Tales from the Crytpobus: Are Cryptocurrency and Web3 Solutions to the Cannabis Industry’s Banking Concerns?

Today it’s nearly impossible to go online without hearing buzz around “cryptocurrency” and also “Web3”. A fair number of businesses in Silicon Valley are vocal about a general movement towards “deregulation” and “decentralization”, although some argue this approach is really something that results in quasi-regulation or eventually will just evolve to a different kind of regulation.

Web3: The Next Digital Revolution

Web3 is the next internet revolution of the World Wide Web and is conceptually aligned with cryptocurrency in the sense of being based on a technology that intended to give way to a new kind of internet service built using decentralized blockchain. These are not super new subjects
of conversation inside or outside of the cannabis entrepreneurial space, but there is a lot of debate around the practicality of their application at this time for a variety of reasons, some of which will be discussed later in this blog.

Cannabis Businesses and Entrepreneurs are Embracing Cryptocurrency

Nevertheless, with the current hyper-regulated framework of cannabis business; a historic gray-area centered around the State and Federal juxtaposition of legal positions; desires to conduct international business; and the current difficulty of traditional banking, some in the cannabis industry feel comfortable enough to turn to yet other creative problem-solving methods for conducting transactions.

For example, some cannabis-related businesses are building their own currencies and communities around that currency, as well as utilizing existing blockchain currencies (like Bitcoin and Ethereum) for consumers to purchase directly from cannabis brands via blockchain technology and to facilitate all types of transactions, including not only business-to-consumer (B2C) but also business-to-business (B2B) transactions. Some businesses are even offering companion NFT (non-fungible token) programs, special discounts and rewards for participation, and other incentives to transition to a blockchain system, one in which critical mass is achieved and critical value of currency or exchange is achieved.

The Benefits of Blockchain in the Cannabis Industry

So, what are the upsides? By using cryptocurrency (or blockchain) and the immutable ledger associated therewith, all data and transaction activity that occurs is fixed, reviewable and theoretically auditable and appears to thereby align with the conceptual requirements of tracking and tracing from seed-to-sale and the other stringent tracking requirements around cannabis and cannabis transactions. Another upside is removal of dealing with excess cash, which lends itself to theft and robbery.

Potential Challenges of Cryptocurrency in the Cannabis Industry

So, what are some downsides? Cryptocurrency can be viewed as a method for facilitating illicit transactions and a means to conceal transactions which the U.S Treasury Department seriously discourages and issued a report about disclosure/reporting requirements; the technology is out-pacing the law, creating lack of predictability in the marketplace, lack of clarity on regulation, traceability, and business-to-customer or business-to-business solutioning in the event of transaction failure(s).

Another crucial issue is how cryptocurrency is taxed; – it’s taxed differently from regular business income and to comply with tax requirements will mean tracking every little transaction and every little detail regarding values at the times of each transaction and related exchange values. This can become expensive and extremely timely. Additionally, it’s no secret that this same lack of predictability and these same barriers to use provide for serious fluctuation in cryptocurrency value, leading to volatility in the marketplace, a lack of an ability to budget and foresee and a potential for serious impact on company finances.

A Recent California Reaction

Furthermore, Governor Newsom signed an executive order on May 4, 2022, for agencies in the State of California to explore creating a comprehensive framework for blockchain technology and digital assets to not only foster innovation, but to provide regulatory and consumer protections and align with the federal government’s call for a similar review. President Biden issued an executive order in March, directing certain federal agencies to conduct a review of cryptocurrencies and report on their recommendations at the federal level. Newsom’s plan is to set California up for success with emerging technologies, examine using blockchain opportunities in state operations, and to develop an infrastructure that’s consistent and transparent, alongside that of the federal government.

Conclusion: Fast-Evolving Solutions for an Innovative Industry

This is an evolving space and one that is moving quickly at the entrepreneurial level and now at the government level. At Rogoway Law, we enjoy the challenge of working in emerging technology, evolutionary solutions and facilitating the creative ideas of our clients. We look forward to seeing how this landscape continues to emerge and how we can assist our clients in navigating unprecedented industry challenges that arise along the way to best mitigate risks, allow for potential new avenues of expansion and work through proper pivot points.

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