Blockchain and crypto-asset payment systems are becoming increasingly common across various industries; people purchase cars, homes, services, and more with these payment systems’ availability. But the impact these systems can have on the cannabis sector makes them viable solutions for the current challenges in place.
Currently, we’ve had numerous states and territories legalize adult-use cannabis. One of the newest states to do so is New Jersey. NJ voters passed legalization with the November 2020 election ballot initiative. However, since cannabis is still listed as a Schedule 1 controlled substance under the Controlled Substances Act (CSA), federal and state laws are at odds with one another. In turn, cannabis companies in New Jersey will face a plethora of challenges, including banking and payment processing.
Every business across all industries needs a fully functioning payment infrastructure. Without this, it’s nearly impossible to scale a business efficiently and effectively. Even with the political acceptance and so much potential for the New Jersey cannabis marketplace to thrive, the business landscape is slow to evolve. But the developments we see in blockchain and crypto-asset banking developments could be the answer to several key challenges.
Wondering how to implement blockchain and crypto-asset systems in your cannabis business? Contact us today to learn more about how we can help.
NJ Cannabis Business Challenges
While Governor Murphy’s signature on the adult-use cannabis reform bill is set to open the New Jersey cannabis marketplace, cannabis is still illegal federally. With this being the case, cannabis business operators still face an assortment of issues while sourcing banking and financing solutions.
For cannabis businesses looking for loans, traditional business loans are usually unavailable. This is because of the banks’ concerns regarding Federal Deposit Insurance Corporation (FDIC) insurability. As if this wasn’t discouraging enough for the budding sector, banks taking an interest in collateral for loans issued to cannabis companies may be subject to forfeiture on account of federal illegality. While some providers are willing to provide services that can include small business loans for cannabis operations, there are usually only short-term financing options with elevated interest rates to account for the risk.
Since the cannabis sector isn’t legal federally, the primary payment option for most canna-companies is cash. Besides posing various dangers and security issues, accepting cash in this industry limits sales potential and makes logistics more complex. The banking limitations imposed on cannabis are inconvenient, to say the least.
Even though cash can be convenient for retail shops, business-to-business (B2B) transactions are another story. A cash-basis environment for a multi-billion dollar industry is ludicrous. While some might think paper checks could be a viable option, traditional banking services aren’t always offered, especially by banks with federal oversight.
Credit cards aren’t always an option for cannabis businesses or employees looking to cover their day-to-day costs. These digital solutions would help the industry tremendously. However, without them, many of the current issues surrounding B2B payments become even more problematic.
Tracking & Reporting Challenges in Cannabis
Compliance is essential for cannabis businesses, regardless of where they operate. For B2B transactions, these companies have to handle the following tracking and reporting challenges to avoid infractions:
- Supply Chain Concerns – Supply chains vary from state to state depending on the state’s regulations. Throughout the chain, the points include cultivation, extraction, manufacturing, testing, B2B and business-to-customer (B2C) transportation, and wholesale and retail sales. Each of these points demands specific licenses, and it’s crucial to have the right license for whichever role you plan to play in New Jersey’s cannabis marketplace. In some cases, licensees will own every level of the supply chain. These are “vertically integrated” cannabis businesses, and this can minimize supply chain concerns when done right.
- Tracking & Reporting – Tracking and reporting are crucial for all cannabis operations. But for vertically integrated cannabusinesses, the right software offers the “seed-to-sale” tracking you’ll need to remain compliant. The requirements vary from state to state. However, the market offers various services to handle your reporting, tracking, and processing needs across all points of the supply chain. If your business is not vertically integrated, it could be challenging to find compatible software. With this being the case, your business could demand more data input and processing time while risking errors as it performs B2B transactions.
- Payment Terms & Trade Credit – Traditionally speaking, businesses use payment terms and trade credits to effectively help with administrative functions and manage their cash flow. However, these practices aren’t always available for cannabis operations. Some commercial solutions exist, but we’re offering highly effective options for outsourced B2B management.
Looking for someone to manage your cannabis business’s licensing, seed-to-sale tracking, and cash flow? Contact us today to learn what we can do to scale your operation.
