The Banking Challenge: Ups and Downs of Using Crypto as Payment in Marijuana Dispensaries

As marijuana legalization is ramping up in the U.S. and Europe, with Germany legalized marijuana just recently, it's becoming obvious that transaction will be a problem for every one involved in the in business, as marijuana remains illegal under the Controlled Substances Act, 21 U.S.C. § 801, et seq., meaning that banks who provide services to marijuana businesses could be perceived as violating anti-money laundering laws. Even if State's legalized it and federal regulators have issued guidance clarifying how financial institutions can permissibly service marijuana businesses the lack of regulation clarity from both State and Federal institutions add to that marijuana still a Controlled Substance businesses cannot find a depository institution to do business with are forced to transact in cash, which creates several challenges related to receiving customer payments, sending payments to third parties, and securely storing large amounts of currency. Some marijuana business owners and cryptocurrency advocates are pushing and advocating for the use of cryptocurrency to send and receive payments by-passing the banks altogether. the only barrier that business owners is facing with regards to accepting cryptocurrency is Tax.


The most consequential laws for businesses accepting cryptocurrency are the Internal Revenue Code and Internal Revenue Service (IRS) regulations, the IRS announced that it views transactions in cryptocurrencies as involving the sale and exchange of ordinary property, meaning that ordinary income is recognized on any gain. See I.R.S. Notice 2014-21, 2014-16 C.B. 938. meaning the business owners must meticulously record the fair market value of the cryptocurrency at the time of receipt, and when converted into traditional currency, any fluctuations in value will be recognized as a gain or loss. The current tax regime thus creates an accounting and tax burden that restricts cryptocurrency adoption, in many cases. Tech companies have developed specialized payment platforms to address these challenges of using cryptocurrencies in the marijuana industry. These platforms offer several key features to circumvent potential tax issues related to cryptocurrency payments:

1. Instant Conversion: The platforms instantly convert the customer’s cryptocurrency payment into traditional currency, settling the funds in the merchant’s bank account the following business day, avoiding the price fluctuation of cryptocurrency and thus avoiding realizing a capital gain or loss.
2. Reduced Cryptocurrency Retention: By instantly converting cryptocurrencies into traditional currency and settling the funds into a merchant’s accounts, eliminating the need to retain large amounts of cryptocurrency.
3. Instant Confirmation: The platforms provide instant confirmation for transactions, essentially guaranteeing payment for the merchant and eliminating the risk of chargebacks. However, because the cryptocurrency payments are instantly converted into cash, refunds are best handled by returning cash directly to the customer.

While the marijuana industry faces unique challenges due to federal prohibition, cryptocurrencies and technology platforms that offer potential solutions, particularly in the realm of payment processing it is by no means the only challenges if must hurdle, marijuana businesses must also consider the accompanying risks and benefits unique within their business but crypto and technology has potential solutions;
The Potential Benefits of Leveraging Cryptocurrency in the Marijuana Industry

1. Cryptocurrencies Are Readily Available to Consumers: For customers, purchasing cryptocurrency is typically a straightforward process. They can purchase and send cryptocurrencies using various mobile applications, which “host” the customers’ cryptocurrency wallets (i.e., accounts). This low barrier to entry means that potential customers can purchase cryptocurrencies in minutes, including from “off-premises” bitcoin ATMs.
2. Cryptocurrency Transactions Are Seamless and Instant: Once purchased, cryptocurrencies can facilitate easy and fast transactions, allowing customers to pay for goods by simply scanning a QR code. While cryptocurrency transactions experience unpredictable settlement times and transaction fees at times, recent technological developments, like Bitcoin’s “Lightening Network” and Ethereum’s “Layer 2” solutions, have enabled instant transactions that cost a fraction of a cent. These innovations, however, require a higher degree of technological sophistication than traditional cryptocurrency transactions. However, as they mature, much of the difficulty will be abstracted away from the consumer, and thereby increase ease of use.
3. Cryptocurrency Networks Are Impenetrable: In 2022, several cryptocurrency service providers collapsed due to alleged high-risk lending practices, commingling of customer funds, and fraud. As a result, some individuals mistakenly conflate these providers’ failures with cryptocurrency networks themselves, which are not the same. The Bitcoin network, for example, is one of the most secure networks in the world. Its security derives from the fact that control of the network is decentralized over tens of thousands of network participants, with no single individual able to alter it unilaterally. As a result, the only security concern individuals must address is the security of their own funds, which can be stolen by hackers and those with access to the private keys associated with a given cryptocurrency wallet. These risks, however, are fairly easy to mitigate.
4. Stablecoins Mitigate Volatility Risk: Traditionally, cryptocurrencies like Bitcoin have seen significant price volatility, which may deter some businesses from accepting payments in cryptocurrency. However, several reputable companies now issue a cryptocurrency variant known as “stablecoins.” Stablecoins are cryptocurrencies whose value is pegged to a given currency. Stablecoins are backed by hard assets in a reserve account maintained by the issuer. To maintain the peg, issuers allow stablecoin holders to redeem them for dollars.
5. Cryptocurrencies Enable Marijuana Businesses to Bank Themselves: By allowing marijuana businesses to maintain custody of their funds without involving financial intermediaries, marijuana businesses can effectively provide banking services to themselves. They can store value on the blockchain, receive funds, and transact with third parties without involving a bank or other financial intermediary.

The Challenges and Risks

1. Self-Custody Presents Risks of Loss: Unlike consumers, marijuana businesses cannot use hosted wallets to facilitate transactions. Attempting to do so could potentially reintroduce the challenges associated with the traditional banking system, since third-party wallet hosts and/or their payment processors may decline to facilitate cryptocurrency conversions for marijuana businesses.[5] As such, marijuana businesses that receive cryptocurrency payments must custody their own cryptocurrency wallets. While relatively simple, self-custody requires some technical skills and additional safeguards. Moreover, marijuana businesses that custody their own cryptocurrency must exercise additional diligence to ensure wallets are adequately segregated from related entities’ and owners’ personal funds. A final concern with self-custody is that cryptocurrency transactions are irreversible, meaning that simple user errors cannot be remedied.
2. Converting Cryptocurrencies Into Fiat Currency: Once a marijuana business amasses a significant amount of cryptocurrency, it may face challenges with converting the cryptocurrency into traditional currency. These conversions would also reintroduce some of the pre-existing challenges associated with traditional banking, since these counterparties may also be hesitant to facilitate large transactions with marijuana businesses.
3. Tax Issues With Converting Cryptocurrency: In addition, converting cryptocurrency into fiat currency may create additional tax liability. Cryptocurrencies are currently taxed as property, meaning that any fluctuations in a cryptocurrency’s value may be taxed as capital gains or losses. While certain tax planning measures can reduce or eliminate the increased tax burden, implementing them may increase operational complexity in a manner that deters cryptocurrency adoption.

In the end while cryptocurrencies offer potential solutions to the banking challenges marijuana businesses face, they also come with their own risks and challenges, it is crucial for business owners and the industry itself to to evaluate the implications of this approach with professionals experienced in both the marijuana and cryptocurrency sectors.



Source
https://www.regulatoryoversight.com/2023/11/the-pros-and-cons-of-marijuana-dispensaries-using-cryptocurrencies-for-payments/
https://www.regulatoryoversight.com/2024/01/navigating-cryptocurrency-in-the-marijuana-industry-risks-and-technological-solutions/
Image Source:
https://www.prnewswire.com/
https://www.mcclatchydc.com/