A European CBD ruling and its implications for acquirers

We examine the implications for acquirers and payment service providers of last year’s ruling from Europe’s highest court on CBD.

In November of last year, the European Court of Justice (CJEU) ruled that cannabidiol, a cannabis-derived compound known as CBD for short, was not a narcotic drug. This has important implications for the free movement and sale of goods in the EU.

Before we look at the regulatory part and implications, let’s briefly look at the science. The terms ‘psychotropic’ and ‘psychoactive’ are used somewhat interchangeably. They both mean ‘capable of affecting someone’s mental state’.

The primary psychoactive ingredient in cannabis is tetrahydrocannabinol, or simply THC for short. This is only one of many chemicals, known as cannabinoids, produced by the cannabis plant. Another is CBD. Unlike THC, this is not psychoactive; it doesn’t get people high.

However, studies have shown that CBD does have therapeutic promise in managing various health conditions, including as a painkiller for arthritis, an antidepressant for anxiety and to prevent epileptic seizures in children, as well as improving wellbeing.

So, that’s the science part over with. Back to the regulatory part.

CBD “does not appear to have any psychotropic effect”

The European court decision that CBD was not a narcotic meant that, in practical terms, member states could not prohibit the free movement of CBD goods, because they are not banned substances.

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The underlying case involved two directors from KanaVape, a CBD vape product marketed in France using CBD made from whole hemp plants. Under French law, only the fibre and seeds of hemp plants may be put to commercial use, not the flower or leaves.

The defendants were prosecuted for selling the vape product in France, fined and given a suspended sentence. The French Court of Appeal in Aix-en-Provence referred the matter to the Court of Justice of the European Union (CJEU). It was asked to opine on whether preventing the sale of the product violated EU single market principles.

As part of its ruling, the CJEU considered whether CBD derived from hemp flowers could be regarded as a narcotic. If so, France would be entitled to prohibit its sale.

The UN drug control treaties behind the relevant EU laws date from the 1960s and 70s and do not contain direct references to CBD. The CJEU found that CBD “does not appear to have any psychotropic effect or any harmful effect on human health on the basis of available scientific data.”

Furthermore, the court ruled that it would be contrary to the purpose and general spirit of the 1961 UN Single Convention on Narcotic Drugs to include CBD under the definition of drugs, given its lack of psychoactive effects.

The CJEU has already prompted several important decisions. The European Commission issued a statement shortly after the ruling, declaring that since CBD lacks psychoactive properties, it would resume the review of Novel Food product applications. The French government is devising new regulations for the commercialization of CBD products.

Many legal ambiguities still exist so it will take time before national and regional legislation is updated. The most pressing ambiguity is around the amount of psychoactive THC that can be present in CBD products. Each jurisdiction tolerates different amounts of THC.

In Ireland, for example, even trace amounts of THC are forbidden, which is tantamount to an outright ban. Since the federal legalization of hemp and hemp products in the US through the 2018 Farm Bill, hemp products may contain up to 0,3% THC. And Switzerland allows up to 1% THC in hemp products, by far the most lenient regulation on the European continent.

What does this mean for acquirers and PSPs?

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The sale of CBD products is a complex and dynamic space. Regulations differ from country to country. They’re also changing quickly, which means acquirers have to keep a watching brief on developments to know and manage their specific risks.

The global CBD market was already worth $2.8 billion in 2020. This is expected to expand at a compound annual growth rate of more than 20% from 2021 to 2028, according to Grand View Research. But while the opportunities are high, so are the risks. These are mainly related to the products themselves, the claims made about them and how they are sold.

1.     The products

The sheer range of CBD products now available adds to the complexity of merchant underwriting. They include herbs, resins and oils, and other types of smoking products, such as e-liquids and crystals, which mirror established illicit cannabis products. Then there are CBD-infused edible products, drinks and ingredients – flour and pasta, for example. Balms, creams and pastes are also available.

E-commerce merchants can change the products they sell quickly by simply updating their web pages. With thousands of CBD products for sale, new ones being introduced, and old ones withdrawn all the time, acquirers must consider how they will monitor their merchants.

How will they know that they are only offering agreed products for sale? How will they monitor regulatory changes within the sector at a domestic, regional and global level? This is applicable at boarding stage and throughout the lifetime of the relationship.

2.     The claims

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Merchants and their acquirers must be cautious around claims. Medicines, dietary or food supplements each have their own requirements for the advertising and marketing claims that can be made about them.

At a high level, while it is possible to make medicinal claims about products classified as medicines, it is not possible to make similar claims about non-medicinal products. The nature of the product determines the claims that can be made about it and vice versa.

Unscrupulous merchants and exotic claims almost go hand in hand. It doesn’t take much to imagine the sort of youth-boosting, fat-busting, wellness-enhancing claims they could make. Or that some could offer ‘CBD’ products containing little to no CBD.

Mystery shopping and monitoring merchant claims helps guard against deceptive marketing practices, false advertising, trading standards infringements etc.

3.     The internet

Medicines, health products and cosmetics are tightly regulated, yet the internet as a sales channel is not. It also facilitates cross-border sales but, according to card scheme rules, transactions have to be legal in both the buyer’s and seller’s countries.

The card schemes don’t want to be associated with any illegal or brand-damaging activities. And acquirers don’t want to fall foul of any scheme compliance, high-risk or high brand-risk programs on account of their merchants’ activities.

Stay up to date with what merchants are selling, to whom, how and where. Conduct mystery shopping and ongoing monitoring to check that merchants have not started selling CBD products online without your knowledge. Either accidentally if merchants expand their product range without explicitly informing you. Or deliberately if they intend to commit bust-out fraud or to obtain an acquiring contract under false pretences.

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