ETA Expert Insights: Confusion and the Path to Confidence in CBD
By Cleveland Brown, CEO, Payscout, Chair, ETA Payment Sales and Strategy Committee.
Cannabidiol (CBD) products have rapidly grown in popularity and garnered widespread demand due to their potential health benefits and medical applications, being suggested to ameliorate seizures, anxiety, chronic pain, and more. Nonetheless, conflicts between federal and state legislation have resulted in a vast amount of uncertainty for consumers, retailers, and financial institutions. These uncertainties stemmed largely from ambiguity surrounding current legislation, primarily the Agriculture Improvement Act of 2018, a piece of federal legislation commonly known as the “Farm Bill.”
The Farm Bill, which was passed in December 2018, removed hemp from the Controlled Substances Act and thus removed its status as a Schedule I federally controlled substance. Consequently, this legalized the cultivation of industrial hemp, and as a result, all hemp and hemp-based products (including hemp-derived CBD) became legal. However, while hemp-derived CBD became unprohibited, the Farm Bill did not address the cultivation of marijuana, and therefore CBD derived from marijuana plants remained illegal, resulting in widespread confusion regarding the legality of CBD.
CBD is a non-psychoactive compound that can be derived from hemp and marijuana plants, both of which are varieties of plants within the cannabis family. From a molecular perspective, CBD is identical regardless of whether it is extracted from hemp or from marijuana. The difference lies primarily in the levels of THC (the psychoactive compound in cannabis) present, with hemp-derived CBD being legally required to contain less than 0.3% THC, whereas marijuana-derived CBD contains greater than 0.3% THC. This generated substantial confusion, as while the difference between hemp-derived CBD and marijuana-derived CBD may not be easily discernible, only hemp-derived CBD is legal from a federal standpoint.
On a federal level, the Drug Enforcement Administration (DEA) and the Food & Drug Administration (FDA) are also involved in the regulation of CBD. According to the DEA, any substance produced from marijuana is classified as a Schedule I substance, which implies there are no known medical uses and a high potential for abuse. This means that marijuana-based CBD is still viewed by the DEA as a Schedule I substance despite the passage of the Farm Bill.
According to the FDA, CBD products are permitted for use as cosmetic ingredients, but may not be marketed as dietary supplements. Additionally, foods to which CBD have been added may not be put into interstate commerce. The reasoning stems from the FDA’s approval in 2018 of the CBD-containing drug Epidiolex for rare forms of epilepsy, leading the FDA to view CBD as an active ingredient in a prescription drug, and therefore restrict its usage in food, beverages, dietary supplements, and ingestible animal products. Following the FDA’s approval of Epidiolex, the DEA announced that all FDA-approved, finished-dosage formulations of CBD containing less than 0.1% THC, such as Epidiolex, would be considered as Schedule V substances (the least restrictive schedule).
After the Farm Bill was passed, many parties attempted to enter the CBD market but subsequently backtracked due to the uncertainty that evolved from areas of the Farm Bill that were left open to interpretation. From a federal perspective, CBD’s legality is determined based on whether it was derived from hemp or marijuana, with hemp-based CBD being legal and marijuana-based CBD being illegal. However, from a state perspective, numerous states have legalized medical and/or adult-use marijuana, meaning that in those states, marijuana-derived CBD is not prohibited according to state law. As a result, in states where medical or adult-use marijuana has been legalized, the legality of marijuana-based CBD products remains in conflict between federal and state legislation. Moreover, as CBD is regulated on a state-by-state basis, products that are legal in one state may be illegal past those state borders. This discrepancy between federal and state legislation led to significant uncertainty, causing many banks and financial institutions to prohibit accepting CBD businesses, in order to prevent risks of violating current legislation.
From a Card-Brand perspective, although marijuana has been legalized in numerous U.S. states, as marijuana is still illegal according to federal law, all related transactions are currently prohibited by Visa. Moreover, in accordance with the FDA, acquirers and their third-party partners must ensure that any merchants selling CBD are not marketing CBD products as food products or dietary supplements, and are not making any disease claims about CBD (including on product labels, websites, and any related social media). Additionally, merchants must also be selling hemp-derived CBD only in jurisdictions where it is legal, as hemp-derived CBD is not currently legal in all 50 states.
As the Farm Bill left several unaddressed questions regarding CBD’s legality, many businesses and financial institutions were looking for something to specifically address their engagement with cannabis, which is where the STATES and SAFE acts came into play. The STATES (Strengthening the Tenth Amendment Through Entrusting States) Act proposes to amend the Controlled Substances Act to restrict enforcement from federal authorities against state-legal marijuana activity, and remove liability for marijuana businesses that are in compliance with state laws. The act also includes certain banking-related provisions, proposing that cannabis-related transactions that are compliant with state law shall not be deemed unlawful, with the aim of allowing banks to engage with cannabis-related companies.
While the STATES Act touches upon several banking-related issues, the SAFE (Secure And Fair Enforcement) Banking Act expressly focuses on the banking sector, aiming to improve access to banking and financial services for state-legal, cannabis-related businesses. This would be achieved by providing a safe harbor for depository institutions, in order to reduce their reluctance to provide financial services to state-legal cannabis-related businesses. As of September 2019, the SAFE Banking Act passed the U.S. House of Representatives and has subsequently moved on to the U.S. Senate. If the bill were to be enacted, this would impact the current landscape in several ways. By enabling state-legal cannabis-related businesses and service providers to gain access to financial services, it would allow these businesses to reduce reliance on cash, increasing safety for both businesses and consumers, and allowing the government to collect on taxes for these transactions.
Taking all the aforementioned factors into account, it is clear why many businesses have reticently accepted selling CBD products in-store, while at the same time, many remain wary. On one hand, the CBD industry represents a booming market with significant potential, yet on the other, many regulatory and legislative hurdles still persist. The STATES Act and SAFE Banking Act thus have the opportunity to clarify present uncertainties and bridge the gap between these two logical conclusions, allowing the industry to cultivate.