A BUFFER: Current regulatory/legal landscape of hemp and hemp-derived products
In December of 2018, Congress passed, and President Trump signed the 2018 Farm Bill. This was a typical farm bill providing important agricultural policy extensions for 5 years. The interesting part of the bill were changes involving the cannabis plant. Before the 2018 Farm Bill, cannabis was not included in discussions regarding subsidies, nutritional assistance, and even crop insurance. Last year and this bill changed all of that; the cannabis plant is front and center in many discussions previously verboten.
Hemp is defined in the 2018 Farm Bill as the cannabis plant with one very crucial difference: Hemp cannot contain more than 0.3 % THC. Previously, the cannabis plant, ALL varieties and, therefore, their derivatives, was made illegal effectively by the Marijuana Tax Act of 1937 and under the Controlled Substance Act (Sound Familiar?) While it is true, Hemp Policy in the United States was dramatically transformed by the 2018 Farm Bill, there are some misconceptions about the full impact of the bill.
Is Hemp Legal in the United States?
Yes, but with serious restrictions and penalties for noncompliance. Prior to last December and a result, in part, of 2014, The US Department of Agriculture and state departments of agriculture allowed for pilot programs to study hemp and its various uses. Hemp experienced small scale expansion grown for limited purposes under these pilot programs. The 2018 Farm Bill changed all of that! Farmers are allowed to expand hemp cultivation broadly not just for limited pilot programs to market interest studies and diversified use/application tests. Hemp is specifically and explicitly allowed to be transferred across state lines without the state by state interference for commercial and other purposes. No federal limits were placed on the manufacture, sale, transport or the possession of hemp derived products as long as they were produced within the confines of all applicable laws, rules, and regulations.
That means Hemp is legal in the United States, right?
Wrong, there are restrictions!
Starting with the simplest “test,” Hemp cannot contain more than 0.3% THC. If the plant contains more than 0.3% THC, it would be considered non-hemp cannabis, or marijuana and would be granted no legal protection under the 2018 Farm Bill.
Now is where this gets more convoluted and interesting; individual states AND the Federal government will SHARE regulatory power over the cultivation and production of hemp and hemp-based products. Per The 2018 Farm Bill, individual state departments of agriculture, in concert with the state’s governor and chief law enforcement officer, must submit a plan for their individual state to the USDA. Unless the secretary of the USDA approves a state’s submitted plan, it cannot be made effective. In state’s not offering a plan for acceptance, the USDA will create a regulatory program and framework where cultivators must apply for licenses and operate compliantly with the federally run program. Confused, think of the ACA and health insurance, there was a federally run program for states choosing not to set up their own federally compliant solutions.
While the most recent Farm Bill legalizes hemp, the law also lists actions that are violations of the federal law including details on punishments for violation. In certain circumstances, such as repeat offending, violations reach the level of felonious. While these regulations are specific and come with potentially serious consequences, the Farm Bill does include pathways for becoming compliant.
So, CBD/cannabidiol is now legal?
Not so fast….
A common misconception revolving around the 2018 Farm Bill is the absolute legalization of CBDs. Yes, a section of the Farm Bill removes hemp derived products from schedule 1 of the Controlled Substance Act but does not reach the level of legalizing CBDs completely. The Farm Bill introduces that CBD produced from hemp is legal if that hemp is compliant with all applicable laws, rules, and regulations ONLY. The Farm Bill has does not address or affect state-run cannabis programs. Over the past 20 some years, 33 states have enacted state-legal cannabis programs and 10 of these states have also recreational adult-use programs. ANY and ALL cannabinoids produced from plants grown under these state-legal programs NOT consistent with the 2018 Farm Bill, will remain federally illegal.
This confusion over legal status and the resulting perceived risk has resulted in what banks and other financial institutions call “de-risking.” CBD retailers, in fact, the whole CBD supply chain lost much of its access to banking and reliable merchant processing. In the spring of 2019, Elevon, a major player in CBD merchant processing, pulled out based on some of the regulatory uncertainty the 2018 Farm Bill introduced, leaving a large number of CBD merchants and industry participants without merchant processing.
The Skies are Grey, but The Future is bright!
As more and more states codify and submit for federal sign off their specific hemp programs, the smoke will clear and normalized financial services will be the result. Meanwhile, there is uncertainty and consequentially reduced access to financial services for the CBD industry as a whole. Missouri, for example, has created a draft of a new 2018 Farm Bill compliant hemp regulatory scheme that ultimately will be submitted to the federal government for “sign off.” Meanwhile, MO CBD businesses, including those dealing in products derived from and plants with less than 0.3% THC, struggle to gain and maintain merchant processing and other financial services.
Recently, more and more banks and other financial institutions, including merchant processors, are entering or re-entering the hemp/CBD space. They are doing so with policies and procedures helping to identify and reduce the risks current and in the future. If you are a Hemp/CBD industry participant looking for financial services in the current environment of uncertainty, stand above the rest. Adopt policies and procedures that will meet the requirements of the bank, providing the transparency needed to overcome the perceived risk.
//TOM LORENZ
Avenir Financial tom@avenirfinancial.com
Tom, of Avenir Financial, is a three-decade veteran of financial services industry working currently with Missouri financial institutions helping them uplift policies and procedures enabling them to service industries traditionally underbanked.
