Jeff Sessions’ move to rescind Obama era Department of Justice (DOJ) policies regarding state sanctioned cannabis entities is unlikely to have the outsized impact on the industry that Sessions hoped for. Industry watchers overwhelmingly predict that Sessions’ call for a “return to law and order” will actually galvanize popular support, which may, push the next Congress closer to federal legalization or at the very least, toward a more sensible cannabis policy. Of course, the short term effects of Sessions’ edict are unclear, but a tangible and immediate consequence will be the effect on banking. Federal criminalization of cannabis, means that a bank willing to serve a state legal cannabis client, may be actively running afoul of federal anti-money laundering and banking secrecy statutes which impose stringent Know Your Client requirements on financial institutions. In 2014, the Financial Crimes Enforcement Network (FinCEN), a division of the Department of the Treasury, published a set of guidelines intended to clarify how financial institutions could provide services to legal cannabis businesses. The FinCEN guidelines, however, did little to allay concerns about serving cannabis clients, and a limited number of financial institutions openly serve the industry. The reluctance of financial institutions to serve cannabis clients has forced the industry to deal almost exclusively in cash, which is problematic for a myriad of reasons, particularly for a $7 billion a year industry in the U.S. alone.
The FinCEN guidelines are not subject to Sessions’ policy maneuvers at the DOJ, and last week a FinCEN spokesperson indicated that the 2014 guidelines will remain in place until there is a contrary directive from the Department of Treasury. However, Sessions’ decision will still effectively halt whatever progress was made and, more likely than not, will prompt the financial institutions that entered the cannabis fray, to make a hasty exit. The cannabis industry has been blacklisted by traditional financial service institutions. And as cryptocurrencies, like Bitcoin begin to gain more traction among traditional retail industries, the cannabis industry is taking note.
What is cryptocurrency and how does it work? Most people (myself included) understand cryptocurrency in the abstract; as an esoteric slightly futuristic concept, as opposed to a legitimate, convenient way to buy things. Cryptocurrency refers to private decentralized digital currencies, which exist only inside an interlinked digital network of currency users. These currencies are not backed by a government and cannot be used to repay debt. Cryptocurrencies operate through peer-to-peer transactions, which are distinct from traditional credit card or ACH transactions which require three parties: a sending and receiving party, and middleman who processes the transaction and confirms the payment information of the sending and receiving parties. Cryptocurrency has no intrinsic value, its value is derived from consumer demand for the currency. The more people use it, the higher the value and vice versa, which explains the wild fluctuations in the value of a cryptocurrency like Bitcoin.
Cryptocurrencies are more secure than traditional financial transactions. Every unit of cryptocurrency has a unique address or “key” and is stored in a “digital wallet”, which allows its owner to send and receive currency. Each transaction is encrypted and assigned a unique transaction number. Transactions are verified in intervals of ten minutes or less and this group of verified transactions is called a block. Each block links to the previous block, forming a blockchain; which is essentially the record of every transaction ever made with that currency. The individual blocks in the blockchain cannot be retroactively altered without changing all of the preceding blocks.
As the medical and recreational industry expands to more states, it is untenable for it to continue to deal almost exclusively in cash. But, can cryptocurrency be a panacea for the industry’s banking woes? Maybe. There are some cryptocurrencies out there, like PotCoin and Paragon, which were developed exclusively for the cannabis industry. But none have gained widespread acceptance by the industry. The slow integration of cryptocurrencies into the legal cannabis economy is based primarily on the fact that many dispensaries do not accept pot-centric cryptocurrencies. And who wants to buy a currency that they cannot use? The
reticence of the industry to embrace cryptocurrency may also be based on the fear that widespread use of cryptocurrency, which many associate with “the silk road” and extralegal transactions, will actually increase federal intervention in the industry. The FinCEN guidelines are safe, for now, but if Sessions move demonstrated the trajectory of federal policy, the industry should continue to explore and invest in alternative payment systems.