CBD is a medically-promising substance found in cannabis plants and usually derived from hemp. Yet not even this non-psychoactive compound has escaped scrutiny. As it stands today, these purchases are often required to be in cash, an inconvenience for shoppers and a more serious problem for sellers.
Similar to Their Southern Neighbors: the United States
A similar issue exists in parts of the United States, where some states have legalized cannabis (either for medical use only or for any use) but the federal government has not. Because banks are federally regulated, they must treat cannabis sales as illegal and cannot handle money from the sale of these goods.
However, since hemp-derived CBD has been reclassified and is no longer considered an illegal drug under the Controlled Substances Act, banks are generally free to handle CBD sales as they would any other supplement. That was, however, until the FDA approved the first-ever CBD-based pharmaceutical drug. Once that happened, CBD fell under the watchful jurisdiction of the FDA.
Currently, there exists uncertainty as to how the FDA will impose or propose regulations or waivers for the use of CBD in supplements, but investors, clinicians, researchers and the public at large remain hopeful. This uncertainty has led many banks and payment processors to include CBD on their banned list of businesses to support. However, many have included an exception for topical CBD products such as lotions and creams which do not fall under FDA regulation.
The Issue With Canadian Banks is Complicated
Canada’s banks are equally at liberty with respect to CBD products and recreational cannabis as well—and yet many of them turn down dispensaries’ business.
The problem is multifaceted. One issue is that Canadian banks sometimes also have American customers, and many are publicly traded with their stock sometimes bought by Americans.
American perceptions, therefore, matter, and Canadian banks are reluctant to become associated with an industry that their southern neighbors might still think of as illicit. That said, we are starting to see the tide turn in favor of both cannabis and CBD. Canadian companies like Next Green Wave are focused on the U.S market, and operate a vertically integrated business including the cultivation, growing, manufacturing, extraction and distribution of medical and recreational marijuana as well as CBD.
A problem more familiar to those in the financial world is that both the cannabis and CBD sectors are considered speculative, with a lot of investor interest and not much of a track record as yet. Given that the market is “new”, there is nothing to indicate how these businesses will actually perform long-term. Some banks—and many credit-card companies—simply don’t want to dip their toes in uncertain waters.
Financial Inconvenience Hinders Growth
Buying with cash only is inconvenient for customers, but stores do what they can to minimize the difficulty. Most have ATMs on-site, for example. The real problem is what the cash-only stricture does to the businesses; having a lot of cash on hand is dangerous, and buying equipment or real estate is difficult or impossible (imagine having to pay for a million-dollar extraction machine in cash). Loans, mortgages, and lines of credit are all but unavailable, and owners must often sell stock in order to raise money for basic business improvements.
The issue is not entirely black-and-white. There are banks willing to work unreservedly with cannabis and CBD businesses, just not very many of them (yet). Others are beginning to develop a number of limited partnerships with companies in the industry, or to add cannabis companies to their lists of recommended stocks. And yet, the reticence of the financial world is still serious enough to cause a problem for businesses that might otherwise be taking advantage of a surge of consumer and investment interest.
Policy Changes on the Horizon?
There is speculation that the majority of large banks will begin changing their policies soon, possibly within the next few months, though it’s likely the institutions will remain highly selective, at least initially, extending credit only to well-established businesses that offer the least risk to investors. In the meantime, stores are left to seek relationships with the few banks that do work with the cannabis sector, or to negotiate deals with alternative institutions, such as the Square credit-processing platform, that offer at least some of the services that a relationship with a major bank would. So far, however, Square and its competitors have not entered the water yet, either. Alternatives to cash transactions, for many stores, are still simply not available.
The reticence of Canadian banking towards cannabis and CBD is not about legal vulnerability but about financial risk. The risk is understandable, to some extent, for while the legal cannabis industry is very large, it is also very new—that means all the businesses in the industry are very new, too, and the legal, financial, and cultural context of these businesses is still rapidly changing and, in some cases, still unclear. Nobody wants to jump into something new prematurely.
But at the same time, no one wants to be the one to jump in too late. And whoever first offers the retail cannabis and CBD sectors alternatives to cash (and other needed services) is going to make a lot of entrepreneurs very happy.