Illicit Cannabis Market Balloons To $79 Billion: Is Rescheduling Enough To Fix The System?

The $79.3 billion illicit market remains a significant competitor to the legal cannabis industry, Beau Whitney, founder and chief economist at Whitney Economics, says.

Whitney, scheduled to speak at the upcoming Benzinga Cannabis Capital Conference, recently shared his thoughts on how rescheduling could affect cannabis companies and the regulatory environment.

Federal rescheduling could open doors for cannabis businesses, particularly regarding access to traditional banking services and capital markets. However, Whitney cautions that predicting the exact outcome remains challenging. This is due to the complexity of the regulatory process and the possibility of political changes.

"Given that the policies have not yet changed and given that there will be a long process to develop, review, and implement new policies, it is not clear what effect that rescheduling will have on banking policy and access to capital," Whitney said. "There may also be a new Congress or presidential administration involved, so it is difficult to predict."

Even with uncertainty surrounding the future, Whitney was clear that the industry’s current state is unsustainable.

“The current system obviously is not sustainable and is generating massive wealth destruction in every state that reform has been implemented in," he said.

According to Whitney’s data:

• U.S. cannabis sales are projected to reach $28.8 billion in 2023
• $29.1 billion in sales by 2024.
• Only about 20% of cannabis licensees are profitable; this leaves many businesses financially vulnerable.
• Total delinquent payments amount to $3.8 billion, representing 1.6 months of 2023 sales.

Challenges to Cannabis Growth and Access

Beyond rescheduling, one of Whitney’s primary concerns is the heavy regulatory focus on hemp. Its limiting the potential for adult-use and medical cannabis markets, he argues.

"The focus on hemp is hurting long-term opportunities for adult-use and medical cannabis by limiting growth and access to traditional retail channels," Whitney explained. This lack of access has also led to the persistence of the illicit market; as Whitney noted, "Lack of consumer MJ access ends up perpetuating the illicit market."

Regulatory policies have also been overly fixated on cannabinoids, leaving major responsibilities unaddressed.

While rescheduling could provide some relief, especially concerning Section 280E (which restricts tax deductions for cannabis businesses), it wouldn't be a complete solution.

"280E would be beneficial for improved cash flows, but it is only a partial solution," he said.

Regulatory Reset Needed

Whitney didn't stop at rescheduling; he also stressed the need for a broader reevaluation of cannabis regulation. He highlighted the imbalance between public safety concerns and the needs of industry operators.

"Regulators need a reset," Whitney said. "Their policies are too focused on public safety and do not balance policies related to operator health, to the point where the costs of regulation are greater than the perceived public safety benefit."

As the Benzinga Cannabis Capital Conference draws closer, Whitney's views are expected to spark important conversations about the future of cannabis regulation and the industry’s economic health. The conference, featuring industry leaders and experts, will offer a platform to address these pressing issues.

Image: Shutterstock