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CA Lawmakers: Crypto Can Solve Cannabis Payments Problem

Can Crypto Solve Cannabis Payments Problem?

Legalized cannabis has a huge cash payments problem – as in, operators have too much, given federal restrictions in the U.S. that have largely prevented the use of cards and digital payments. That introduces friction and more risks of theft into this growing area of retail, which is even gaining a luxury component as pot becomes more mainstream. But there is increasing movement to solve that problem, at least temporarily, via cryptocurrency.

The latest evidence of that comes from California, one of the pioneers of the legal pot industry, both recreational and medical, and still one of the world’s largest suppliers of marijuana. There, two Democratic members of the state assembly, Kevin McCarty and Phil Ting, have 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.

“Existing law imposes a state excise tax on the purchase of cannabis and cannabis products, as defined, at the rate of 15 percent of the average market price of any retail sale by a cannabis retailer,” the bill reads. “Existing law also imposes a state cultivation tax upon all cultivators on all harvested cannabis that enters the commercial market, at specified rates per dry-weight ounce of cannabis flowers and leaves. The California Department of Tax and Fee Administration administers the cannabis excise tax and the cannabis cultivation tax.”

Market Size

According to California State Treasurer Fiona Ma in a recent hearing in consideration of 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.

Despite 47 states having some form of legalized marijuana for sale, the legal cannabis industry exists in a state of potentially dangerous uncertainty when it comes to financial services. Collectively, those states are home to nearly 319 million people, or 98 percent of the U.S. population.

The problems arise because federal law still classifies marijuana as an illegal drug, which presents legal risks for financial institutions and payment card networks that want to serve the legal cannabis industry – not only to provide services to legal pot sellers, but also to their customers and vendors.

Pot Crypto

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, and as of late Wednesday morning (April 3), it was worth $0.0263.

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. Just 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.

While there has been slow, but relatively steady, movement in the U.S. toward passage of the SAFE Banking Act, the prospects of its enactment are uncertain at best. Cryptocurrency might be called upon to handle more payment duties until other changes are made.

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