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Is Blockchain A Solution To The Cannabis Industry's Banking Challenges?

October 12, 2018 10:09 am
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It's estimated that legal cannabis sales in the U.S. could reach $10 billion this year and more than double within the next five to six years. Yet Arcview Market Research estimates that people in North America spent $56 billion on weed last year — meaning the industry has a lot of room to grow.

The sector continues to face many challenges, such as an inability to work with banks, a constantly changing regulatory environment and the problem of attracting investors. 

Cryptocurrencies: A Solution To Weed Industry's Banking Problems?

American cannabis companies are predominantly cash-only businesses. Few effective solutions have been found for this problem. 

"There's a lack of protection for state banks from federal law enforcement, so the majority of banking institutions close their doors to cannabis business because it's too much trouble to deal with. This creates several side effects: businesses are at risk with handling millions, if not hundreds of thousands of dollars in cash, and regulators end up dealing with inaccurate financial statements and therefore taxation hurdles," seed accelerator Orthogonal Collective told Benzinga.

That's where cryptocurrencies could be a possible solution. Since they are deregulated, cryptocurrencies could become a feasible form of payment for cannabis companies. They allow for secure, cashless and fast payments and can be easily converted into fiat money or transferred to any point around the world quickly.  

Cannabis is similar to many industries in that it has needs that can be addressed by cryptocurrencies, Scott McGovern, the founder of Green Rush Daily and co-founder of Blocklr.com, told Benzinga. 

"On one hand, cannabis businesses stand to benefit from a cryptocurrency that has high liquidity, fast transactions and an accessible mobile app for in-store payments," he said. "But more broadly, the entire supply chain is hindered by cash-only transactions."

A blockchain platform fueled by a cannabis cryptocurrency could facilitate transactions between the members of the cannabis supply chain, which range from farmers to transporters and dispensaries to non-plant-touching suppliers and ancillary service providers, McGovern said. 

There are at least 17 cannabis-related cryptocurrencies are in existence today. Most aim to help marijuana companies avoid banking issues and dealing with cash, since banks are still not allowed to work with cannabis businesses.

PotCoin, DopeCoin, HempCoin, and CannabisCoin are among the cannabis cryptos available today. These cryptocurrencies have very small capitalizations; PotCoin's total value is around $4.7 million.

The use of cryptocurrencies as a payment method could also open the cannabis industry to further scrutiny from regulators, as cryptocurrencies are often used for money laundering purposes. 

Blockchain Opens Cannabis Industry To More Investors

The advancement of blockchain technology has meant many new enterprises are seeking capital from investors through initial coin offerings, or ICOs. A company presents its project, which is usually based on blockchain, and issues a token that are either backed by assets of the company that develops the project (equity tokens), or provide users with access to the platform and its services (utility tokens). As ICOs are unregulated, they allow startups to raise money without having to comply with strict regulations.

As the ICO market is booming, more ICOs from cannabis companies seeking to raise capital could be coming soon. 

The aforementioned Orthogonal Collective is one example. Orthogonal aims to invest in cannabis startups and is preparing to conduct a security token offering — similar to an IPO, but with equity represented by tokens rather than shares.

One advantage, the company told Benzinga, is that “tokenized equity” is easier to sell than shares issued in an IPO.

Since a very small percentage of ICOs actually succeed — according to ICO Rating, only 7 percent of all ICOs in Q2 managed to list on an exchange — attracting investors is a crucial step for the Orthogonal Collective. That’s why they have been working with Verma Media, a digital marketing agency that focuses on innovative startups, particularly blockchain and cannabis.

Blockchain represents a decentralized secure database that cannot be altered. New information is simply added to the chain, where it is permanently stored. This feature could help cannabis companies keep up-to-date with regulations and legislation.

The technology has already been used for tracking supply chains in other industries, and the potential exists for cannabis companies to use blockchain to monitor cannabis from the seed stage to retail locations.

Green Rush Daily's McGovern said a blockchain platform can function as a product tracking system. 

"Cannabis regulations are more specific than ever. Having a blockchain record that businesses and governments could consult would make regulatory adherence a lot easier — and a lot easier to prove," he said. 

Related Links: 

New Ways For Cannabis Companies To Raise Money 

MedMen Just Became The Biggest Cannabis Company In The US