Arizona is looking to FinTech and stablecoin to help solve the payments problem faced by the marijuana industry.
The problem, of course, stems from the fact that federal law still views marijuana as an illegal substance no matter what state laws might say. That works to keep financial institutions and payments services providers on the sidelines, given their worries about violating anti-money laundering regulations. That also serves to make legal marijuana a cash-dominated retail activity.
Medical marijuana use (not recreational) is legal in Arizona, but the same payments challenge applies. Now, according to a recent announcement from the state’s attorney general, digital token startup ALTA “has been approved to enter Arizona’s FinTech Sandbox,” making it the seventh participant in the innovative program.
“ALTA is a private financial services ‘club’ using money transmission services and digital asset technology aimed at providing a cash management solution for licensed medical marijuana providers and vendors. ALTA uses digital tokens to allow members to safely transfer cash. ALTA allows those tokens to be redeemed for cash and the value of the token never fluctuates,” the announcement said.
This is not the first time that state lawmakers have looked to cryptocurrency for marijuana payments. Earlier this year in California, two Democratic members of the state assembly, Kevin McCarty and Phil Ting, filed a bill that would enable operators of legal cannabis businesses to pay their city, county and state taxes and fees in stablecoin — that is, cryptocurrency with value tied to traditional currency, commodities or other assets. The bill so far has failed to make it out of committee.
According to California State Treasurer Fiona Ma in a hearing for the Secure and Fair Enforcement of Banking Act of 2019 (SAFE Banking Act), the legal pot industry in that state will be worth at least $5.1 billion by 2020. The bill would prevent federal regulators from targeting banks that accept deposits from legal cannabis operators. Such prohibition could involve limiting FDIC protections for those deposits, for example, or trying to prevent loans to those businesses.
Increasingly, proponents and observers of the legal pot industry are looking to cryptocurrency as a solution, given that it is legal, as well as safer and cheaper to handle than large amounts of cash. Indeed, there is even a cryptocurrency designed for use in the legal cannabis industry. Plainly enough, it is called PotCoin.
Cryptocurrency could have wide use in the legal pot industry, according to proponents. As one recent analysis put it, “cryptocurrency accounts and transactions are anonymous, an additional benefit to customers who don’t want their marijuana purchases known.” Not only that, but “digital assets provide for the immediate settlement of funds and the underlying or when combined with blockchain technology provides for nearly instantaneous validation of all transactions, as opposed to waiting hours or days for a credit card payment to post.”
While the interest in using cryptocurrency to support legal pot transactions — along with the fees and taxes owed by operators — is surely gaining steam, the idea is not brand-new. More than a year ago, Cannabis Science announced an initial coin offering (ICO) as it prepared to launch its third dispensary in California. The company highlighted the potential of blockchain technology, not only to facilitate the sale of its CBIS Asset-Backed Blockchain, but also to solve several challenges businesses face due to their inability to get banked.
The cannabis cash and payment problem is not limited to the U.S. — a similar problem exists in Canada, where pot is legal across the entire country, but where the reluctance of U.S.-based financial institutions and payment service providers is also felt.
It’s not clear how far cryptocurrency would go in solving the cannabis payments problem — at best, it would likely be a short-term patch. But expect more movement on this general payments problems over the next months and few years.