost, so the Act does not provide anything new in that regard. The SAFER Banking Act might reduce the cost to access basic checking and depository services, but this is a relatively minor relief considering the broader financial challenges facing the industry, including the scarcity of availability of capital. It doesn’t significantly enhance financing options, leaving cannabis operators contending with high capital costs and the complexities of securing funds for a federally illegal activity.

Overall, positive developments in federal cannabis legislation mirror increase in public support. Over 70% of Americans support legalization according to a 2023 Gallup poll and adult-use consumption is now legal in 24 states and U.S. territories such as the Virgin Islands.

The SAFER Banking Act and the potential rescheduling of cannabis are consistent with and driven by public support for reform. Yet their benefits are more symbolic in nature. In reaching their current state, each has already demonstrated the progress being made on the federal level.

SAFER and rescheduling keep the industry in a state of partial reform and provide limited upside. Their passage may hinder full legalization efforts since opponents would likely argue the measures sufficiently address the need for reform.

A rejection of the SAFER Banking Act and rescheduling, paradoxically, may serve the industry’s interests best by keeping focus on the ultimate goal: federal legalization. Alcohol and tobacco serve as primary examples of federally legal substances that are outside of the scope of the CSA and subject to strict regulations on both the federal and state level.

In recent years, Congressional lawmakers have introduced a variety of legislative initiatives aimed at removing cannabis from the CSA and empowering states to spearhead its regulation. This approach, rather than patchwork and inconsistent reform, is best suited to create a clear federal framework from which the industry can mature and thrive.