The global banking crisis is taking its toll on the cannabis industry. Already cut off from most financial services because of the continued federal prohibition against cannabis, businesses now are finding that funding from regional lenders and alternative sources is also drying up.

That’s a difficult situation as only about 10 percent of U.S. banks and 5 percent of all credit unions provide cannabis banking, according to Reuters.

Morgan Paxhia, co-founder of cannabis hedge fund Poseidon Investment Management, told Reuters that “what this crisis means is probably the duration of the capital tightness in our space (will continue) because we’re seeing risk-off mentality. We’re expecting banks to become more restrictive with lending and that’s going to have implications.”

Customers are directly impacted by this situation when they visit a dispensary which typically must deal only in cash.

Why Banks Can’t Offer Cannabis Banking Services

Cannabis remains a Schedule I illegal drug at the federal level. Despite cannabis legalization for both recreational and medical use in states across the country, banks still cannot offer financial services to cannabis businesses because they are subject to federal regulations.

If a bank does provide financial services to the cannabis industry, it runs the risk of violating federal law. That could result in severe penalties, including the loss of their banking charter and criminal prosecution.

The U.S. Congress has worked on a variety of laws to protect banks that want to extend financial services. But until the situation changes, cannabis businesses face a hard time in getting financial services. But even as more people back the idea of providing protection to banks, no change has occurred.

Banks also work in a highly regulated industry and must comply with strict anti-money laundering regulations. It can be difficult for banks to comply with these regulations when working with cannabis businesses, given current federal law.

Customers are directly impacted by this situation when they visit a dispensary which typically must deal only in cash.

How the Global Banking Crisis Impacts Cannabis

The entire global economic system runs on a series of agreements on monetary values, and at the core of these agreements is confidence that the financial underpinnings of the system are sound. The failure of two regional banks in the U.S. in the early 2022 shook investor confidence. The takeover of Swiss bank Credit Suisse further undermined that confidence.

While that may seem far removed from the cannabis industry, it is not. With confidence “shredded,” as Reuters put it, the ability to borrow money has become increasingly difficult. It’s especially tough for cannabis businesses that have few options in the best of times.

“Given they already have slim pickings when it comes to raising capital, nervous investors won’t help the situation,” Rachel Gillette, partner and leader of Holland & Hart’s cannabis practice, told Reuters. The crisis is expected to impact both the interest rates on loans as well as the ability to raise new capital.

Investors moved into the cannabis sector in hopes that the Secure and Fair Enforcement Banking Act (SAFE) would. But the SAFE ACT, which protects lenders serving legitimate cannabis-related businesses, remains stuck in the U.S. Senate.