Why Cannabis Banking Liberalization Would Indeed Increase U.S. Competitiveness

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As war continues in the aftermath of Russia’s invasion of Ukraine, interest by policy makers and the media has spiked in competitiveness bills passed separately by the House and Senate to purportedly help the U.S. better compete with powers such as Russia and China. My Competitive Enterprise Institute (CEI) colleagues and I have mostly panned the America COMPETES Act (H.R. 4521), which passed the Democrat-controlled House on a largely party-line vote in February, about two weeks before the Russian invasion. Iain Murray, Wayne Crews, and others at CEI have pointed out that many of the bill’s provisions will not achieve its stated goal of increasing American competitiveness but instead undermine it.

However, during the House floor debate before the bill’s passage, one provision added to the bill would actually increase U.S. competitiveness by cutting red tape that hobbles exports from a growing American industry. Ironically, even though this provision has widespread bipartisan support, it became the punchline for Senate Minority Leader Mitch McConnell (R-KY) in describing all that was supposedly bad in the bill.

“China has been steadily building up its military and economic might, and the Democrats’ answer is to help Americans get high,” McConnell exclaimed on the Senate floor. But the provision did nothing of the kind. It simply clarifies federal law to allow banks and credit unions to provide financial services to marijuana businesses following the laws of the states in which they operate.

The provision stems from the Secure and Fair Enforcement (SAFE) Banking Act (H.R. 1996), which passed the House in 2021 as a stand-alone bill, 321-101, gaining the support of nearly all Democrats and 106 House Republicans. And as my colleague Matthew Adams points out here, bipartisan support for the bill’s approach is further demonstrated by the fact that former President Donald Trump, former Attorney General William Barr, and former Treasury Secretary Steven Mnuchin all expressed support for liberalizing marijuana banking.

Yet, the Senate leadership of both parties seems to be the problem—from Minority Leader McConnell pooh-poohing the Act to Senate Majority Leader Chuck Schumer (D-NY) holding it hostage to a more comprehensive approach that would package banking liberalization with efforts to address the injustices of the Drug War. The criminal justice issues stemming from the Drug War, including lengthy prison sentences for nonviolent offenses, are real, but unnecessarily prolonging the de-banking of legal marijuana firms simply perpetuates the Drug War’s injustices further.

This week, the Senate moved to set up a conference committee to resolve differences between the House and Senate bills. As the process moves forward, members of both parties need to realize that retaining the SAFE Banking Act in the final bill would have multiple benefits.

Today, banks and credit unions are reluctant to offer basic financial services to legal marijuana firms—from holding deposits to issuing credit and debit cards—because marijuana production is still illegal under federal law, even where it is allowed under state law. Thus, the financial institutions fear that they could be charged with money laundering or otherwise violating federal law if they serve firms engaged in any type of commerce involving marijuana.

Because cannabis firms often cannot put their money in banks or utilize credit and debit cards, they are forced to do business in cash and hold large volumes of cash. This in turn attracts crime. As described by Politico: “Lacking bank accounts, growers and retailers are forced to hold large stashes of cash on premises, a magnet for thieves and robbers.” The resulting crime has had tragic results, such as the shooting of a citizen last year who tried to stop an attempted break-in at a marijuana dispensary in Colorado Springs.

The SAFE Banking Act has attracted widespread grassroots support and received plaudits from longtime marijuana legalization advocates such as NORML, free-market groups such as CEI and Americans for Prosperity, and financial trade groups like the Independent Community Bankers of America and the Credit Union National Association. The groups all tout the obvious benefits of reducing violent crime and of giving banks and credit unions legal certainty when dealing with legitimate businesses.

But the legislation has benefits beyond even those. Namely, it would actually increase U.S. competitiveness, the stated goal of the COMPETES Act to which it is now attached. In McConnell’s Senate floor tirade, he scoffed at the notion that providing legal clarity for marijuana banking could in any way help U.S. firms become more competitive. “Needless to say, this is not a winning strategy for global competition between great powers,” he declared.

In truth, however, knocking down federal red tape hobbling marijuana firms would indeed make the U.S. economy more competitive through greater economic and employment opportunities and giving us a leg up in the sizable and growing markets for marijuana exports. According to an article in Kaiser Health News, global trade for marijuana reached an estimated $14.9 billion for 2019.

The Kaiser Health News article notes that, “after 20 years of experience, legal marijuana growers in the U.S. have the reputation of creating the best product in the world, scientifically grown and tightly regulated for quality and safety.” Given the worldwide trend toward marijuana legalization—it is now legal in at least 30 countries for medical purposes—the article argues that world markets would welcome high-quality U.S. pot. It adds, “The crop would be in high demand internationally—perhaps the centerpiece of a new U.S. industry—if not for the regulatory conundrum in which growers operate.”

This “regulatory conundrum” is a patchwork of conflicting federal and state laws, including banking rules. Marijuana actually can be legally exported from the U.S. if the Drug Enforcement Administration issues a permit, but federal rules that prevent interstate commerce as well as banking for marijuana firms effectively prevent the coordination necessary for an export market.

Ironically, reports the article, “Canada has emerged as the dominant exporter in the burgeoning global trade of marijuana,” despite its colder climate being much less suited to harvest pot than the warm states of the U.S. In fact, according to Newsweek, “a Canadian cannabis company has become the first international entity to be granted a license to import and sell its products in Ukraine.”

The lack of clarity on federal banking rules also poses issues for legal hemp, much of which is grown in McConnell’s state of Kentucky. Even though the hemp is grown primarily for industrial uses, banks are still reluctant to offer financial services to hemp firms simply because of the possibility that part of the crop could be used for marijuana and be in violation of federal law

It’s worth noting that in the 18th century, one nation became a world power by becoming the dominant exporter of hemp to Great Britain and much of Europe. That country, ironically, was czarist Russia.

Hemp back then was used for the production of ropes, sail cloths, clothing, paper, and linens. According historian Kent Masterson Brown, the plant at that time was recognized by the government for its useful application for military purposes, especially naval purposes, owing to its natural resistance to mildew and rot. Given that there may be a shortage in raw materials given the Russia-Ukraine war, and there already had been a shortage of cotton due to supply chain challenges preceding the war, hemp may become invaluable in fulfilling those uses again.

In this new era of global competition, we can’t let antiquated policies of the Drug War that Americans have overwhelmingly rejected keep American entrepreneurs from capturing a burgeoning global export market.

Competitive Enterprise Institute Research Associate Christian Johannessen contributed to this article. The author would like to thank CEI colleagues Michelle Minton and Ryan Nabil for their valuable insights on the issues involved.