Can Crypto save the Cannabis Industry?
The legal cannabis industry’s problems go much deeper than a lack of access to banking. This piece is part of CoinDesk's Sin Week.
Cryptocurrency has long been held up as a panacea for the U.S. cannabis industry’s well-publicized banking problems.
Despite being legal in a growing number of states for either medical or recreational use, cannabis is still illegal under federal law. The resulting regulatory uncertainty has effectively locked the industry out of the traditional financial system. Dispensaries and other cannabis companies have largely been shunned by federal banks and credit card networks, forcing them to hoard cash on-site – a practice that has made them a growing target for violent robberies – or pay exorbitant fees to bank at state-chartered institutions.
This feature is part of CoinDesk's Sin Week.
To many, crypto seems like the natural solution. Cannabis companies could, in theory, bypass the legacy financial system by accepting crypto payments and storing the money in crypto wallets rather than store stacks of cash (although that would likely attract a different sort of thief).
But theory doesn’t always match reality.
Crypto’s inherent volatility and high transaction costs make it a poor substitute for cash, dissuading many potential cannabis business owners from going through the trouble of setting up a digital wallet and learning how to accept crypto payments. Those who forge ahead aren't immune to censorship: In 2018, Coinbase shut down a Washington-based medical marijuana dispensary’s account, citing federal regulations. Coinbase didn't return a request for comment on whether its policy has changed since that time.
And even if crypto could solve the cannabis industry’s banking woes, there are a host of other issues it can’t fix (legally, at least), including high taxes, slim profit margins and black market competition.
Though crypto is certainly no cure-all, many in the cannabis industry have found it to be a useful tool.
The cannabis industry and the crypto sector first shook hands in the Silk Road, the modern darknet founded by “Dread Pirate Roberts” or Ross Ulbricht. Before being shut down by the FBI in 2013, the Silk Road allowed people to use bitcoin to buy and sell marijuana, which was at the time criminalized in many states.
It has been almost a decade since Ulbricht was apprehended and the Silk Road shut down, and during that time, the cannabis industry and the Web3 sector have made significant strides in becoming more normalized.
The 2018 Farm Bill removed hemp from the definition of marijuana in the Controlled Substances Act, and several states have legalized cannabis. In 2021, Colorado collected more than $423 million in tax revenue from marijuana sales, compared with $387 million the prior year.
Additionally, last month, Senate Majority Leader Chuck Schumer (D-N.Y.) and Democratic Sens. Cory Booker of New Jersey and Ron Wyden of Oregon introduced the Cannabis Administration & Opportunity Act, which would remove cannabis from the Controlled Substances Act, expunge any arrests and convictions for a nonviolent federal cannabis offenses as well as impose an excise tax on cannabis products.
On the crypto side, the overall market capitalization has grown to $1 trillion at the time of this writing from $10 billion at the end of 2013. The days when crypto wasn't on the radar of national governments are long over as heads of states are sanctioning protocols and formulating their own strategy to launch their own digital currencies.
The dramatic changes that have normalized both industries have shifted the crypto-cannabis culture since the Silk Road days.
Take, for example, Crypto Cannabis Club, “a social club for cannabis consumers that basically uses NFTs as the membership card,” CEO Ryan Hunter said, referring to non-fungible tokens.
Hunter, who once built a 10-acre cannabis farm, indicated that the vision for the Crypto Cannabis Club was to create a community that covers both virtual and real-life experiences.
For instance, on the digital side, the cannabis NFT social club has a virtual dispensary in the Voxels metaverse, and on the real-world side of the ledger, Crypto Cannabis Club has formed partnerships with more than 30 different cannabis products and accessory providers to establish a utility program that offers discounts to their community members.
Cory Mitchell, the operations manager at Flower Power Botanicals, a dispensary in Fort Collins, Colorado, that accepts cryptocurrency, told CoinDesk he was “able to partner and sponsor the local university (Colorado State University), be their first cannabis industry partner and reach out to the college community in a way our competitors cannot.”
