Legal

It’s Not Easy Being Green: Cannabis Payments

In 1992, a discussion about buying marijuana was pretty straightforward. Back then, it was illegal and socially stigmatized. Walking into a storefront to buy it was pretty much out of the question — unless you happened to be connecting thru Amsterdam. Most transactions occurred on street corners or back alleys, and payment was in cash.

Four years later, in 1996, the situation regarding marijuana legislatively changed dramatically, when California passed Proposition 215 and legalized marijuana for medical patients. Over the next two decades, 28 states have also legalized marijuana for medical use (apart from a handful of early adopters, the bulk of the medical states have legalized in the last ten years).

And then, in 2012, the situation got even more complicated. Voters in Colorado amended their state constitution with Colorado Amendment 64, which essentially legalized the recreational consumption of marijuana for adults over 21. Seven other states have followed suit within the last five years, including the District of Columbia.

What has not changed is how payments for marijuana transpire.

While state laws have changed greatly in the last two or so decades, the federal code regarding marijuana has not changed at all since Bill Clinton denied he inhaled it 25 years ago. It is still a Schedule I controlled substance, meaning it is illegal to buy, sell or possess cannabis.

And while the DOJ, so far, has agreed to look the other way when it comes to enforcement of the law regarding the sale of marijuana, that’s not the case for financial institutions who might want to take payments coming from a marijuana dispensary.

“This is not a political statement, though it may sound like one. I thought it was incredibly cynical of the Obama administration, who on one hand said, ‘Hey states, don’t enforce the marijuana laws; you do whatever you want.’ But then on the other tell any bank or any federal entity that they will completely enforce the Federal Reserve system. I think that is just a very cynical mixed messages to send out to the industry.”

That was one of the voices from the Innovation Project’s panel on “The State of Cannabis and Commerce in the U.S.,” moderated by Cortex MCP CEO Shaunt Sarkissian, with participation from Ohio State Senator William P. Coley, Regulatory & Compliance Principal and Former Fed Bank Examiner Dante Tosetti and Green Bits CEO Ben Curren. The panel looked at how to square the circle of state-level legality co-existing with federal-level prohibition.

Dissatisfaction with the federal government’s sort of bifurcated approach — allowing the practice to exist, but forcing it to exist in a lumpy and friction-filled environment — was not universal. At least one panel member praised the feds for at least giving out guidance to financial institutions for when they can and cannot do business with dispensaries.

But mostly there was dissatisfaction with the current state of cannabis commerce today. All panel members agreed that forcing a multi-billion-dollar-a-year vertical to operate in a cash-dominated, semi-black market when it comes to financial services is not sustainable — or smart.

Higher Risk Than Necessary

Payments are a problem across the board at dispensaries — not just in front end transactions. That is the most obvious problem. Dispensaries have “solved” this by putting ATMs in their locations insofar as customers have an easy way to gain access to the only payment method that is universally open to dispensaries: cash.

But the average dispensary doesn’t just do front end transactions, the panel noted. They also pay their staff, pay their suppliers, pay their utility bills and pay their taxes. And all of those things become extremely unpleasant when a business doesn’t have a bank account — and, in most cases, can’t get one, because banks don’t want to run afoul of RICO laws that could technically interpret any payment to or from a dispensary (or any other marijuana marketplace player) as an act of money laundering and wire fraud, if said payment should happen to drive across state lines.

And cash-only is not a reasonable way to run a business, especially one with as much money going through it as the multi-billion dollar cannabis industry. Dispensaries get robbed, noted panel members, as do employees paid in cash. Moving tax payments to the county office — something most businesses can now do digitally — is often a very involved process involving tactics out of spy movies simply because the payments in question are tens of thousands of dollars being brought in cash, in suitcases, to county tax authorities.

And state officials like the situation even less than dispensaries do — a panel member claimed — because all the cash flying around makes it very hard to keep track and be certain that the right amount of tax revenue is actually being paid. This is central concern to state officials, since one of the main driving forces behind legalization, particularly recreational legalization, is the tax revenue it can bring in.

“Everyone has an interest in solving this problem,” a panel member noted, “because this much money not being well cared for is so obviously bad for all the players.”

No Silver Bullets

The additional wrinkle in all of this, panel members said, is that though federal laws are unitary on this subject, state laws are not. The rules about who can buy cannabis, where they can buy it, how much they can buy at once and how taxes need to be levied on various purchases vary tremendously.

That makes the commerce situation even harder, because there isn’t a one-size-fits-all system that is going to work evenly in every market. A state where marijuana is legal for medical patients under very strict doctor supervision, has very different needs than a medical state that allows anyone with a headache to purchase marijuana; and both have very different needs than a state with fully recreational legality — with a high tax rate to go along with the newly legal vice.

Those systems all have to be on the right side of federal law and guidance on how to follow it, which will likely mean closed-loop payment systems so that no interstate issues arise. But these systems, members of the panel noted, will also have to be very robust and transparent, because the point is making payments for cannabis easily trackable — and taxable — like payments for any other good.

“Marijuana is never going to be just any other good,” moderator Shaunt Sarkissian noted after the panel. “And I don’t think anyone on that panel thinks that it will be. But if we can get cannabis to be more like beer — something that we let the right people buy at the right time — I think that will be a big improvement. And it is very doable to make marijuana much more like beer.”

A/B Testing the War on Drugs

All of the panel members claimed that they themselves are not marijuana advocates. Ben Curren of Green Bits noted that his interest in cannabis stems from his general interest as a software engineer in solving problems — and getting to A/B test various solutions. The multiple decades war on drugs, he told the crowd at IP, hasn’t really worked out as planned, and now voters in 28 states have decided to try out a new method.

States as the test labs for democracy, when it comes to cannabis commerce, was a popular notion on the panel; the need is obviously there. Consumers want to buy it, dispensaries want to sell it and states want to collect revenue on those transactions.

Plus, the panel noted, building payments systems that are digital and transparent also means building data sources on cannabis that are reliable and trackable over time.

“I think we have an option to replace the war on drugs, which isn’t working, with data sets that might actually inform better policy,” one panel member said.

And while the data drive alternative to the war on drugs might be a longer term goal, in the now, the problem is clearer: Get cannabis off cash and onto payments rails that are more secure and transparent.

If it seems impossible, just remember this: Twenty five years ago, the president said he didn’t inhale something that you can now buy in a strip mall in Colorado. Stranger — and more miraculous — things have happened.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out our April 2019 Unattended Retail Report. 

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