Are Stablecoins the Solution to the Cannabis Payment Crisis?
The legalization of cannabis in many states in the U.S. and in countries all over the world in the past few years has fueled the exponential growth of the medical and recreational cannabis industries.
Cannabis legalization has encouraged many businesses to venture into this fast-paced and lucrative industry — legalization has also led to the differentiation of cannabis products through the infusion of extracts like CBD and THC in products such as edibles.
Why the Federal Government Affects the Cannabis Industry, Despite State Legalization
Although cannabis has been legalized in many states, the U.S Government has not changed its stance on cannabis and still classifies it as a schedule 1 drug. This means that marijuana is legally in the same category as meth, cocaine, and hard drugs that have a high potential for abuse. The Schedule 1 category also means that the Federal Reserve does not recognize cannabis as a product that has medical benefits.
The Federal Government’s stance on the cannabis has posed a major challenge for cannabis businesses. U.S. banks follow the guidelines provided by the Federal Government, so they cannot offer banking services to companies that deal with drugs that are part of the Schedule 1 category. Marijuana businesses cannot get loans or transact through banks without getting into trouble.
The inability of cannabis businesses to secure banking services has been difficult for them considering that the industry has been rapidly growing, thus providing more revenue opportunity. It has also been a challenge to secure credit for expanding operations. The problem is not that banks do not want to do business with cannabis firms, but the fact that they would get in trouble for violating Federal laws.
How Cryptocurrencies Could Help
The lack of access to direct banking services means that cannabis businesses cannot accept digital or card payments. This makes things complicated because holding too much cash poses some problems such as theft. This is where cryptocurrencies come in.
Digital currencies are not subject to the same limitations and laws that affect fiat currencies. Digital currencies are easily accessible, and, best of all, they facilitate easy storage and transfer of funds. In short, they bypass the inconsistencies and inconveniences of using cash. They are also decentralized, and some cryptocurrencies even offer anonymity.
However, over the past two or three years, cryptocurrencies have been subject to heavy criticism for the challenges they bring. For example, they have been extremely volatile, which means that one could receive money right now in the form of crypto, but it might be worth much less in the next hour. They also operate in the digital domain and are thus prone to digital heists, as has been the case with the many crypto-thefts.
There are always some challenges when rolling out new systems; the same applies to the cryptocurrency segment. Also, the companies that are involved in the cryptocurrency industry have been busy working on solutions to fix some of these issues. One solutions is the stablecoin.
Stablecoins are cryptocurrencies whose value is pegged to the value of a fiat currency, a group of currencies or commodity. Tether (USDT) and TrueUSD (TUSD) are currently the most popular stablecoins. Both of these digital currencies are backed by the U.S dollar, which means that they do not suffer from as much volatility as their non-stablecoin counterparts.
All things considered, stablecoins are an ideal medium for closed-loop payment solutions for cannabis, which are a legal work-around to the retailers inability to get merchant bank accounts. Amongst the top stablecoins, Stably (USDS) is currently working on an end-to-end payment solution for all underbanked businesses.
Why Stablecoins Are the Ideal Solution for Cannabis Payments
As detailed earlier, one of the challenges that the cannabis industry faces is the inability to access banking services. Rather than accepting fiat cash, the cannabis industry has circumvented the issues around those problems by using digital currencies to facilitate digital transactions in exchange for their products. They also use cryptocurrencies for storage purposes.
Unlike when transacting with cryptocurrencies such as Bitcoin (BTC), cannabis businesses would not have to worry about losing money when there is high volatility in the crypto market, which can cause regular digital coins to lose value. Another advantage of using stablecoins is that they are often verified by third parties, and, in addition to being fiat-backed, are also legally protected.
State Governments Embracing Crypto for Cannabis
The fact that the entire cryptocurrency industry has been affected by the Federal Government’s stance on cannabis classification also means that state governments are affected. The massive revenue to be gained by state governments from cannabis legalization was one of the key factors that helped the legalization agenda.
State governments benefit from the cannabis industry through the collection of tax from the cannabis supply chain, including tax on grow licenses, sale licenses, and revenue. However, without access to services, cannabis companies cannot pay these taxes.
Earlier this year, a California bill proposed that cannabis businesses pay their taxes through stablecoins. This is not only an interesting solution for state governments and the cannabis industry but also the cryptocurrency industry. This is because such a move would present an opportunity for mainstream adoption of cryptocurrencies.
Anonymity: a Major Selling Point
Some digital coins have anonymity as one of their selling points. This feature is especially useful for those that are averse to their cannabis consumption being known about or those that simply want to buy cannabis without a record of their cannabis consumption. This is not awkward considering that the cannabis industry is still in its early stages and so people have not completely adjusted to the legal status.
Industry experts believe that the use of cryptocurrencies to facilitate transactions will not only solve the problem of financial services but also encourage more investors to jump on board. This would allow the industry to grow at a faster rate, allowing production and supply efficiency to match the huge demand in the market. The need for financial services in the cannabis industry has even led to the creation of a cryptocurrency called Potcoin, whose purpose is to facilitate transactions in the cryptocurrency industry.
Will Banks Ever Jump on Board?
The problem of banks being reluctant to offer their services to the cannabis industry is not something that is only happening in the U.S. Cannabis firms in Canada have been facing similar problems despite the legal status of cannabis in the country. The problem is that marijuana has been illegal for such a long time that many industries, including the banking industry, have not entirely adjusted its new legal status. The same also applies to society where a large percentage of the population still feel that cannabis consumption is a vice.
It is only a matter of time until banks realize the potential financial opportunities in the cannabis industry. Once this happens, they will likely pressure the federal government to soften its stance over the matter, and such a move will pave the way for banks to provide their services to the marijuana industry.
State governments have already realized the cannabis industry’s potential and have been working on an initiative aimed at remedying the situation. For example, on June 2019, the House of Representatives gave the greenlight for an initiative aimed at preventing the Federal Government from interfering with cannabis laws passed by individual states. This includes cannabis cultivation, sales, and recreational consumption.
The Secure and Fair Enforcement (SAFE) Banking Act
The American Banking Association believes that the time has come for Congress and regulatory agencies to provide more clarity about cannabis. Some regulators have already proposed a bill called the Secure And Fair Enforcement (SAFE) Banking Act to bridge the gap between cannabis legalization in states and the banking sector.
The proposed bill was introduced earlier this year by Warren Davidson (R-OH), Steve Stivers (R-OH), Denny Heck (D-WA) and Ed Perlmutter (D-CO). Sen. Jeff Merkley (D-OR) also backed the bill. If passed into law, the bill would mark a major milestone for the cannabis industry. This is because the bill would allow banks to work with cannabis firms. The bill would prevent federal regulators from going after banks that work together with marijuana firms, and protect any other businesses that do business with cannabis firms.
Although the SAFE Banking Act paves the way for banks to offer banking services to cannabis firms, it does not reduce the costs of running cannabis businesses. It also does not mean that the risks of running such businesses are reduced. Nevertheless, it would be a massive step in the right direction, and allow cannabis firms to run their businesses with more ease. However, cryptocurrencies might still offer some advantages above traditional banking, such as ease of use, fewer formalities, and faster transactions.
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