Amy Deneson, a crypto and cannabis marketing specialist, has also “noticed an uptick in hotels and hospitality services in legal markets accepting payments in cryptocurrencies and psychedelic experiences.”
Despite being on the fringe in the past, cannabis and crypto have become mainstream. More than ever, both industries are connected at the hip. Some cannabis organizations are decentralized autonomous organizations like the People’s DAO, which is primarily for BIPOC (Black, indigenous, people of color) leaders in the cannabis industry to gain access to capital, and there are other organizations that provide NFT services to strengthen their community.
Small street dealers on the black market are even becoming increasingly open to accepting crypto.
One individual from New York City told CoinDesk he was open to creating a wallet to accept crypto if there was a demand, albeit there would be an increased fee for paying in crypto rather than in dollars. And another from California, who stopped distributing marijuana but not other substances, indicated that he routinely accepted crypto as payment.
Cannabis and crypto have now reached a point where it is impossible not to recognize the substantial changes in the culture of the overlapping industries.
More money, more problems
Although the cannabis industry’s lack of access to banking is its most well-known issue, it’s far from the biggest, according to experts.
Bob Solomon, a professor of law at the University of California, Irvine and co-chairman of the UCI Center for the Study of Cannabis, told CoinDesk that the tax burden, not banking, is the top issue facing the cannabis industry.
Because cannabis is still illegal federally, the industry is subject to Section 280E of the tax code, which means cannabis businesses must pay taxes without deducting the usual business expenses, making profit margins very small.
Henry Baskerville, the owner of Colorado-based law firm Fortis Law Partners, told CoinDesk that the Section 280E tax requirements mean cannabis companies pay around a 70% tax rate, compared with the average corporate tax rate of 20%.
“A lot of people get into cannabis thinking that they’ll make money hand over fist, but they aren’t taking into consideration these taxes and smaller profit margins, so they fail,” Baskerville said.
The burden isn’t just on cannabis companies, though – it’s also passed to the consumers. Solomon told CoinDesk that taxes pile up at every level, including local surcharges, which makes it difficult for legal dispensaries to compete with the black market.
With tight profit margins and cash-flow issues, the volatility of crypto is an even bigger risk to cannabis companies.
Khurshid Khoja, co-chairman for policy at the National Cannabis Industry Association, told CoinDesk that even crypto-savvy retailers are concerned about the volatility of crypto markets and potential tax implications of accepting crypto payments.
“They don’t want to think that they will accept cryptocurrency payments and be exposed to either capital-gains risk or the risk that these currencies will lose their value suddenly and without warning when tax payments and rent are due,” Khoja said.
In addition to taxes, access to commercial lending is a serious difficulty for cannabis companies. Would-be dispensary owners and growers struggle to find loans with reasonable interest rates.
“Credit is a pain point for sure,” said Dave Rodman, a Colorado-based lawyer who specializes in crypto and cannabis law. “There are ‘hard money’ loans tied to real estate and sometimes large assets, but that is it.”
An unfair stigma?
Some experts, including Baskerville, have also suggested that because both the cannabis and crypto industries exist in a regulatory gray area, there is a potential that working together could be stigmatized.
“There’s already scrutiny on the cannabis industry and potential for criminal activity, theft and so on,” Baskerville said. “Adding another industry like crypto that has similar issues has the potential to multiply problems.”
Khoja told CoinDesk he believes the lingering stigma is a result of the Silk Road case and resulting public perception of cryptocurrency as a tool primarily used to buy illegal drugs.
“I am embarrassed to say that I used to be in that camp as well many years ago,” Khoja said. “I would joke with my clients that they should break one federal law at a time … as an advocate for cannabis businesses, I wanted to avoid any inference, no matter how far-fetched, that legal cannabis businesses were engaging in any other unlawful drug commerce.