Available Payment Processing Options Pros & Cons
Cannabis businesses in New Jersey have a few options for non-cash solutions. The cannabis marketplace in the U.S. has evolved to allow payment processing, despite the various shortcomings. Here’s a list of the available options and risks associated with each:
- Debit Card Payments – Debit card payments for cannabis businesses are integratable with point of sale (POS) systems. The main benefit of using this payment method in conjunction with your POS system is that you’re ruling out the risk of error during the sale process. However, to make this work, you’ll have to find a bank willing to provide these services, which we can facilitate.
- ACH Payments – ACH Payments incorporate third-party solutions to make it easier to process customer payments. While this incurs fees on the organizational side, these solutions are integratable with the POS and bypass the risk of error during the sales process. Thus, like with the debit card payment solution, you’ll facilitate compliance and avoid infractions.
- Cashless ATM Payments – Cashless ATM payments involve having a third-party ATM-like machine for customers to deposit their payments directly to businesses’ bank accounts. While this offers the convenience of cashless transactions and offers POS integration, it’s also capable of operating outside of your POS. However, there’s risk associated with errors in the sales process that directly relates to your chosen service provider. These third-party solutions also charge fees for companies that use these services.
- Credit Card Payments – Credit cards are another third-party option. Some businesses are willing to take on the risk of accepting credit card payments by using a third-party payment processor. However, if the company is noticed acting out of compliance, there’s a chance that merchants can refuse the revenues the cannabis business has earned. If the money hasn’t been deposited yet, this can be especially problematic. State regulators also tend to look into non-compliance actions, potentially resulting in a company’s license forfeiture.
Looking at the available payment processing options for the cannabis industry, common operational and accounting challenges become even more complex for these businesses. However, we have hope that blockchain and cryptocurrency solutions are the answer. As major companies are backing these solutions for payment processing and B2B payments, it’s increasingly apparent that these options are viable, realistic solutions worth considering.
Blockchain & Cryptocurrency as a Solution
Over the last few years, Bitcoin has been gaining momentum as a cryptocurrency. While it’s gained a lot of attention, blockchain and cryptocurrency, generally speaking, have become viable options for many businesses – including cannabis.
To fully understand cryptocurrency’s potential to solve the financial woes of cannabis companies, it’s ideal to know about the categories and what they represent for the industry.
- Decentralized Cryptocurrencies – Decentralized cryptocurrencies aren’t issued or governed by a single entity or small group of organizations. These are rather volatile, with a lot of speculation surrounding them. But the main issue here is the related uncertainty surrounding taxes, reporting, and accounting.
- Stablecoins – Stablecoins were created to combat the price volatility we see with decentralized cryptocurrencies. While stablecoins are cryptocurrencies, they’re different from others. Stablecoins differ because they’re issued, governed, and managed by single entities or small groups of organizations. These coins are stable because they’re linked to another asset. Most of the time, they’re connected to the U.S. dollar. The result is lower price volatility, which allows them to be used in transactions for various products and services. With this being the case, stablecoin can play a significant role in cannabis businesses’ operations. However, this can be a complex system to implement, and many remain uncertain about blockchain-based tech’s role in the future of business. Thus, some business operators are hesitant (and rightfully so) to implement crypto-based payment systems.
Accounting for Cryptocurrencies
For many organizations, accounting for cryptocurrency transactions is a challenge. However, stablecoins have the potential to be used as an alternative to currency. But, under the current U.S. regulation, these coins are still treated as property.
With this being the case, each time a stablecoin changes ownership, there’s a taxable event. This complicates things for accounting, recordkeeping, and tax compliance action. However, it also offers several opportunities for the people willing to implement crypto-based payment systems for cannabis.
We’ve seen some updates in the regulatory landscape that highlight how wider adoption of crypto-based payment systems could happen, including:
- Gary Gensler – Gary Gensler is the Biden Administration’s choice to head the Securities and Exchange Commission (SEC). This is a leap forward for blockchain and crypto regulation. While amenable legislation isn’t a sure thing, Gensler is knowledgeable about these topics and will be responsible for proposing and enacting regulations.
