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More Marijuana Regulation Is Always a Bad Idea

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Prior to 1913, marijuana was legal nationwide. Motivated by anti-immigrant sentiment resulting from an influx of Mexican immigration after the Mexican War in 1910, states started to outlaw marijuana. By 1931, 29 states effectively outlawed it. The Controlled Substance Act of 1970 officially banned marijuana federally, as part of the government’s War on Drugs effort.

These policies have caused incredible suffering through the loss of lives and livelihood—police violence against black and minority communities, poverty, asset forfeiture, mass imprisonment, and health hazard through adulterated black-market products, to name a few.

However, 2020 was a big year for drug legalization, especially marijuana legalization, and 2021 seems likely to continue that trend. However, layers of regulatory inconsistency have imposed a de facto barrier in the production, distribution, and consumption of marijuana or marijuana-based products in the legal context. There is a lot more work to be done.

For example, the 2018 Farm Bill legalized hemp, a marijuana derivative containing only 0.3 percent THC. Yet hemp farmers struggle to find banks to keep their legal business afloat. Erik Bogard, president of the hemp processing company Columbus Naturals, said: “I called probably 20 different companies and got denied 19 different times before I found someone, and it’s probably 10 times the cost of what it would be if we weren’t dealing with hemp.”

The strict 0.3 percent threshold is difficult to maintain since the concentration level varies depending on the growth period and harvesting environment. Testing requirements are not clearly laid out either. The Farm Bill puts the USDA in charge of setting testing regimes while the FDA and DEA are involved in other parts of regulating the derivates of marijuana.

Similarly, Marijuana farmers in states where it is legal face similar obstacles applying for loans—although caused by a different set of regulatory inconsistencies. As a New York Times article reports, “Growing and selling marijuana are, like using it, legal under Colorado law. But banks tend to take their cues from the federal government. Not only does selling marijuana violate federal law; handling the proceeds of any marijuana transaction is considered to be money laundering. Very few banks are willing to bear that risk.”

In Addition to that, D.E.A. agents began showing up at bank offices in Colorado to remind executives that as far as the federal government was concerned, the whole industry remained illegal. The state bankers’ association formally urged its members to avoid marijuana businesses.

Costly due diligence, regulatory hurdle involving multiple agencies, and liability triggered by the Controlled Substance Act make loaning to hemp farmers very risky. Moreover, inconsistency with federal law prohibits banks from serving local marijuana farmers in legal states.

Addressing the issue, the American Bankers Association has urged the regulators time and time again to introduce a coherent mechanism. Recently, the House passed the Secure and Fair Enforcement (SAFE) Banking Act which would protect banks providing services to state-legal marijuana services. Among 180 co-sponsors, 26 were from the Republican party—indicating a bipartisan effort. A similar bill has been introduced in the Senate with 8 Republican legislators out of the total of 38 currently cosponsoring it.

This, unfortunately, is the wrong solution. A more straightforward solution—which does not tangle FDA, DEA, USDA, and FDIC’s bureaucratic red tape, while keeping regulatory and banking costs low—is federal marijuana legalization.

It is absurd to micromanage marijuana derivative products with four different agencies when about 71% U.S. population already live in an area with legalized medical or recreational marijuana. The solution to this agency-bank circus is simple—make marijuana federally legal. This makes regulation simple to follow for farmers and bankers alike and cuts regulatory spending.

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