Risk management within the cannabis industry: Building a framework for the cannabis industry

Abstract

Thirty states and the District of Columbia have legalized the use of cannabis for medicinal and/or recreational use by either formally or informally de-criminalizing its use. However, cannabis remains a Schedule 1 drug under the Federal Controlled Substances Act (21 U.S.C. Sections 801 through 812), leaving federal law in conflict with the laws of over half of the states. As a result, market participants in legal cannabis businesses face risks due to the industry's unique legal status within the United States. We examine the risks and challenges deemed by the cannabis industry as the top risks facing the industry's continued future growth and its sustainability. In addition to general risks inherent in a nascent industry, a legal cannabis business faces additional risks, such as risks in its banking and finance activity, placement of insurance, payment of taxes, and managing its supply chain. These legal businesses also face true legal risk from the possibility of being shut down by the federal government and seizure of assets and product under the CSA. This paper also examines whether the cannabis industry would benefit from a futures market to mitigate price risk.