Cannabis and Cryptocurrency: Frenemies
Why hasn’t the red-hot cannabis industry fully embraced the zeitgeisty cryptocurrency wave?
A few years ago, at one of the many pre-legalization cannabis conferences, business expos or cannabis competitions that after a while all seem to blend into one very hazy and terpy glad-handing session, someone manning the table at one of the (boring) flower-less booths handed me a card. It was the size, shape and heft of a credit card—which, as something very hard to use, then and now, in the almost-banking-less marijuana industry, was enough to strike interest. But this wasn’t a credit card at all. Instead, the card said, “PotCoin.”
“So, what’s this?” I asked. “It’s PotCoin,” said the fellow who handed it over. “Great,” I said.“So, what is it?”
Had I heard of Bitcoin? he asked. This being 2015 or so—around the time that online, crypto-powered drug marketplace Silk Road was busted, but Bitcoin was still mostly a thing for drug dealers and geeks, and not mainstream investors—I replied that I had.
“Great,” he said. “This is like Bitcoin, but it’s for pot.” “Great,” I said. “What’s it for—and how can I use it?” “Ah,” the fellow said, before launching into a lengthy and well-practiced monologue about blockchain, the digital peer-to-peer ledger; and cryptocurrency, the decentralized, digital currency that uses blockchain.
If you have heard any number of Bitcoin stump speeches, and if you’ve wandered onto social media anytime in the past five years, you’ve heard this spiel. A libertarian’s dream. Forget banks, forget governments. Total freedom through technology! (Mind you, by this time, only a handful of states had legalized recreational cannabis.)
“Great,” I said. “So how is any of this going to help cannabis?”
It was around then that the conversation screeched to a halt, with a return to the stump speech before both parties lost interest. (I still have the card, which had an activation code that I could use to put some PotCoin in a crypto wallet, sitting around in a junk drawer somewhere.)
Whether the man in question was Joel Yaffe or Nick Iverse, the two men who publicly claimed to have founded PotCoin, I couldn’t tell you if my life depended on it. A message to Yaffe sent to his email and Instagram accounts wasn’t returned. But in that time, not much has changed in the discourse around cannabis and crypto.
In 2022, Bitcoin, blockchain, cryptocurrency and other blockchain-reliant gizmos such as non-fungible tokens (NFTs) are near-household words whose adoption (or at least awareness) has been helped along by big-name billionaire endorsers including Twitter founder and former CEO Jack Dorsey and Tesla CEO Elon Musk, as well as a growing crew of extremely online investors. Cannabis is still bereft by a host of problems—around banking, around cash flow, around product tracking and authenticity—that a decentralized, peer-to-peer currency might be able to solve—but hasn’t.
And so, the question remains: What can cryptocurrency do for cannabis, exactly? Is cryptocurrency just the latest shiny new thing, or does blockchain truly offer something valuable for the marijuana industry? The answer largely depends on who you’re asking, and on how bullish they are on cryptocurrency.
If you’re a believer, then blockchain and crypto are pure magic, ready to revolutionize everything from regulatory requirements to payment solutions to basic user and customer data. But for most cannabis investors, entrepreneurs and customers, cryptocurrency and blockchain remain a solution in search of a problem: an interesting idea, an emerging technology, but nothing that seems immediately able to help with the questions of raising money, using banks, paying taxes, attracting customers and the simple art of consuming weed.
For businesses who are still shut out of banks because of federal law, and for companies who must pay state and federal taxes in hard US currency and who would have to pay transaction or conversion fees if they operated in a currency other than US dollars—“crypto is solving no problems,” says Brendan Hallinan, a San Francisco-based cannabis attorney who represents clients all over northern California.
“People always talk about it like, this or that coin could do this or that for the cannabis industry,” says Jessie Grundy, founder and CEO of Oakland, CA-based Peakz brand. “But from everything I experienced, it was horrible.”
Young and tech-savvy, Grundy was a relatively early adopter, trying out Litecoin and a few other tokens in 2017-18. There was some utility in “trying to do black-market shit,” such as shuffling money around, Silk Road-style, he says. However, for trap artists (and just about everyone else), cash is always preferable. For legal operators like Grundy, whose branded flower is now available in three states, US dollars were still needed. Crypto, then, had appeal as an investment vehicle—but with its notorious volatility, it’s just as easy to lose your shirt when dealing in crypto as it is to become the next Bitcoin millionaire. (Grundy admits that he lost interest after losing some money. Buy the dip, bro!)
