12.18.2015
policy

Bitcoin and Bud: The Cannabusiness Guide to Cryptocurrency

Will bitcoin present a viable solution to banking in the weed biz?

“There are very few banks that will interface with cannabis businesses," Marshall Hayner, CEO and co-founder of Trees, a San Francisco-based startup operating at the confluence of cannabis delivery and digital currency, tells KINDLAND.

“Until federal regulations change, this is an issue that will continue to plague the industry," he says.

Companies doing business in the legal weed space—from dispensaries and marijuana retailers to technology companies and logistics platforms—must find creative ways to manage finances. New data suggests that contrary to guidelines issued by the Department of the Treasury, the same number of banks are terminating services to marijuana-related businesses as there are banks providing services. 

Processing retail transactions or vendor invoices, managing employee payroll, paying taxes, and the secure storage of monetary assets present entirely unique sets of regulatory barriers because transactions are largely confined to cash, and the cash has flowed in from a source that banks are reluctant to accept. Some industry stakeholders, Hayner among them, see digital currency as a viable solution, or a model to be explored until the banks catch up.

Cy Scott, co-founder of online cannabis hub Leafly, and recently launched business data platform Headset, describes the relationship between the financial sector and the cannabis industry as rocky, at best. 

“I think banking is a problem for everyone in the space, and it's unbelievable that it's still a problem that's not fixed,” Scott tells KINDLAND. “Ancillary services seem to have an easier time with banking. But it is by no means free and clear.”

Washington has taken in more than $114M in excise tax, in 2015 alone. Yet, businesses in this space struggle to keep their bank accounts.

Leafly and Headset represent the significant portion of businesses within the cannabis space operating in states where cannabis is legal, and might not necessarily come into physical contact with the herb as part of their daily operations, but face financial frustrations similar to those of commercial weed retailers and distributors. 

Trees primarily acts as a tastemaker. Much in the same vein as Birchbox is to cosmetics, or Graze is to healthy snacks, Hayner and his team of cannabis specialists curate highly rated, award-winning weed strains and artisanal cannabis products. These are then presented to customers in a connoisseur box and delivered in tow with everything needed to consume the high-end strains. 

Image via TreesDelivery/Facebook

Hayner sees the future of cannabis retail as a departure from physical locations, with mobile apps, blockchain (the public ledger technology recording bitcoin transactions), and encryption technology playing a major role in that transition.

“I spoke with the president of a smaller, but still very major, progressive bank in the United States," Hayner says. "He told me that he would love to invest in my cannabis startup, but he would never allow us to open an account with his bank.”

Scott speaks from similar experience: “With Leafly, we lost a number of banks and payment processors. [Headset] is in Washington, where the state has taken in more than $114M in excise tax in 2015 alone. Yet, businesses in this space struggle to keep their bank accounts. It really is crazy illogical. So are a lot of things when dealing with cannabis.”

Which leaves the legal weed industry with few viable alternatives to cash. 

BuzzFeed reported on weed businesses storing their money in high value functional glass art. Others run their earnings through shell companies. “[These are] the extremes that cannabis business owners have to go through in order to utilize their legitimate revenue,” Paula Givens, a cannabis banking consultant told the site. 

“Banks may not be able to stop people from withdrawing money from their accounts, but they can control what people spend it on,” Hayner tells KINDLAND. “We see bitcoin, or digital currency technology, as a possible solution, a way to circumvent the banks altogether.

Hayner says the problem is: "Most dispensaries don’t have the time or technical capacity to integrate bitcoin into their business model. Most payment processors, such as BitPay, will refuse merchant agreements or close accounts once they learn the nature of the business. And most consumers just aren’t using bitcoin."

“I have been into bitcoin for a long time, and I saw the potential of it becoming a great tool for the cannabis industry, and also for the consumer,” says Chin Song; owner of Golden Gates Greenest, a collective in northern California. GGG operates entirely online, utilizes delivery drivers to get the product to their patients, and accepts bitcoin as a form of payment for its products.

On the amount of bitcoin transactions GGG does on a monthly basis, Song says, “It’s really low. It’s a very small percentage. Not all bitcoin people are weed people, and not all weed people are bitcoin people.” Like Hayner, however, Song sees much of the retail side of the industry moving away from physical brick and mortar locations and with that shift, more dispensaries integrating bitcoin into their business model.

Among dispensaries that process credit and debit card transactions, Hayner describes an industry-wide reliance on cashless ATMs. These look like debit card readers, but will authorize retail transactions as withdrawals from the customer's checking account. This leaves a digital footprint that reads more like a cash advance than a weed purchase.

Cashless ATMs come with high risk. Fly-by-night payment processors operating them might tack on exorbitant fees, felt by the merchant and the consumer. Operators have been known to close up shop and disappear without a trace, leaving their clientele—typically online gambling sites, purveyors of pornography, and now cannabis businesses—out in the cold. 

SericaPay, is described by players in the bitcoin game as the 'PayPal of cryptocurrencies.'

While players within the space such as Hayner and Song see a healthy relationship between bitcoin and cannabis, others don’t share the vision. Among dispensary owners and other industry investors KINDLAND spoke with, there is a palpable apprehension regarding any relationship between the cannabis industry and de-centralized, digital currencies. Bitcoin advocates work to distance the mainstream perception from any kind of connection to money laundering, or the Silk Road—the dark web drug bazaar over which buyers and sellers exchanged bitcoin for narcotics and other illicit goods and services. 

Image via Wikimedia Commons

Song acknowledges that a significant portion of requests to pay by bitcoin come from out-of-state aspiring customers, and that he is unable to disrupt that status quo. As cannabis is legalized across the country in some form, Song sees digital currencies as an instrumental part of that move.

SericaPay, is described by players in the bitcoin game as the “PayPal of digital currencies.” The digital payment startup—a graduate of Y Combinator, the accelerator that also provided seed funding for companies such as AirBnB and Dropbox—is earning a positive reputation by working with merchants across a wide range of industries, including healthcare. It offers businesses and consumers operating in the legal medical marijuana space a streamlined, user-friendly platform to work with digital currency. According to the company’s website, “SericaPay is a digital asset wallet that allows you to purchase digital assets to spend with a variety of merchants online.” 

A base understanding of the process is, customers can pay to load a digital wallet with “digital assets" which are given value by the merchants that accept them. In an email to The KIND, SericaPay declined to offer comment for this article. 

Similarly, correspondence to popular bitcoin exchange and digital wallet service provider, Coinbase, went unanswered. 

As more states legalize cannabis, and it becomes more widely accepted in the mainstream, new innovations enter the industry at virtually every level on a seemingly daily basis. Corporate and venture capital interest is at an all time high, while big pharma is chomping at the bit to enter the medical marijuana market. The business of bud is booming. And everyone wants a piece. 

The general consensus is that federal marijuana legalization is more of an anticipatory “when,” than a hopeful “if.” And until that "if" becomes "now," entrepreneurs such as Scott, Hayner, and Song will seek out creative ways technology can empower the weed world.

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