Dr. Sean Stein Smith, CPA, chair, NJCPA Emerging Technologies Interest Group, and Melissa Dardani, CPA, leader of the NJCPA Cannabis Interest Group
| January 19, 2021
This is the first in a three-part series describing the impact of blockchain and cryptoasset payment systems on the cannabis industry.
To date, 17 states and territories have legalized adult-use cannabis including New Jersey, whose residents voted in favor of legalization via a ballot initiative in the November 2020 election. Yet, due to the classification of cannabis as a Schedule 1 controlled substance under the Controlled Substances Act (CSA), a disparity exists between federal and state law which precludes cannabis companies from typical operations, including ease of banking and payment processing solutions. That said, any business or industry requires a fully functioning payment infrastructure to grow efficiently and successfully. Despite more political acceptance and a large growth potential for this market in New Jersey, cannabis organizations continue to be hamstrung by the slowly evolving payments landscape.
Cash is a leading form of payment in the cannabis sector. Accepting cash is an option for these enterprises, but it presents a security issue, may limit customer sales and provides a logistical headache particularly when considering the banking limitations imposed on the industry. Cash may be convenient on a retail basis, but when it comes to business-to-business (B2B) transactions, the feasibility of a cash-basis environment quickly diminishes. Resorting to paper checks may be a solution, however these businesses must hurdle federal banks’ hesitation to service cannabis businesses.
Similarly, opening a credit card may not be possible for a cannabis business or its employees for day-to-day purchases. This simply exacerbates many of the existing issues with B2B payments and deprives cannabis organizations of the benefits associated with digital solutions.
The cannabis industry also faces an additional hurdle: the inability to accurately and consistently provide trade credit. Granting credit to suppliers and wholesalers is a common industry practice. An influx of U.S. medicinal market advocates emerged in the 1990s, culminating in the passage of the Compassionate Use Act of 1996 in California. Since then, 41 states and territories have enacted a legal medicinal market, most of which are highly regulated with extreme barriers to entry. Therefore, those with the benefit of early access to the market are at an immense advantage.
Payment Options and Risks
There are several non-cash solutions that have entered the marketplace to serve the payment processing needs of cannabis businesses, but none of them are a perfect solution and each has its own risks. These include the following:
- Debit card payments should be able to integrate with the company’s point of sale (POS) system to rule out the risk of error in the sale process. The organization will also need to source a bank willing to service their needs, although this challenge exists regardless of payment processing solutions.
- ACH payments use third-party solutions to facilitate customer payments, which incurs fees on the organizational side. Similar to debit card payments, these solutions should be able to integrate with the POS to rule out risk of error in the sales process, which raises compliance and regulatory ambiguity.
- Cashless ATM payments and credit cards via third party are other options. While some businesses have assumed the risk of accepting credit or cashless ATM transactions as a form of payment, perhaps using a third-party to process the payments as a perceived workaround, this is a risk to the business. If found to be acting out of compliance, merchants may refuse revenues the business has earned but which have not yet been deposited, and providers may refuse services in the future. State regulators may also probe into any non-compliance, which could risk the company’s license to operate.
Framed in this context, typical operational and accounting challenges are exacerbated for cannabis businesses. But hope is on the horizon. With companies like Microsoft and EY backing blockchain and cryptocurrency solutions for payment processing and B2B payments, we know they are not a mere conceptual idea or fringe item. The potential for blockchain and cryptoassets to form the basis of a payment system is a realistic solution for practitioners and entrepreneurs to consider.
Read part two in this series: How Blockchain and Cryptoasset Banking Developments Could Enhance the Cannabis Marketplace