The Future of Cannabis and Cryptocurrency
Cannabis has a banking problem. This is nothing new to those in the industry - without federal legalization, many banks and financial partners are just plain afraid to play in the cannabis space for fear of the regulatory hammer potentially coming down on them without warning.
The SAFE Banking Act of 2021 has the potential to give those in the cannabis industry the answer to their biggest banking issues, mainly because it gives protections to banks and financial institutions that work with legal entities in states with cannabis programs. Since this act is stalled in Congress, again, some in the industry are looking elsewhere for answers.
Enter cryptocurrency.
There are a number of reasons why cryptocurrency might be an answer to the cannabis industry’s banking problem.
For one, it can serve as a legitimate alternative to operating a cash-only business as company assets can be stored or transacted in digital currency instead. Cash-only businesses come with many inherent risks for the folks handling large swaths of cash and maintaining on-site vaults. In an industry like cannabis where cash cannot be stored in a standard banking environment, companies often have vaults on site at both the dispensaries and the main headquarters that contain (you guessed it) large amounts of cash. Besides posing a risk from an internal petty theft and control perspective, this also makes cannabis companies and their associated delivery agents an optimal target for armed thefts and robberies. There is a reason why driving an Uber, which only accepts electronic payment from customers, is a safer profession than driving a traditional taxi, which can accept and potentially carry enough cash to make a stick up worthwhile for some.
For a budding cannabis company, lack of access to capital makes investing, acquiring new assets, and growing a business challenging. Standard business loans cannot be used to startup a new business or expand on existing footprints. Because of this, cannabis companies are reliant on investors with highly liquid assets and (you guessed it, again) large amounts of cash. It’s pretty crazy that the government is so focused on regulation and controls around cannabis, yet because of companies’ inability to access regular banking, cannabis companies are forced to get in bed with capital providers with buckets of cash available.
Utilizing cryptocurrency to store company assets and funds gives cannabis companies the chance to not only invest and accrue additional value, but it also allows the trading of funds between organizations to do things like buy raw materials for production or additional land for a new greenhouse without having to show up someplace with the previously alluded to sketch bag of cash.
Even regulators should be comfortable getting behind a cryptocurrency because of the inherent transparency in transactions. Transactions conducted via cryptocurrency are permanently recorded on a blockchain and are visible to all network participants responsible for maintaining the distributed ledger. Unlike in a cash-only environment, the books cannot be cooked after the fact or adjusted in any way.
Also from a regulatory perspective, the use of cryptocurrency would pose limited additional burden on cannabis companies. Cash-only operating environments are already a challenge to manage from a tax filing, IRS, and regulatory perspective. In both a cash-only and cryptocurrency environment, organizations are required to adhere to similar reporting and bookkeeping requirements to curb the potential for money laundering (like report all transactions over $10,000). While this is not ideal, many cannabis companies today are used to the additional regulatory circus acts, so they would be no worse off if the decision was made to switch to a digital currency environment.
For all its potential pros, exclusively utilizing a cryptocurrency for the cannabis industry comes with its own challenges as well.
Currency, whether digital or cold hard fiat money, only works if it is widely adopted. Cannabis companies would have to rally around one of the top cryptocurrencies (think: Bitcoin, Ethereum, etc.) that are regularly transacted and traded in for this to work. After all, what good is having cryptocurrency or a 20-dollar bill if you cannot buy the things you need for your business with it?
Cannabis-specific cryptocurrencies, while theoretically intriguing, are a bad idea in their current state. The ones out there today (like POT, CANN, DOPE, and THC) are not even on the map in terms of adoption rate and have little to no activity to hang their hats on. Even if these currencies were adopted by every member of the cannabis industry, the challenge of exchanging cannabis crypto for an accepted currency to do basic business activities like buying real estate, office supplies, or paying employees still exists.
And finally, the biggest challenge that all industries face when contemplating cryptocurrency adoption is the instability of most cryptocurrencies’ market value. Banks are great because they take your cash and keep it somewhere safe. Where you know it will be worth more or less the same (pending inflation) when you withdraw it. For a cryptocurrency to be viable for businesses to transact in, there must be some promise of stability, especially in an environment without widespread adoption. Even stablecoins aka cryptocurrencies that are pegged to existing and widely adopted asset classes, like gold or USD, have their own regulatory requirement and adoption challenges that make their viability as a well-adopted currency questionable.
While cryptocurrencies can be an answer for the cannabis industry in the face of nonexistent federal banking regulations, ultimately many changes would be necessary to support a significant industry-wide shift to a digital economy.
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