Regulating Cannabis in 2020

Hemp and CBD Products vendor at a market event in downtown Tucson AZ

We have entered the world of Cannabis 2.0. Or so the Washington Liquor and Cannabis Board has proposed, coining the phrase in two recent bills meant to help modernize the maturing legal market in their pot-pioneering state.

It’s a sign of the times. The phrase Cannabis 2.0 reflects how far the industry has grown since Washington and Colorado first rolled out recreational laws five years ago. Eleven states (and Washington D.C.) now allow legal pot. Illinois was the latest to join this group on Jan. 1, 2020.

More states will consider legalization this year. In particular, watch for the pro-pot movements in New Jersey, New York, New Mexico and Arizona as the most likely to succeed.

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As the recreational map grows, states that have already legalized will continue learning from their experiences, as well as from the experiences of other states.

Which is all to say that the legal cannabis industry, although still young, has reached a new phase of maturity.

“I think this is a transition year for cannabis,” says Brian Smith, communications director at the Washington State Liquor and Cannabis Board. “The system is relatively stable with regards to review, sales and commerce. Yet we’re still experiencing growing pains. We’re taking a long-term look at what the future of cannabis regulation looks like in Washington State.”

Reasonable Regulations

One of the challenges faced by state governments is establishing the proper level of cannabis regulation. It’s a Goldilocks scenario. Laws obviously should not err on the side of being too loose, yet overregulation of this maturing market could significantly hamper growth.

The solution for this problem seems to be communications. An open line of dialogue between regulators and cannabis business professionals — coupled with patience from both sides — has helped address these issues as they arise.

“Obviously public safety is the most important thing, but if any mistakes on the part of the industry can be rectified by education, we do that,” says David Harns, communications manager at Michigan Department of Licensing and Regulatory Affairs.

Recreational cannabis sales started in Michigan with the beginning of 2019. As in other legal states, there have been some issues with licensee behavior. 

“We try to educate them before we resort to punishing,” says Harns. “We approach it in a way that works with licensees rather than seeming like we’re out to get them. We want licensees to be successful. We don’t want them to think we have a ‘gotcha’ mentality.”

Instead, the Michigan regulating body remains in contact with the industry. Executive Director Orlene Hawks is constantly on the road to meet with licensees. The department also livestreams certain meetings to publicize information.

“Our teams work very closely with our licensees out there so that the licensees know what to expect,” Harns says. “There’s a difference between genuine mistakes versus purposeful evasion. We have come down with disciplinary action when necessary.”

On the West Coast, California is a bit further into legalization than Michigan.

“As we embark on year three of legalization, I think operators are getting more comfortable with doing business and adhering to the rules in place,” says Alex Traverso, assistant chief of communications Bureau of Cannabis Control in California. “However, if you listen to what folks are saying, there’s a lot of chatter about taxes being too high. I think that issue is going to be a big focal point this year: How do we make it less expensive for the legal operators to do business.”

It is the same scenario for the states that pioneered legal pot. As we transition into Cannabis 2.0, government officials are reconsidering the severity of marijuana taxes and regulations.

“Our original traceability system was tightly regulated, but it worked,” says Smith of Washington. “Now that the landscape is different, it’s time to rethink what is and isn’t necessary moving forward. Is our traceability system too complex? Now we’re working with the industry to see what exactly we need. We want to ease the burden on the businesses that want to comply.”

“For instance, we’re the only legal-cannabis state that doesn’t allow for vertical integration,” Smith continues. “Now we’re proposing that our smallest tier of growers can have some retail privileges, because they’re struggling against the economy of scale.”

Cannabis Collaboration

As the legal pot market expands, so too has the collaboration among the states that are involved with the industry.

“Individual states are now working together to formulate a regulators roundtable,” reports Mark Pettinger, marijuana spokesperson for the Oregon Liquor Control Commission (OLCC). “It’s moved from an informal gathering to a more-formal sharing of knowledge.”

What began with the initial legalization states — Washington, Colorado, Alaska, Oregon — now comprises more than a dozen states. This includes several that currently only permit medicinal pot.

“We’re becoming more tight-knit, and on the path towards a formal association,” Pettinger says. “Our group also now includes some provinces from Canada, and members of the Canadian federal government.”

The last meeting convened in Baltimore, with another one scheduled in Oregon for this coming June. In sharing best practices and knowledge, one goal is to bring about uniform application of standards. 

“We want greater synchronization among states,” explains Pettinger. “For example, when the vaping crisis hit, regulators could quickly get together to exchange information about that. That’s one good example of how this relationship building was beneficial in the short term with how we all handled a situation.”

Another reason that information sharing is important is because of the changing configuration of the private sector in cannabis.

“We’re seeing the rise of a lot of multistate operators,” says Pettinger. “They’re operating in 12 to 14 distinct jurisdictions, each with a unique set of rules and regulations. The idea is to harmonize as many of those rules as possible.”

The Black Market

Combating the cannabis black market remains a top priority for regulators. Switching consumers off of entrenched buying patterns was never going to be simple.

California has taken aim at illegal sales by highlighting that safer products are available through state-monitored, lab-tested operations.