“The truth is, of course, that the blockchain is the ultimate audit trail for any regulator concerned about drug cartels using legal cannabis businesses as fronts to launder illegal drug money,” Khoja added. “Every last sat is accounted for – we know how the businesses got it and from what wallets.”
A cannabis dispensary’s perspective
The rise of instant crypto-to-cash payment platforms has helped some crypto-curious cannabis companies feel more comfortable about accepting crypto payments, both in terms of avoiding volatility and ensuring compliance with regulations.
Mitchell of Flower Power told CoinDesk that he wasn’t comfortable accepting crypto payments until the dispensary partnered with ForumPay, a crypto payments platform.
“Compliance in the cannabis industry is huge, and I didn't want to risk entering a gray area on my own without the guidance of an organization that specialized in this field,” Mitchell said.
Mitchell said ForumPay has been an alternative to credit card processors that has been easy for the dispensary’s staff to use.
Though the option to pay with crypto is still used by only a few of Flower Power’s customers, Mitchell said the number of crypto payments has been growing consistently.
“I do believe it has attracted new customers and piqued a lot of people’s curiosity into crypto,” Mitchell said. “At the very least, it’s another option for our customers who don’t always want to carry cash … ForumPay does not charge a monthly subscription, so it does us no harm in offering this utility to our base.”
The SAFE Banking Act
Much of the cannabis industry’s struggles to access banking could be resolved with the passage of the SAFE Baking Act, which would allow banks and other financial institutions to provide banking services to legal cannabis businesses without the fear of being punished by federal regulators.
The bill has broad bipartisan support, It has been passed several times by the House but has repeatedly failed in the Senate, most recently in July.
“SAFE won’t clean up all of the industry’s problems, but it would have a significant impact,” Baskerville told CoinDesk. “Some cannabis business owners are paying in the range of $2K a month just for the pleasure of having a bank account.”
Others have stressed, however, that even if the SAFE Banking Act passes, the industry could continue to struggle with high fees and other banking-related issues.
“SAFE wouldn’t require banks to make business lending available, and it wouldn’t necessarily cause banks to reduce the fees they charge cannabis businesses,” Khoja said.
Even if the SAFE Banking Act – like crypto – isn't a full solution for the cannabis industry’s myriad problems, it’s still a necessary step in the right direction.
“To operate in [the cannabis] industry, you have to have banking regardless,” Mitchell said. “Payroll, taxes, operating expenses/utilities, etc. ... too many ‘what-ifs’ if you tried to 100% depend on crypto rather than fiat that would hinder the ability to be successful.
“[Crypto is] a great tool in addition to the standard business practices, but I do not think it is the answer,” Mitchell added.
Blockchain technology for supply-chain management
Crypto may not be the “answer” to all of the problems inherent in the cannabis industry. But Sundie Seefried, CEO and president of Safe Harbor Financial, which has provided cannabis banking services since 2015 and processed more than $14 billion, is excited about the possible implementation of blockchain technology.
A regulator expressed to Seefried that crypto and cannabis could be a good match because blockchain technology provides a good traceability factor for funds derived from cannabis plants, she said.
Safe Harbor now relies on a couple of different sources to track the cannabis plants, which increases the risk that something won't be properly accounted for.
“Start to finish, I know that’s a legitimate [cannabis] plant right from the get-go, if we do this correctly,” Seefried said in regards to the potential of integrating blockchain technology.
Ben Bartlett, a member of the city council of Berkeley, Calif., and a crypto lawyer, expressed a similar idea. Blockchain technology can help cannabis companies have compliant supply chains by proving provenance and tracking ownership.
“The cannabis industry has a lot of friction, a lot of redundancy and a lot of authentication. That's a problem, and through the use of blockchain technology, everything is transparent. With the automated use of smart contracts, it significantly decreases the amount of friction in the cannabis industry,” he said.