Are Cannabis Stocks SAFE to Buy?
Mar 24, 2022
By Jay Caauwe
Cannabis stocks, often referred to as pot stocks or marijuana stocks, offer an opportunity to invest in a relatively new market sector that many have termed up-and-coming. Equity index futures in the cannabis space can be a great way to access such a market in a more diversified way that requires less capital than stocks. Stay up to date on the potential for growth in cannabis stock investment.
When the Small Exchange launched S420, the first US cannabis futures contract in 2021, everyday people were afforded an opportunity to both invest in and speculate on a developing market segment. Like any developing market, pot stocks carry the challenges of risk and volatility.
As investors know, however, challenges can yield opportunities. And in a still federally prohibited product insight into the legislations that will lead to more ‘commodification’ of cannabis can afford investors a better sense of timing and direction to make an informed decision on when and how to use contracts like S420. To that end, a tutorial of the current banking practices and how future legislation will enable future market opportunities is worth exploring.
The SAFE Banking Act and Cannabis Companies
The SAFE Banking Act, officially H.R. 1595, is proposed legislation regarding disposition of funds gained through the cannabis industry. Generally, this bill would prohibit a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business. Medical cannabis is available in 37 states, with 18 states recognizing the legal use of cannabis as a recreational product. Yet within these same states, legal businesses in the cannabis industry are prevented from accessing standard banking practices enjoyed by most other state-sanctioned retail or wholesale businesses.
When considering whether to provide financial services to a cannabis-related business in a state where cannabis is legal, banks have significant penalties to weigh, including having their deposit or share insurance terminated or limited. Additionally, proceeds from a transaction involving activities of a cannabis-related business are currently considered proceeds from unlawful activity. Proceeds from unlawful activity are subject to anti-money laundering laws. These incongruities are what the SAFE Banking Act is looking to resolve.
Under the SAFE Banking Act, a depository institution would not be, under federal law, liable or subject to asset forfeiture for providing financial services to a legitimate cannabis-related business. This will allow for the creation of standard business practices between institutions and the retailer or wholesalers engaged in canna commerce. It is, after all, a consumer packaged goods driven industry.
Could New Legislation Lift Cannabis Stocks?
There have been discussions about rescheduling or de-scheduling cannabis as a Schedule 1 substance - a substance with no currently accepted medical use and a high potential for abuse - by the DEA. Those discussions do not cut to the core of the issue, however, which is how to effectively allow enterprises to enter into an industry currently hampered by federal banking policies.
As of April 19, 2021, the proposed legislation has passed the House and has moved to the Senate.
Once passed by the Senate, more allocations of capital and investment would be expected to take place in cannabis. And activity on the Small Exchange could be reflective of that bullish indicator on what may become a faster growing market segment leading to eventual greater adoption in the equity asset class.
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