But that’s also why crypto may not be all that great for cannabis. Aside from conversion requirements, volatility is probably the chief reason why crypto isn’t a solution for cannabis’ woes. For a dispensary or a business that needs to raise $1 million or needs to pay the state franchise tax board $200,000 in taxes, a digital currency that investors don’t deal in and that the state won’t take—and that might be worth $800,000 or $1.2 million tomorrow, depending on Elon Musk’s tweets—isn’t the thing.
“For dispensaries, it’s hard for them to even take credit card payments,” Grundy says correctly. “So, for them adding crypto, that’s almost a no-go.”
In some instances, crypto makes things worse for cannabis. Steve Schain is a Philadelphia-based attorney. He and his firm represent cannabis clients all over the country. Schain’s secured bank accounts for large, publicly traded cannabis companies—and he’s a strong believer in blockchain and crypto as cannabis solutions.
The firm also represented a dispensary in Washington state that briefly accepted 28 different types of cryptocurrency. Briefly, because as the dispensary discovered, what customers wanted was to exchange their cash quickly and easily—their US dollars—for cannabis. What they didn’t want to do was deal with digital wallets or converting the cash to crypto and then into cannabis. That, in blockchain parlance, is “friction”—what you or I might call “a pain in the ass”—and thus a legitimate barrier to adoption.
As far as Schain and other experts I spoke to, no dispensaries in the US currently accept Bitcoin—or if they do, it was a very recent innovation. “It wasn’t a great idea,” Schain says. “It’s just one more thing to deal with.”
Initially, Schain points out, cryptocurrency held appeal for anyone with large amounts of cash they needed to either store safely or (ahem) clean. But “that didn’t really work,” he says. The problem was that every time cash was converted into Bitcoin for storage, safekeeping or transfer, taxes were owed. Then, whenever someone wanted to use the Bitcoin to actually do something, like, say, buy a house, converting Bitcoin back into cash was another taxable event.
“People thought they could evade the IRS—and they were flat wrong,” Schain says. “It was a good idea, but aside from facilitating international money laundering or trying to assuage safety concerns, it just wasn’t applicable.”
There’s a school of thought in cannabis that cryptocurrency’s main benefit is to solve banking problems, and once Congress gets its act together and passes banking reform—like the SAFE Banking Act that’s cleared the House several times only to stall in the Senate—crypto’s appeal disappears. Schain rejects this argument outright. SAFE Banking merely formalizes the 2014 Financial Crimes Enforcement Network (FinCEN) guidelines. “That’s better than nothing, but nothing great,” he said.
Banks would still be required to monitor customers’ accounts and file Suspicious Activity Reports for a host of reasons, and file Currency Transaction Reports for activity in amounts greater than $10,000. In Schain’s view, cryptocurrency offers less value to cannabis than blockchain generally.
Shifting from a government-sponsored single tracking mechanism, such as MJ Freeway or Metrc, to blockchain for state-mandated “track-and-trace” networks would be a benefit for transparency as well as security. It might also require states like California, who refuse to share any track-and-trace data with the public, citing state law, to finally reveal how cannabis flows around the country’s biggest individual market. Deals could be inked in smart contracts that automatically execute between two parties and the terms of which exist on blockchain. Growers could tag seed packs or strains with a blockchain-powered QR code as a stamp of authenticity. And dispensary owners could track their customers’ buying habits.
“All that kind of stuff makes a lot of sense,” Schain says. “It transcends alleviating security concerns. Your $20 bill cannot see what your covered medical condition is. Your $20 bill can’t talk about a terpene profile. Your $20 can’t do that, and your $20 bill doesn’t integrate with a hard copy ledger. Cryptocurrency does.”
That all makes sense—too much sense. So why hasn’t blockchain technology been adopted by the cannabis industry yet? The simple answer is that the government won’t let it. Track-and-trace has to be done via whatever system the state in question mandates. And taxes still need to be paid in dollars.
Robert Carp is a retired lawyer in Massachusetts who runs a compliance business. Many of his clients are cannabis companies—all of whom asked him to find ways to reduce their costs, including debit and credit card transaction fees (which they shouldn’t be processing, but whenever there’s a will, there’s always a way). He’s working on a blockchain-powered platform that promises to do just that, as well as serve as an all-in-one enterprise management tool.
“We’re still working on it,” he says, before pivoting into the familiar pitch. “It’s coming, and it’s going to capture the [cannabis] industry, because who’s gonna say no to saving money?” Nobody, of course—but when and how both remain to be seen.
This story was originally published in the print edition of Cannabis Now.