In December 2018, Zack Johnson, CEO of Greenbox Robotics, the worlds first intelligent CBD robot, found out that their Elavon solution was being shut down twenty minutes after they plugged in their robots at SXSW as a part of the Select CBD activation. “It was in that very moment I realized that payment processing in the cannabis and CBD space was the only part of my business that was out of my control. It was extremely frustrating because unattended payment processing is what keeps our business operational.”
In a four-part article series, we at Solvent will explore the current hemp & CBD problem with the financial industry, take an in-depth look into the confusion caused by the passing of the 2018 Farm Bill, and explain how Solvent plans on providing affordable merchant processing for the hemp & CBD industry.
Let’s start at the beginning, the 2018 Farm Bill…
Hemp production as an agricultural commodity became legal with the passing of the 2018 Farm Bill in December 2018. The passing of the bill was an exciting event since the hemp & CBD industry had grown by 705.7% since 2016. Furthermore, BrightField released a report predicting it would hit $22 billion by 2022.
Since 1970, the Controlled Substances Act recognized all plant species under the cannabis family as marijuana thus not distinguishing them from hemp. The 2018 Farm Bill solved this problem by defining hemp without removing marijuana from Schedule 1. So, what is the real difference between hemp and marijuana?
Hemp is a different cannabis variety from marijuana. Legally, the only difference between hemp and marijuana is the concentration of THC. Any part, extract or derivative of it can’t contain more than 0.3% on a dry weight basis. If surpassed, it’s recognized as marijuana and is illegal. The line; therefore, between being legal and illegal is thin.
The 2018 Farm Bill and the Hemp Industry
As long as hemp is grown compliant to the 2018 Farm Bill, it’s not classified as a controlled substance. Hemp may be used in the production of non-ingestible goods such as paper, furnishings, and clothing. However, once it’s involved in the creation of CBD products to be added to food and drinks, the U.S. Food, Drug, and Cosmetics Law comes into play.
During April 2019, Commissioner Scott Gottlieb released a statement saying, “As we’ve stated earlier before, we treat products containing cannabis or cannabis-derived compounds as we do any other FDA-regulated products. Among other things, the FDA requires a cannabis product (hemp-derived or otherwise) that are marketed with the claim of therapeutic benefit to be approved by the FDA for its intended use before it may be introduced into interstate commerce.”
In short, hemp products sold as food or food supplements are subject to regulation under the Federal Food, Drug, and Cosmetics Act (FFDCA) and must meet existing federal regulations.
The FDA also requires that manufacturers, distributors, and sellers of hemp products comply with state-controlled substance laws.
Hemp is mostly legal in the eyes of the federal government; however, individual states need to formulate their own policies around hemp production. The National Law Review advises each cannabis business to determine whether their state:
· Allows hemp cultivation but prohibits products manufactured from hemp
· Allows only non-ingestible hemp products
· Permits hemp products only when used for medicinal purposes
· Restricts hemp products shipped from outside the state
· Requires hemp products to be registered
· Requires manufacturers, distributors or retailers of hemp products to be licensed
Once considered, they should be able to confidently operate their businesses while remaining compliant in the eyes of the federal and state laws. However, has this confidence spilled over to the financial services dealing with them?
The Sudden Exit of Elavon
With the legalization of hemp, CBD businesses looked forward to receiving financial services that other businesses received so easily. However, the response they received was unexpected.
Elavon, a subsidiary of US Bankcorp, in the fall of 2018, began to offer merchant services to CBD businesses. The response they received was higher than they had expected and unfortunately came with excessive fraud and chargebacks.
In February 2019, they, therefore, withdrew from the industry with the following announcement, “After several months supporting this merchant segment, it has become clear that the evolving pace of the Federal and State regulatory framework makes it extremely difficult to validate the qualifications required to operate within the industry. It is with an abundance of caution that we make this decision.” Numerous businesses, as a result, were left prey to overpriced and backdoor financial solutions.
Advances in technology to enhance KYC
In 2014, the Financial Crimes Enforcement Network (FINCEN) developed regulations to help guide financial institutions in their Customer Due Diligence procedures as they dealt with cannabis-related businesses.
To reduce the risk taken on by financial institutions, various technologies have been developed to enhance KYC for financial institutions. The idea behind these technologies is to conduct better customer identification and customer due diligence, making it easier to verify who is purchasing, what they are purchasing, and where they are purchasing. Managing risk, therefore, becomes more effortless and a more precise view is obtained of whether every transaction is compliant.
However, why should financial institutions consider supporting the hemp/CBD industry despite it being high-risk?
Well, part of the answer begins with Charlotte Figg.
Entangled in Charlotte’s Web
When Charlotte was five years old, she suffered from a form of epilepsy which caused 500 seizures a week. Thanks to a CBD-based product made from a strain of cannabis called Charlotte’s Web, her seizures reduced to twice a week and, with time, vanished completely.
Charlotte’s story opened the eyes of researchers to the possible benefits of CBD in the medical world. Families faced with the same illness could now help their children live healthy lives.
The hemp & CBD industry may have significant financial potential and face the possibility of being used to conduct fraudulent behavior, but it also bears a great deal of promise to the many patients who have benefited.
Financial institutions should consider how they can support the businesses who are genuinely trying to make a difference in society without having to open themselves to the risk of being involved in fraudulent behavior.
One question worth exploring is this: What does the current financial landscape look like for CBD merchants?
To be continued in the next article…
The article was written by Bakhita Kamau, a freelance writer for Solvent