New York State's Cannabis Market Faces Steep, Familiar Challenges

By Scott Solomon, CEO of Operational Security Solutions (OSS) 

The cannabis world awaits the rollout of New York’s adult use marketplace. New York has a rich agricultural history, thriving cities, diversity, and many cannabis consumers. The state already has one of the largest cannabis markets, consuming between 1 million and 5 million pounds of cannabis products annually. A thriving licensed cannabis market in New York would also likely create opportunities across job sectors and potentially generate billions in needed state revenue. 

Rules are incrementally coming online, and licenses are being granted, creating the state’s legal product supply infrastructure. All the while, the Office of Cannabis Management (OCM) is heading up a task that few states, if any, have been able to create: an inclusive, equitable industry focused equally on generating restorative justice and billions of dollars in revenue. The OCM is set to license up to 150 dispensaries through early 2023, with additional approvals expected in later application windows. 

If successful, New York could become one of the leading cannabis markets in America in just a few years. “If” being the key word here. While the state looks on track to achieve its goals, numerous hurdles have tripped up or taken out other well-intentioned states. Operators and hopeful licensees across the supply chain eagerly await the rest of New York’s determinations. No matter the outcome, licensed cannabis ventures will encounter the same substantial hurdles facing the entire marketplace: staying solvent and compliant.

The New York Market’s Challenges

New York’s regulators and operators must contend with similar steep challenges other states face with booming unlicensed markets. At the same time, operators are likely to run into funding issues that could shutter the business. The former has its solutions but remains a tall task. The latter is a bit more upbeat of an outlook at this time. 

In 2014, the US Financial Crimes and Enforcement Network clarified its expectations for the Bank Security Act (BSA) concerning cannabis accounts. Plainly speaking, if a licensed cannabis business adheres to BSA regulations, it can receive services from a financial institution. Financial institutions also received clarity, essentially saying that if they conducted more thorough due diligence on potential accounts, federal agencies would not take action against either party. 

The news isn’t all positive, however. Due to federal regulations, charges using payment systems, like credit cards, remain illegal. Companies offering cashless ATMs or similar payment options are also federally illegal and could face legal action. 

Funding issues may slowly erode, but compliance will remain an ever-present concern. Staying on top of ever-changing rules and regulations begins at the oft-confusing application phase, often made murkier due to local cannabis licensing rules. Compliance concerns only grow as the business further becomes a reality and eventually matures. 

Working with various local and state bodies, including inspectors, city councils and state agencies is difficult enough when you’re also trying to run a business. Complying with state rules can prove challenging, particularly when an operator is not used to having transparent conversations with regulators. Many from the legacy, or unlicensed, market have a deep fear of government and law enforcement. And even if willing to comply, state laws can often be complex and burdensome for operators.

Like compliance, security must remain a priority with companies often needing to exceed state minimums to ensure staff and asset safety. The troubling trend is largely caused by a lack of banking solutions available or known to operators. Rather than traditional banking, cash is left at dispensaries or seemingly secure locations, becoming vulnerable to thefts and related crimes. 

Licensed operators also face the threat of legacy operators who benefit from untaxed markets with many already established buyers. Regulated, lab tested products are expected to sway many consumers to licensed dispensaries. Still, legacy markets like California’s have swelled since recreational sales began. If unable to integrate legacy operators and buyers, New York could face similar challenges in the years ahead. Already facing losing sales to neighboring legal states in Massachusetts and New Jersey, the state must act soon - and correctly - or face coming up short on critical goals imposed. 

New York’s Possible Solutions

Addressing these pressing challenges is not simple. Success will come from a collective effort between operators, regulators and engaged communities. 

The word is getting out on banking solutions, but red tape still prevents access. Lawmakers are taking action as more information is presented to them. In New York, Senator Jeremy Cooney introduced SB S8758, which would allow the OCM to share applicant information with requesting financial institutions. If approved, banks would not need to file costly suspicious activity reports for every cannabis transaction. The law is believed to help improve customer relationships and make cannabis banking less burdensome and compliance-laden for financial institutions. The bill is currently in committee. 

Federal and state lawmakers are listening and will hopefully improve industry funding and public awareness. At industry-focused gatherings like the Payments Banking and Compliance (PBC) Conference in Washington, DC,, lawmakers spoke their minds and heard from vendors, banking partners, and other concerned parties in the cannabis space. These conversations don’t ensure progress, but they show that lawmakers are warming to cannabis as time passes. 

Rules handed down by the OCM will set the path for the market and its operators. Providing clear regulations concerning licensing, operating and compliance is vital. So too, is embracing the small market. Lawmakers should pass rules that support and encourage participation from small market operators, including many hemp farmers who have received conditional licenses to grow marijuana for the recreational market. 

New York would be wise to embrace small market growers and other operators. The state’s announced $200 million equity fund could be a great support when funded. New York City has also announced plans to integrate gray market operators into the city’s legal small business sector. Support for the new market must also come from the community. Getting locals to buy in and report unlicensed activity will be crucial to keeping licensed operators open. 

With much left out of their control, cannabis operators can only plan whenever possible. Security is one component where companies can get ahead. With cannabis operators often targeted, companies must have security measures in place. From cameras to cash-in-transit handling, every step counts. Even when implemented to a T, risks remain, thus highlighting the need for federal action on banking to mitigate at least one substantial market concern. 

We await the rollout of New York’s market. While many concerns remain, operators should breathe more easily about their financing and banking solutions. Options are available and could grow if specific legislation passes. It remains to be seen if any reform occurs on the national level in the next year or two. 

In New York, we can undoubtedly expect action. Soon enough, the OCM will lay out its remaining parameters, and the market will open for operators. We can’t be sure of the outcome, but it appears that New York has been putting its best foot forward on developing an inclusive market that supports its large and small operators. If successful, the state could become a shining light in the state marketplace while setting an example for market equity, regulations and compliance.