What Is RegTech, and How Can It Help Your Cannabis Business in 2022?
To help ancillary businesses stay on top of complex cannabis regulations, we need RegTech platforms.
With U.S. legal sales projected to reach $24 billion in 2021, a 37 percent increase over 2020, cannabis is one of the U.S.'s fastest-growing industries. But many traditional companies that could serve cannabis operators such as banks, insurance agencies, law firms, marketing companies, and financial institutions are sitting on the sidelines.
Why? Cannabis is still federally illegal, and given the complexity of regulations and the ramifications of non-compliance, many ancillary entities have been reluctant to work within the industry. It's difficult for these entities to know how to jump in and do so compliantly.
As a nascent, rapidly growing industry, many cannabis companies have emerged over a very short period, and the regulatory landscape is constantly changing. There are many rules and regulations to follow for any player that enters the space, and these rules can vary substantially between states and municipalities.
In addition, as an industry that is not federally regulated and still highly stigmatized, ancillary players working with cannabis companies are subject to an intense amount of scrutiny. Failing to adhere to regulations can be detrimental, leading to substantial fines and, in some cases, a complete business shutdown.
But ancillary businesses have always played a vital role in helping core industries succeed—and cannabis is no different. Banks, insurance agencies, law firms, marketing companies, financial institutions, and others have the potential to make the cannabis industry safer and stronger as a whole. In return, the economic opportunities for the entities entering this space are tremendous, especially for the early movers.
One solution for ancillary businesses entering the cannabis space is to utilize robust RegTech platforms. What is RegTech? Regulatory technology platforms track pertinent rules and regulations and provide updates and guidance on laws so that companies can stay compliant and direct their focus towards their core competencies. While RegTech is undoubtedly helpful to several industries, it's truly a game-changer in the cannabis space.
With different rules and regulations in every medical and adult-use state, cannabis is uniquely complicated. In particular, for the companies that conduct business in multiple states, a RegTech platform is a handy tool to quickly access relevant information, perform self-audits, and stay ahead of regulatory oversight agencies. Platforms that automate tracking regulatory guidance are also more affordable, convenient, and reliable than outsourcing regulatory oversight to a law firm.
Staying on top of cannabis regulations in multiple states without RegTech is nearly impossible. To illustrate the confounding nature of cannabis regulations, our team of experts found there were 3,000 pages of regulation changes in January 2021 across just three states: Colorado, California, and Massachusetts. Using RegTech, a company could parse through changes relevant to them and perform a self-audit; if they broke compliance, their RegTech platform would send a notification and generate a remediation report to fix the problem.
In addition to the complexity of updates, there are variations in regulations between states that many companies wouldn't think about. For instance, an advertising firm working with a cannabis multi-state operator would need to know the specific advertising laws in a given state to ensure that packaging and marketing don't run afoul of local laws. For example, some states currently ban cartoon images on labels and advertising. In contrast, other states have broader (and often more vague) restrictions on graphics, fonts, and features that might make a brand's packaging attractive to children. RegTech can guide agencies on what kind of creative can be used on a state-by-state basis – and flag when they need further guidance on specific state regulations.
The banking problem
One of the biggest hurdles in the cannabis industry has been that major lenders and banks have been hesitant to participate. In this vacuum, some unscrupulous lenders have stepped up and charged exploitative interest rates, leading to issues and stifling potential growth for some operators. Banks, which can uplift the industry and fix many of the problems that plague it, are accustomed to stringent rules and regulations coming from the U.S. Treasury. They want to apply the same rigor to cannabis. Fortunately, RegTech takes a lot of the uncertainty out of the equation. Using a RegTech platform, a bank can verify a cannabis company's license and ensure its legitimacy. On the flip side, a cannabis company can utilize a RegTech platform to ensure their compliance records signal to a financial institution that they are mindful of and up-to-date on their compliance.
The emergence of RegTech designed for the cannabis space has had a positive impact thus far.
As the CEO of Simplifya, I've seen banks and credit unions who adopt RegTech begin to get involved in the industry. While there are still hundreds of banks and credit unions working with cannabis companies, and as more companies start using RegTech, this number continues to grow. Not only will the participation of banks help bolster cannabis companies and make the industry more equitable, but it will also make the industry a lot safer.
Cannabis has primarily been a cash-only industry, and rather than depositing their revenue in a bank, dispensaries have had to keep huge sums of cash on hand, making them particularly vulnerable. In 2020, there were 99 dispensary thefts, including a couple that turned deadly. When cannabis companies can use banks, we'll hopefully see a significant decrease in criminal activity.
It's imperative for any company involved with cannabis to comply with state rules and regulations. The fractured, complex cannabis compliance landscape isn't going away anytime soon – even after cannabis is legalized federally and interstate commerce is permitted. Abiding by state and local regulations will still be essential, and every player that enters the cannabis space should make compliance a proactive issue, not a reactive one. As more companies embrace RegTech, compliance will become easier, and the industry as a whole will grow stronger.