- Updates from the Office of the Comptroller of the Currency (OCC) – Recently, the OCC released two updates that cannabis business operators and practitioners will appreciate. In September 2020, the OCC explained that federally-regulated banking institutions could hold reserve dollars for privately issued stablecoins on deposit. With this update, stablecoin issuers have full access to the services and support of the commercial banking system. The update also made it clear which specific products and services banking institutions can offer stablecoin issuers. In January 2021, the OCC offered an update that federally-regulated banking institutions will be allowed to join permissionless blockchains (independent node verification networks) and validate transactions under the OCC’s jurisdiction.
Through these OCC updates, we know stablecoin transactions are transparent, and banks are accountable for these transactions. Furthermore, these institutions can now purchase, sell, and process transactions with stablecoins backed by the U.S. dollar. Thus, federally-regulated U.S. banking institutions are now capable of joining blockchains and processing these U.S. dollar-backed transactions.
Marijuana Cryptocurrency Options for New Jersey Cannabis Businesses
Since cannabis business operators are still having trouble using traditional banking services for their transactions due to federal legislation, many turn to marijuana-specific cryptocurrencies. Even though Bitcoin is one of the most popular, alternative coins have been developed to specifically serve the needs of the cannabis sector.
PotCoin is one of the first cryptocurrencies for the cannabis industry. This crypto was designed with cannabis banking problems in mind. The trades are direct, allowing people to bypass banks and clearinghouses to make their transactions. PotCoin’s creators focused on Colorado’s cannabis legalization, installing a PotCoin automated teller machine (ATM) at a dispensary in the state.
However, PotCoin didn’t have the impact the creators had hoped – at least not at first. But when a press release and video showing former NBA star Dennis Rodman wearing a potcoin.com shirt in North Korea went public, PotCoin re-entered the media spotlight. CoinMarketCap.com reported that this event drove PotCoin’s value up 75% in one day. By November 2020, PotCoin’s market cap nearly reached $1.5 million, which is significant compared to February 2014’s market cap of $81,547.
PotCoin’s supply is limited, with 420 million coins in circulation. At this point, it’s trading on three markets and has transitioned to proof-of-stake, allowing crypto-miners to mine or validate block transactions per the number of coins they’re holding. PotCoin claims its transaction speeds are 40 seconds, and the cryptocurrency has introduced new features that include HD Wallets, faster network synchronization, and reduced sync times.
HempCoin is also one of the first cannabis cryptocurrencies to hit the scene. This coin was developed for the farming industry and dispensaries. According to HempCoin’s website, it was explicitly designed to “facilitate transactions between marijuana farmers and the local dispensary shops.” But it’s possible to use it to buy gear and tools for cannabis farming.
At this point, HempCoin is being used across the agriculture industry; it’s not limited to cannabis. Thus, it’s safe to say that its use cases are quite vast and impressive, especially compared to other marijuana cryptocurrencies.
CannabisCoin hit the crypto scene a few months after PotCoin. As a proof-of-work, peer-to-peer open-source currency, the idea behind it was to facilitate transactions for dispensaries.
This cannabis cryptocurrency can be converted directly into cannabis. There’s a line of cannabis medicines and strains being grown specifically to exchange for CannabisCoin, allowing people to purchase 1 gram of medication with 1 CannabisCoin. The supply of CannabisCoin is 91.8 million coins, and over 77 million coins are currently in circulation.
CannaCoin is a cannabis cryptocurrency running on a decentralized blockchain that uses Peer2Peer tech. The currency has been around a while, but it transitioned to proof-of-stake at block 370,000.
Its founders describe this crypto as “a group of cannabis enthusiasts working towards future developments of cryptocurrency applications related to cannabis production, seed production, extract production, glass blowing facilities, vape and dab station manufacturing, crypto development, and more.”
Adam Howell founded DopeCoin with the mission “to provide marijuana enthusiasts with a modern and secure way of doing business for the 21st century.” Its website says DopeCoin users can make their transactions pseudo-anonymously in less than a minute without paying any fees or transaction costs.
The vision for this coin was to make the Silk Road for marijuana transactions. With 117 million DopeCoin in circulation, it’s limited. But it is also a proof-of-stake currency, offering investors the ability to earn 5% in interest annually.
New Jersey Cannabis Crypto-Based Payment System Implementation
For operations looking to accept marijuana-specific cryptocurrencies, virtual wallets hold and store these coins. This is the same across the crypto industry.
Interested in implementing a crypto-based payment system for your cannabis business in New Jersey? Contact us today for recommendations.