Pros and Cons to Using Digital Currency in Your Cannabis Business

Despite the increase in the number of states that have been legalizing marijuana for both medical and recreational use, many banks are still reluctant to assist marijuana growers, manufacturers, and retailers. Cannabis cryptocurrency provides a promising alternative.

This past June, the House Appropriations Committee rejected a measure that would have protected financial institutions from being penalized for providing banking services to state-legal marijuana-related businesses. Despite the increase in the number of states that have been legalizing marijuana for both medical and recreational use, many banks are still reluctant to assist marijuana growers, manufacturers, and retailers, for fear of violating money laundering and other federal laws.

The average California marijuana retailer earns over half a million in business annually, with thousands of dollars of cash transactions taking place on a daily basis. When transactions are handled in cash because the business cannot get banking or credit card services, the business and its customers are not only inconvenienced, they are also at high risk of being robbed. For many, this leads to the hiring of armed couriers and taking other security measures. Paying federal, state and local taxes and fees has also been a tremendous challenge.

Blockchain has provided an alternative option to circumvent the cannabis banking issue. Cryptocurrency solves many of the cannabis industry’s problems and is gradually replacing cash as its medium of exchange. However, the use of cryptocurrency presents some of its own challenges.

From Liz Prehn, lead tax attorney at Moskowitz LLP a Cannabis-friendly tax firm with over 30 years experience, we learned some of the benefits and pitfalls of the pairing of cannabis and cryptocurrency:

Cryptocurrency advantages:

Here are some of the advantages of using cryptocurrency in your cannabusiness:

• It’s legal. Despite its volatility as an investment, and the tax and regulatory issues surrounding it, there is nothing illegal about using cryptocurrency.
• It’s secure. Cryptocurrency’s blockchain technology provides a secure payment and tracking process for cannabis transactions – that doesn’t require an armored contingent.
• It’s private. Cryptocurrency accounts and transactions are anonymous, an additional benefit to customers who don’t want their marijuana purchases known.
• It promotes transparency. The sale of marijuana requires a thorough record of the movement of the product from the grower through to the end user. Cryptocurrency provides this record through Blockchain technology, which keeps incorruptible and transparent digital records.
• It provides for the immediate settlement of funds. Blockchain technology provides for nearly instantaneous validation of all transactions, as opposed to waiting hours or days for a credit card payment to post.
• There are lower transaction fees. Even cannabusinesses that manage to arrange for credit card processing, as a high-risk industry the transaction fees can be significant. With cryptocurrency, the fees are generally less than 1%.
• It’s available everywhere. Cryptocurrencies, including cryptocurrencies developed specifically for the marijuana industry, can buy most anything, anywhere in the world.
• Additional benefits. Some companies provide digital tokens or cryptocurrency rewards that can be used for marijuana purchases. For example, PotCoin community members get benefits for prescription medical marijuana through WeedMD.

Cryptocurrency disadvantages:

For a business with little or no traditional banking support, cryptocurrency seems like a great idea. However, it is important to acknowledge the following concerns voiced by its critics:

• It may undermine the legitimacy of the state-legal marijuana industry. The marijuana industry is struggling for legitimacy in the eyes of the public and the U.S. government. Joining forces with another federally unregulated industry may undermine these efforts.
• It will complicate your taxes. Marijuana-related businesses are already at a disadvantage tax-wise – they can’t deduct their business expenses so careful planning is required to avoid paying extraordinarily high taxes. Cryptocurrency is treated as property for tax purposes, and detailed records of all transactions must be kept to determine tax owed. For this reason, buying and selling marijuana with cryptocurrency is likely to provide an additional layer of tax preparation complexity.
• Not enough people use it yet. Although many people are using cryptocurrency, many cannabusinesses find that they don’t have enough crypto-paying-customers to make the implementation of a cryptocurrency payment system worth the effort.
• No one knows the future of cryptocurrency. Cryptocurrency is gaining momentum, but it is still a risky investment. It may end up being regulated or otherwise lose many of its advantages.
• Traditional banking is changing. In the near future, banks may be an option for all cannabusinesses – with many of the advantages that cryptocurrency currently provides. Despite Attorney General Sessions’ revocation of the Cole Memo, data shows that an increasing number of banks are working with marijuana businesses to some extent. Using a bank provides greater protection than cryptocurrency (which is unregulated), FDIC insurance, and an easier method to pay taxes and fees. Furthermore, the ever-increasing influence of Blockchain technology on the banking industry may make many of the advantages of cryptocurrency, such as lower fees and instantaneous posting, irrelevant.