“With our ‘Get #weedwise’ public awareness campaign, we’re working to show consumers the important differences between legal operators and those without a license,” says Traverso. “Last week, we were able to take a sample of products seized from illegal operators and have them tested. More than 75% of the vape cartridges we tested failed for vitamin E acetate and other harmful additives. We really want people to know that buying from the illegal market may save you a few dollars, but at what cost?”

Pricing is another important weapon against the black market. 

“We always thought that if we could get our prices competitive with the illicit market, then we could always be competitive with that market,” says Smith of Washington.

With average legal cannabis prices at or below the standard black market price of $10 per gram, Washington can justifiably fight for consumer dollars from the standpoint of value.

“Achieving that in our state stores, along with the variety of product that we have that’s also lab-tested, I think we have had a significant impact against the black market,” Smith adds.

Oregon has seen similar results.

“The prices going down for legal cannabis has brought a lot more people into the legal market,” says TJ Sheehy, operations & policy analyst for the Recreational Marijuana Division of the OLCC. “A 2019 report estimates that we have a 55% market share of the state’s overall cannabis market. The rest is a mix of medicinal, home grown and the black market.”

“After only three years, to have over a 50% market share, that’s a good number,” Sheehy adds.

Back in Washington State, officials have also made headway in handling larger elements of the illegal industry.

“Eastern Washington is pretty rural, and so people set up hidden grow houses there to move product out of the state,” Smith says. “Some people thought that because our state legalized they could get away with more here. We have had foreign nationals trying to operate illegal grow houses. But thanks to our work with law enforcement agencies, many of those people are figuring out that if they set up illegal operations here, they will get arrested.”

Issues in 2020

A number of issues that affected the legal cannabis industry last year will continue to nag the market in 2020. Testing labs remain at the top of this list.

“There have been a lot of complaints about the results of our labs,” says Smith. “Some people claim that our labs give higher THC results for some companies over others. They believe our labs are more friendly with some businesses than others.”

“It’s hard for us to validate that sort of stuff,” Smith adds, because the state does not currently license labs itself. Washington uses a third party to certify, and also does not oversee the day-to-day operations of labs. 

But that’s changing. Washington is in the process of transitioning control of the labs to the state’s Department of Ecology. “That will be a more appropriate setup, but that won’t finalize until 2024,” says Smith.

In the meantime, Washington labs are expanding their suite of tests this year for more contaminants — including pesticide. 

Oregon recently received negative headlines from reports that the state unintentionally produced a six-year surplus of cannabis.

“A lot of that was absorbed into the system in the form of more shelf-stable products, like tinctures, oil cartridges and edibles,” says Sheehy. “The supply continues to grow in the state, but so does the demand. The gap between supply and demand is closing, though it’s not necessarily in equilibrium between the two yet.” 

Part of the problem is the evolving diversification of the cannabis industry, along with consumer taste.

“The variety of products in this industry is amazing, though it does present complications in that it’s not as easy as saying we need to make 100 widgets for an order of 100 widgets sold,” Sheehy says.

The changing makeup of legal marijuana has also complicated regulations. The federal Farm Bill passed at the end of 2018 legalized some forms of hemp and CBD, fueling growth for yet another segment of this complex industry.

“Now that has to be reconciled with as well,” says Pettinger of Oregon. “Hemp now is more like what marijuana was when it first started being regulated — it’s still the Wild Wild West. With hemp, CBD and THC, there’s one plant, but not one system in place yet in terms of approaching it all from a regulatory aspect. They don’t have the same licensing and regularity requirements.” 

Social Equity

Most if not all of the legalized states have implemented some form of social equity program. These set aside licenses for members of certain communities. 

“Dozens and dozens of these cities have been disproportionately affected by marijuana prohibition, and we want to help people in those cities apply for licenses,” says Harns of Michigan. “That way, we’re actually impacting those communities for the better.”

Washington has a similar program and goal.  

“We have set aside additional licenses for minority communities that were disproportionately affected by the war on drugs,” says Smith.

What’s Next?

Many big issues remain on the table for cannabis in 2020. Banking is still a huge problem. Pot professionals in most states cannot use banks because marijuana remains a Schedule 1 drug federally. Without the ability to deposit money into banks, moving around all that cash is a huge security risk, to say nothing of the hassle.

Also on the federal level: Rumors persist that corporate interests in Washington D.C. have pushed for the deschedulization of cannabis. This would allow name-brand stores like 7-11 and Wawa to sell pot products like they were tobacco.

In that scenario, corporations with large, existing distribution chains would likely gobble up a significant part of the industry. The likes of Constellation Brands and Altria Group would be the big winners, thanks to their sizable investments in cannabis companies in recent years. Obviously this would represent a major shakeup of the industry, potentially reshaping the entire retail segment overnight.

But nobody really knows what will happen on the federal level in 2020. One thing remains clear, however: This budding industry continues to grow rapidly.

“The legal cannabis market is still a child proceeding towards adolescence,” says Pettinger of Oregon. “And it’s moving at a much faster pace than what happened after the prohibition of alcohol was repealed.”

Kyle Swartz is Editor of StateWays.

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