A New York State of Mind (on Cannabis)

Since 2014, New York has made medical cannabis available to individuals suffering from a variety of conditions under the Compassionate Care Act.  If recent news articles are to be believed, New York State is looking to legalize adult use cannabis early in 2019.  New York would then join the ranks of other states legalizing adult use such as Colorado, Massachusetts and California in allowing adults over the age of 21 to purchase and use cannabis.

It will be interesting to see what the final adult use program will look like when presented to New York.  There are numerous issues that require very careful thought.  These include the number of licenses to be issued for growers, processors and dispensaries.  Will New York continue to require that all grow facilities be contained indoors in a secure facility?  California has dealt with numerous zoning lawsuits regarding the location of facilities and dispensaries.  New York could see similar litigation arise.  Problems with supply plagued Canada and other states here in the U.S.  Preventing similar problems should be at the top of New York’s list of things to avoid.

Overall, it is not shocking that New York is moving in this direction.  While cannabis in the U.S. remains illegal at the federal level, many analysts believe the U.S. market for cannabis could be sizable, noting the current illicit market is valued at around $40 billion to $50 billion.  Additionally, New York City Comptroller Scott Stringer previously projected in May 2018 report that approving adult use cannabis in New York could develop into a $3.1 billion market with over $400 million in new tax revenue.

The economics of the plan are obviously enticing.  How New York State reinvests those funds will be paramount in determining how much good this initiative creates.  New York will also need to take steps to address nagging issues that continue to plague the industry.  These include employer/employee disputes, environmental issues and perhaps most importantly, banking issues.  As of the end of September 2018, there were 375 banks and 111 credit unions maintaining financial services for cannabis businesses, according to a report published in November by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).  That is not nearly enough for an industry of this size.

In 2014, FinCEN drafted a memo providing guidance to banks about how to serve the cannabis industry without running afoul of federal regulators. The memo required financial services providers to file regular reports on customers with cannabis accounts.  Instead of providing assurances to banks, many continued to be reluctant to work with cannabis businesses due to continued federal prohibition of the drug.  While banking groups want more clarification, none has been forthcoming as of yet.

New York State should take heed of this fact and work with cannabis businesses regarding this and other issues if they wish to have a successful adult use program.  Do not rush into creating a system just to have one in place, but take the time to recognize the enormity of this initiative. By looking at the flaws in other states’ plans and learning from their mistakes, New York has the opportunity to craft a thoughtful framework that is prepared for the numerous issues that are bound to occur.

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