Barred from using the traditional banking system by federal and state laws, cannabis dispensaries nationwide have explored alternative, non-cash options in order to conduct their daily business, but so far they have not been widely adopting the use of electronic cryptocurrencies to do business.
“What makes cashless currencies so attractive (the lack of a paper trail) is exactly why our bank would never allow us to use it,” according to Zachary Zises, owner at Dispensary33 in Chicago. “We need to be able to demonstrate total transactional accountability and transparency in order to have any access to the banking system, which is why cash remains king at medical cannabis dispensaries,”
As a result of being locked out of the traditional banking system, dispensaries mostly operate in a cash environment due to their limited access to even the most simple business vehicles, a checking account. As a result, this situation has made dispensaries go through extra work in order to meet their record keeping and compliance obligations to state authorities.
Since cannabis is a Schedule 1 controlled substance, the IRS has stated that dispensaries and others in the cannabis production and cultivation cycle can only deduct expenses related to the costs of goods sold for federal reporting purposes. This means cannabis business can pay tax rates as high as 75% to 90% of net income, according to the accounting firm of Daszkal Bolton. To complicate matters, each state has its own tax laws covering legitimate deduction, including excise taxes on farming and dispensaries.
Yet while the link between being a cash business and meeting state and federal tax standards is easily done in most industries, the cannabis industry does not have a seamless way to do business, while also meeting its tax and regulatory obligations.
On its face, Bitcoin could be considered as a solution to this problem. It has been hailed by its advocates as a transformational invention because it has two purposes: as a digital currency and as an open-source software that can be used to facilitate financial operations and transaction processing on a global basis.
As a digital currency, Bitcoin can be managed electronically from anywhere in the world. It also is becoming more widely accepted by banks and merchants outside of the cannabis industry. In its other form, as an open-source software, the Bitcoin technology platform is being used by institutional financial traders and software developers to transform the operational and transactional sides of the financial industry.
Cryptocurrency Adoption Is Limited
Outside the U.S., PotCoin, the digital currency that facilitates transactions within the legalized cannabis industry, announced in December that it will be launching a promotion with the Canadian federally-licensed producer and distributor of medical cannabis WeedMD Inc. On its website, PotCoin said this deal is “what appears to be the first association between a cryptocurrency and a licensed producer to date.” The company said it sees this “as a major move towards faster adoption by cannabis vendors and suppliers.”
At the individual consumer level, cryptocurrencies may have a larger role. In June 2017, Bloomberg reported that two start-ups, Singlepoint and POSaBIT, were launched that allow individuals to use their credit cards to purchase cannabis from dispensaries. POSaBIT reported that it had 30 dispensaries using its system in Washington state, so customers could buy pot using their credit cards. On Washington dispensary reported that it sold $3 million in 2016 and that 13% of its customers were charging their purchases using POSaBIT.
Yet while there have been some advances in using cryptocurrencies at the customer level, dispensaries themselves have been slower to adopt cryptocurrencies at the managerial level. “I don’t know of any dispensaries in Chicago that accept the electronic currencies,” Zises of Dispensary 33 in Chicago said. “We have too many strict state and federal standards to meet, and right now, the cryptocurrencies don’t allow us to meet those high standards. I don’t think there is any regulated market where a state regulatory agency would allow it, but it’s just a guess.”
The Basics of Bitcoin
Introduced in 2013, Bitcoin is a type of digital currency, printed in a fixed quantity: Only 21 million Bitcoins will ever be issued on a declining scale that will end in 2140.This currency is the first in the world that is created and managed electronically.
This means there are no banks or middlemen needed to handle transactions. This makes Bitcoin a very disruptive invention since it eliminates the need for credit cards or bank accounts. Money can be transferred instantly and free, so there could be no need for wire transfers or money orders.
While Bitcoins are electronic money (they are also called a “cryptocurrency”), they can be purchased at ATMs, from other Bitcoin owners, or online exchanges. Once the Bitcoins are purchased and entered into the system, they become totally usable, electronic, transferable and anonymous. This means Bitcoins can be spent, sent, saved, or easily converted into any nation’s paper currency.
So once users recognized that Bitcoin is liquid, they attracted the attention of financial types who saw they could become an investable asset despite their very special qualities. One of those special qualities is that Bitcoin is considered property by the IRS in the United States. This means an investment structure cannot directly own Bitcoin, but it can hold Bitcoin as part of shares in an investment trust, which has purchased Bitcoins.
The other problem is that the financial, regulators and the courts are not clear about how to classify Bitcoin. Recent rulings have found it to be a cash equivalent, a security, a commodity and a foreign currency. This confusion explains why regulators are uncertain about its legal and regulatory jurisdiction.
Matt Karnes, the founder of GreenWave Advisors said, “Because cryptocurrencies are so controversial, we believe its use raises added concern for the cannabis industry, which already faces its own unique challenges for banking and do not consider it a viable option at this point in time.” This is just a list of current cannabis-focused cryptocurrencies as compiled by GreenWave.
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