• by Erik Oster , September 22, 2023

Despite 38 states enacting laws legalizing adult use for medical purposes -- and 23 doing so for recreational purposes --  how cannabis is categorized by the federal government has remained unchanged since it was classified as a Schedule I substance under the Controlled Substances Act (CSA) of 1970.  That means cannabis is placed in a category of substance with “no accepted medical use” and a “high potential” for abuse,” alongside drugs including heroin.s

It seems likely that will change. The Congressional Research Service (CRS) issued a report last week finding that the Drug Enforcement Administration will likely approve the Department of Health and Human Services’ recommendation to reclassify cannabis as a Schedule III substance, placing it in a category for “drugs with a moderate to low potential for physical and psychological dependence,'' like anabolic steroids and ketamine.

As the CRS wrote in its report, among the impacts of rescheduling would be easing medical research restrictions; eliminating DEA production quota limitations, while likely growing the role and demands of FDA oversight; and allowing producers to list deductions on federal income tax filings. While the impact on the recreational cannabis industry would be less direct and immediate, it would still be significant  -- with the potential federal income tax component alone being substantial -- and could be a harbinger of further federal reform.

A bill for banking reform for the cannabis industry proposed by Democratic lawmakers in the Senate could compound this impact further, easing restrictions that limit the ability of cannabis-related businesses to easily access capital.

CPG Insider caught up with David Charles, co-founder and CEO of Mood, an ecommerce dispensary that offer consumers legal THC products, to dig into the details of these proposed federal reforms.

This interview has been edited for length and clarity.

CPG Insider: What would federal rescheduling and banking reform mean for existing cannabis businesses and for those looking to enter the industry?

David Charles: Currently, companies can’t take any tax write-offs due to its Schedule I status, meaning they’re effectively paying a tax rate of 80%-85%. Everyone was betting on this move to reschedule happening a lot sooner. You can see it in the stock prices of cannabis companies. You’re already starting to see a lot of action around these stocks as the market gets more bullish about the prospect of federal drug law reforms and safe banking. There’s a magnitude of institutional interest in the market we haven’t yet seen.

How do you view the prospect of federal legalization? What does the potential fast track for that look like, and how long might a slower process take?

The slow walk would be that it’s rescheduled, safe banking regulation passes, and then I don’t know there’s a next legislative step. As institutional money pours in and more states open up, at some point in the next 10-20 years, it becomes an inevitability. The fast track could be five to 10 years.

Can you elaborate on some of the current restrictions that would be eased by rescheduling and bank reform legislation?

While Mood is a federally lawful company, we’re still treated as if we’re federally illegal all the time. It’s no joke. When you go out and look for banking services, it can take four or five months. You really just get treated as a criminal and it makes doing business really difficult. We wanted to get dental insurance coverage for our employees and were rejected by three servicers

While this is largely viewed as long overdue and much-needed reform in the industry, could there also be some negative consequences for smaller businesses attempting to keep up with regulatory oversight and increased competition?

A lot of regular people are going to lose a lot of money. It used to be that if you wanted to grow marijuana, you’d spend a few hundred dollars and sell it to dispensaries. Now it’s thousands to navigate that process at a small scale.

The same things happens at a larger scale: Costs go way up and there’s a lot of supply. There are burdens of compliance that industry consensus views as too much red tape, which takes time and resources away from people.

Obviously, cannabis should be tested for any impurities and labeled with clear indications for potency. The people who grow it shouldn’t then have to navigate an exhaustive series of additional regulatory barriers. If you’re running a relatively small business, that can cost a few hundred thousand extra per year which could put you out of business.

The biggest thing that regulators can do for the industry is to not overregulate it. Inevitably, the big corporates will win -- they always do. Hopefully regulators don't overregulate to the point where small businesses can’t even compete.