Return to search

Awaiting a banking solution, cannabis firms eye blockchain-payment tech

Flush with cash but prohibited from working with traditional banks, some cannabis companies are turning to blockchain-technology payment systems to simplify transactions.

While some see the workaround as a bandage until federal banking regulations relax, others see it as a signal that blockchain technology and cryptocurrencies will transform the financial industry.

In 2016, legal cannabis sales in North America grew 34 percent from the year before to $6.7 billion, and they are projected to reach nearly $23 billion by 2021, according to Arcview Market Research.

But cannabis remains illegal at the federal level, and most banks and financial companies prohibit cannabis-related companies from opening accounts, forcing most marijuana retailers to transact in cash.

“There are so many security issues in the cannabis industry caused by this problem,” said Jeffrey Zucker, president of the Denver cannabis-focused business-strategy firm Green Lion Ventures. “It’s really hard for us to create this vibrant, professional industry without access to banking.”

That has many in the industry looking for an alternative solution, with some turning to blockchain-based payment systems.

Cryptocurrencies, and the underlying distributed ledger technology on which they’re based, provide an immutable record of transactions that can be confirmed and verified from anywhere in the world almost instantly. This enables payments to be securely cleared and settled in seconds.

Some payments companies see the technology as a way for the cannabis industry to bank securely without access to traditional financial institutions.

Cannabis-focused holding company SinglePoint hopes to provide one such system. In June, the publicly traded Seattle company said it partnered with First Bitcoin Capital of Vancouver to develop a bitcoin-payment solution that would solve both the cash and federal banking problems for cannabis companies.

SinglePoint closed a $1 million investment with New York-based Blackbridge Capital to fund the partnership. First Bitcoin Capital did not respond to VCJ’s request for comment.

“With the explosion of [cryptocurrencies like] bitcoin and ether and the blockchain in general, we don’t think that’s going anywhere. We think if we build this solution, we can use it for anything, but it will really help in the marijuana industry,” said Wil Ralston, SinglePoint’s vice president of sales and marketing.

SinglePoint began exploring development of bitcoin-payment acceptance in 2014, but the cryptocurrency was too obscure for the average user to adopt at the time, Ralston said.

“Now that you’ve got CNBC and Fox News saying bitcoin is the hottest thing ever, people are buying it and learning how to use it,” he said.

SinglePoint and First Bitcoin Capital plan to develop a bitcoin-based payment system that enables customers to pay with a credit or debit card at a dispensary. The technology would be implemented into a point-of-sale machine by downloading the payments application.

Other startup companies like POSaBIT, Tokken, CanPay and PotCoin are developing similar blockchain-based payment technologies for the cannabis industry.

Not everyone in the cannabis industry is convinced that blockchain technology will become its banking backbone. Some, including Green Lion’s Zucker, expect federal cannabis banking regulations to loosen faster than blockchain technology gains widespread adoption.

“Cryptocurrency is growing and important to the long-term growth of the global economy, but blockchain is going to take longer to catch on in the cannabis industry than it is for us to get regular banking,” he said.

Currently, eight states and the District of Columbia allow adults to use marijuana recreationally, and 20 additional states allow it for medical use.

Under President Obama, the Department of Justice released the Cole Memo, which largely allows states to regulate cannabis under their own jurisdictions and outlines a hands-off approach to enforcing federal cannabis regulations. Trump-appointed Attorney General Jeff Sessions has left the memo in place and acknowledged that the Department of Justice lacks the resources to bolster enforcement.

Some states have explored the possibility of creating state-backed banks specifically for cannabis companies, but those efforts have been largely unsuccessful.

But with the cannabis market growing in the United States, Zucker says it’s only a matter of time before big banks can begin to do business with the cannabis industry.

And given the choice, most cannabis-business owners would prefer to work with traditional banks rather than adopt a blockchain-based payment system, Zucker said.

“Business owners have all dealt with regular banks, whether through other businesses or personally,” he said. “Once the doors do open, it will be a quick transition and these cryptocurrency solutions will fall off.”

Others like Martin Lagod, a managing director and co-founder of Firelake Capital Management, see blockchain technology as possibly filling the gap for cannabis firms until mounting pressure from states prompt changes in federal banking laws. Lagod is also founder and owner of a medical cannabis investment company based in California that is independent from Firelake Capital.

“I do expect the federal banking issue to be fixed as a matter of expediency, driven by the states who want better visibility and less opportunity for tax revenue to leak,” he wrote in an email. “Blockchain could provide an interim solution that ultimately could run in parallel to standard banking much like it does in the general economy.”

Some in the legal cannabis industry remain leery of blockchain technology and bitcoin, associating them with illegal drug transactions on the so-called dark web.

“There’s no use for that in the legitimate cannabis world,” said Aaron Herzberg, a partner at CalCann Holdings, a California medical-marijuana real-estate company. “Bitcoin is associated with people engaged in money laundering, and we’re a highly regulated industry.”

Some banks are working with cannabis companies through holding companies, said Herzberg, and a federal crackdown on the marijuana industry isn’t likely. “There are so many other priorities at the federal level that I don’t see at this point the federal government vigorously enforcing banking laws through the Federal Reserve,” he said.

Blockchain technology could, however, have lasting use for the cannabis industry in other ways, Zucker said, like tracking plants from seed to point of sale. “We’re a compliance industry and are trying to show how responsible we are and be very heavy on reporting,” he said. “Blockchain technology is going to be huge for that.”

And SinglePoint is hedging its bets in case federal banking laws do relax. “If the banks do open up, we’re already set up and just adding this to our payments-solution arsenal,” SinglePoint’s Ralston said. He adds that the company is also looking to utilize the same transaction methodology to track marijuana plants from seed to sale.

While he says blockchain will be a temporary step in the cannabis industry’s path toward full integration with big banks, Zucker also says it will have a lasting impact.

“Blockchain is going to affect the global economy, but I just think that the time frame is further along,” he said. “It’s definitely something people are talking about a lot these days.”

Photo of cannabis leaf and $100 courtesy of OlyaSolodenko/iStock/Getty Images