Because cannabis remains a Schedule I drug under federal law, financial institutions have shied away from marijuana businesses … enter Bitcoin.
By Carey Wedler
As the age of cannabis prohibition slowly comes to an end — despite the best efforts of drug warriors like Attorney General Jeff Sessions — there is an increasing degree of accountability and transparency in the emerging industry. The more states legalize and decriminalize the plant, the more it makes its way out of the shadowy black market and into a more professional, retail setting as retailers and growers face more scrutiny and higher standards.
But even as states legalize cannabis and consumers are increasingly offered safer settings and more product variety, the industry is still struggling as a result of the federal government’s continued tirade against the substance. This is clear in its ongoing police attacks on cannabis operations — even in states where it’s legal. But anti-drug laws are also causing headaches for the industry another way: they’re making it nearly impossible for members of the industry to safely conduct financial transactions.
Because cannabis remains a Schedule I drug under federal law, financial institutions have long shied away from allowing marijuana businesses to use their services. As a result, those working in the cannabis industry are largely forced to conduct their transactions in cash, which is not only inconvenient for both the merchant and the consumer, but also a safety risk; they must hoard large sums of cash rather than being able to deposit their profits in a safe account. The Los Angeles Times has reported that 70 percent of cannabis businesses have no bank accounts.
As a result, Bloomberg reports, participants in the cannabis market are coming up with solutions to this problem. The outlet reports that “[l]egal cannabis was a $6 billion industry last year and is expected to grow to $50 billion by 2026, according to Cowen & Co,” and as a result, at least two cryptocurrency startups are stepping in to help process those profits.
Enter bitcoin, the cryptocurrency that consists of digital coins ‘mined’ by computers solving increasingly complex math problems. At least two financial-technology startups, POSaBIT and SinglePoint Inc., use the cryptocurrency as an intermediate step that lets pot connoisseurs use their bank-issued credit cards to buy weed.
POSaBIT operates by installing kiosks in cannabis shops that allow customers to purchase digital currency with their credit cards (with a two dollar transaction fee added on). That purchased currency can then be applied in the store.
John Baugher, co-founder of POSaBIT, argues the technology is vital.
“There’s no industry — whether it’s the production and sale of cannabis or the production and sale of a cup of coffee — that can operate safely, transparently or effectively without access to banks or other financial institutions and traditional services,” he says.
“That’s where we thought we could leverage the use of digital currency.”
Trove Cannabis, a high-volume shop in Washington that conducts 3,000 transactions per week, started using POSaBIT after spending six months on a waiting list. According to Yin-Ho Lai, the company’s CEO, 13 percent of their customers have since chosen to pay with credit or debit cards and tend to spend more when they use that form of payment.
Consumers also have the option to keep the digital currency they buy and spend it elsewhere.
Though this new development represents the innovation of the market, POSaBIT is still complying with federal and state standards. The consumer buying the digital currency must have a valid ID “that is scanned, encrypted and stored.” They can purchase no more than $150. Further, POSaBIT has a nine-point fraud detection system.
POSaBIT is not the only company coming up with solutions to the government’s impositions on the cannabis trade. “SinglePoint, a mobile-tech firm that specializes in payments via text message, signed an agreement last week with First Bitcoin Capital Corp. to develop a solution for cannabis and other high-risk industries without access to traditional banking,” Bloomberg notes.
SinglePoint put terminals in Washington-based shops two years ago, but banks shut them down, citing too much risk. Now that cryptocurrency is becoming increasingly mainstream, however, there is hope. “It’s not foreign to them now, like some sort of weird scam that they don’t know about,” says Greg Lambrecht, founder and CEO. “More and more establishments are accepting it, but it’s kind of like the wild, wild west.”
Nevertheless, one prevailing view from industry insiders is that by the time these cryptocurrency options are widespread, traditional banks will be more willing to accept cash from the cannabis industry as the plant continues to move into the mainstream. In the meantime, however, the technology will continue to improve the quality of the ever-profitable and burgeoning business.