How to Set Up a Blockchain or Crypto-Based Payment System for Cannabis

by Melissa Dardani, CPA, leader of the NJCPA Cannabis Interest Group, and Dr. Sean Stein Smith, CPA, leader of the NJCPA Emerging Technologies Interest Group | April 27, 2021

This is the third post in a three-part series documenting the weakness and risks of existing payment options for the cannabis industry, and how it can potentially benefit from a blockchain and cryptoasset payment system. 

In any new and emerging industry, there are bound to be opportunities and challenges alike, and, in that sense, the crypto and cannabis industries have a lot in common. They are both still somewhat controversial and are still developing means of integration with wider economic actors.

Even though recent legislation has proven beneficial to the cannabis industry, federal and state law disparities still exist (these differences are discussed at length in part one and part two of this blog series). And despite progress being made, there is still ambiguity as to how legalization will impact the integration of cannabis into the banking system. 

Blockchain and crypto may be uniquely positioned to offer a critical bridge to banking alternatives for what is currently a predominantly cash-based industry. Here are some practical considerations that any organization seeking to implement a blockchain and crypto payment system should take into account:

  • Decide which crypto to accept. Before doing anything else, an organization that is planning on beginning to accept cryptocurrencies as a form of payment needs to decide which crypto it will accept. Similarly, it must decide how it will store the crypto and what service it will use to facilitate the payment. This requires extensive due diligence in the vendor selection process as well as the underlying technology relied on by this vendor. It is important that competent professionals who understand the technology are involved in this process. 
  • Develop a crypto strategy. Like every major implementation, remember the six Ps of planning: prior proper planning prevents poor performance. A company must determine how and where to store their currency just as they would with fiat currency. They may run into issues opening accounts with major exchanges due to mirrored federal banking concerns and limitations. They must develop standard operating procedures which dictate whether these crypto-denominated payments are going to be held by the organization (and if yes, how) or if they will immediately be converted back into fiat currency. Any conversion process requires clearing the traditional banking hurdle. 
  • Don’t reinvent the wheel. Blockchain and crypto might still seem like an amorphous topic that can be confusing, but no organization interested in implementation of a crypto-based solution needs to begin from scratch. Accepting crypto as a payment option is not an impossible idea; multiple vendors have been offering these exact services for years at this point. Again, proper due diligence is key to understand and mitigate third-party risk.

There are other issues and benefits to bear in mind when determining whether a crypto-based payment infrastructure is right for your business. They include:

  • Cybersecurity and interoperability. Going cashless and being able to access the banking system through stablecoins and other crypto payments might be a solution for certain firms, but that does not reduce the importance of cybersecurity. As prices and interest in crypto continue to increase, practitioners need ensure that the controls in place are up to the task. It is also important to understand how the technology you onboard will cooperate with other parts of your business and with those who you wish to do business.
  • Reduction in cash dependence. Cryptocurrencies, specifically stable coins that maintain value against a certain benchmark such as the U.S. dollar, can act as an alternative to dealing in fiat currency for these organizations. Less cash dependence means lower risk of theft, embezzlement and security around organizational finances.
  • Lower fees. Even if the march toward legalization continues unabated, a crypto and blockchain-based payment structure could result in lower fees per transaction than the traditional third-party payment processing solutions that are available to the cannabis industry. Cash is risky and comes with the added costs of security and astronomical banking fees. Credit cards (which are currently not available to the industry) come with a “baked-in” fee of approximately 3 percent per transaction. Similar fees will be incurred to make use of third-party ACH services or cashless ATMs. Service providers generally understand the limitations imposed on the industry and are taking advantage to meet the demand at high costs. A crypto-based payment system could reduce these fees and add back some of these amounts to the bottom-line.
  • Better traceability. Even with substantial progress toward legalization well underway, a highly regulated industry will bring immense operations requirements such as product tracking. New Jersey law requires a uniform state-mandated tracking requirement and an underlying requirement that businesses maintain their own inventory tracking records. A blockchain and crypto payment system enables specific transactions to be followed, in real time, to their points of origin. Blockchain also may offer the benefits of immutable records due to decentralized authority. Compliance will remain a top priority for cannabis organizations; transparent and traceable records must be maintained with ease. 
  • Other Applications. Another viable application of blockchain-based technology is the smart contract, which exists on the blockchain and is essentially a set of instructions that allows for an array of practical applications. Many bullish on the technology believe that the security offered by the immutable, decentralized nature of the public blockchain, paired with the enterprise-wide applicability introduced by smart contracts, will revolutionize the modern business environment. Processes that can be migrated to the blockchain include record keeping, validating transactions, tracking transactions, assets and company history, payment facilitation and virtually any other task that involves exchanging information.

Melissa A. Dardani

Melissa A. Dardani

Melissa Dardani, CPA, MAcc, is the founder and managing member of MD Advisory, a boutique forensic firm. She is the leader of the NJCPA Cannabis Interest Group and a member of the Student Loan Debt Task Force and the Emerging Leaders Council. She can be reached at melissa.dardani@mdas.cpa.

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Sean D. Stein Smith

Sean D. Stein Smith

Dr. Sean Stein Smith, CPA, is a professor at the City University of New York – Lehman College. He also is the leader of the NJCPA Emerging Technologies Interest Group (#NJCPATech) and the host of the NJCPA TechTalk Podcast.

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