Cannabis and cryptocurrencies: the time is now

Cryptocurrencies are in full swing. One example is the fact that in late November 2017 the value of bitcoin, the virtual currency par excellence, reached an all-time high of over $10,000 per coin. Definitely, a rising market in which also cannabis has found its own niche, with several US marijuana companies resorting to virtual coins for their business transactions.

Last year the US legal cannabis industry generated revenues of $6 billion and is expected to grow to $50 billion by 2026, according to New York-based financial company Cowen & Co. These numbers clearly demonstrate the significance of the cannabis industry in the country. Yet with 29 states and the District of Columbia having legalised marijuana, traditional financial institutions are reluctant to get involved because the plant remains illegal under federal law.

In fact, under the Controlled Substances Act, banks granting loans to legal cannabis dealers risk losing their money if the borrower refuses to pay - as cannabis remains illegal under federal law, banks can be denied access to deposit insurance and may even face prosecution.

As a result, cannabis business are forced to operate as cash-only business, finding themselves submerged under piles of bills and coins, which only bring logistical problems and security threats. Luckily, we seem to be getting closer to a solution, as cryptocurrencies are giving dispensaries and other companies in the cannabis industry the possibility to operate in a virtual environment - which is safer and more user-friendly - eliminating the problem of cash glut and improving the shopping experience of customers, who can use their credit cards as in any other shop.

Paying for your weed with bitcoins

"There's no industry - whether it's the production and sale of cannabis or the production and sale of a cup of coffee - that can operate safely, transparently or effectively without access to banks or other financial institutions and traditional services," said Jon Baugher, co-founder of POSaBIT, whose bitcoin technology is used by 30 dispensaries in the State of Washington. "That's where we thought we could leverage the use of digital currency." Based in Seattle, the company gives consumers the possibility to easily acquire digital currency at the point of sale.

 

 

Thus, once the customer decides which cannabis product to buy, an employee of the dispensary asks them whether they prefer to use cash or virtual coin, in which case the buyer can use a credit card to buy bitcoin o litecoin - a similar alternative - through POSaBIT with a $2 transaction fee.

At this point, the customer would own the value of the purchase in bitcoin, which can be cashed in in the dispensary itself or anywhere else where this payment method is accepted. If the customer decides to finalise the purchase in the dispensary, POSaBIT registers the amount and transfers the value in US dollars to the relevant bank account.

Faced with criticism from both the cannabis and the digital currency industry, POSaBIT says it has taken steps to comply with federal and states laws regulating both marijuana sales and virtual currencies. For instance, customers are required to present a valid ID prior to purchase - which is then scanned, encrypted and stored - and are not allowed to exceed the purchase limit of $150 in bitcoin. Further, the company has implemented a fraud detection program and requires retail customers in the cannabis industry or elsewhere to have a bank account.

Cannabis-specific cryptocurrencies

SinglePoint Inc. (SING) is yet another startup that has chosen to link both industries, making efforts to help cannabis users obtain bitcoins at the point of sale. Among the steps taken is the purchase of the cryptocurrency Weed, aimed at solving the payment problems faced by the cannabis industry. A recent initial coin offering resulted in an impressive market capitalization of $60 billion, and although the currency is far from dethroning the almighty bitcoin, in November 2017 it was valued at about $1.19.

But Weed is not the only cannabis-specific cryptocurrency. Created by three anonymous developers known under the pseudonyms of Hasoshi, MrJones and Smokemon 514, PotCoin ($POT) has been in circulation since 2014. As explained in their website, the aim of the developers was to "empower, secure and facilitate the legal cannabis community's transactions", and three years later, the currency is available at 800 ATMs in over 35 countries - in Spain, for instance, some grow shops in Marbella, Fuengirola and Barcelona accept PotCoins as payment method. In November 2017, the currency reached a value of $0.327, but with a market as instable as this, there's no telling what will happen in the future.

Another cannabis-specific cryptocurrency is HempCoin ($THC). It was one of the first 30 coins to be developed in 2014 and, contrary to most digital currencies, it is backed by Rocky Mountain Ayre, a company listed in NASDAQ, the American stock exchange. As for November 2017, its record high was $0.025.

Meanwhile, CannabisCoin ($CANN) stands out as the preferred digital currency in American dispensaries. Referred to as 'the marijuana bitcoin' by many users, as for November 2017 its value had not exceeded 3 US cents.

The situation is similar for DopeCoin ($DOPE), which in 2015 launched the network GROW in order to give Canadian producers the possibility to safely sell their plants using DopeCoin for their transactions.

Pros and cons of the teaming up

According to experts, the use of cryptocurrencies in the thriving cannabis market could open the eyes of the federal government, prompting it to enact legislation enabling banks to serve cannabis businesses - a measure that, considering the growth prospects for the sector, would be more than welcomed by banks. But these banking agreements wouldn't necessarily mean the end of the idyll between cannabis and cryptocurrencies, which now have to deal with the problem of mutual unfamiliarity.

On the one hand, the general public still has difficulty in understanding its functioning, including Neil Demers, who owns a dispensary in Denver. "I am sure education could enlighten me and a lot of this industry on bitcoin being a feasible payment option, but we just don't see it," says Demers. On the other hand, cannabis is still dealing with criticism over legalisation, and pushing the envelope with these innovative virtual concepts could just result in people who are not familiarized with them mentally associating the situation with the black market.

In fact, despite their many advantages, cryptocurrencies are not without risks. Being much less widespread than traditional currencies, their value is still highly volatile and unstable. Another problem is the certain lack of accountability in the event of fraud. In light of the recent trial for the disappearance of €400 million worth of bitcoins from Mt Gox vault, which led to the exchange's bankruptcy in 2014, investors have good reason to distrust cryptocurrencies.

Cases like this fuel the debate about the need to regulate the sector, a position supported by countries like Russia and China - the Asian giant has already prohibited cryptocurrency-based investments, including Initial Coin Offerings. In the opposite direction, CME Group, the world's largest financial market, opened the door to bitcoin futures in December 2017, driving the currency to an all-time high value and reinforcing the idea among investors that bitcoins rightfully occupy a central place in the world of finance.

Despite the drawback, now's the right time to build this kind of partnerships. Legal marijuana and cryptocurrencies are emerging industries worth millions of dollars and, as such, their merger can only bring returns to those who are brave enough to bet on the new economy and the future of cannabis.