Cannabis processors fight a war on multiple fronts
State laws on marijuana are confusing and constantly changing, as are the laws governing the cryptocurrency that’s a possible solution to reduce dispensaries’ reliance on cash.
Many cannabis sellers have trouble getting a bank account or acquirer relationship due to their conflicted legal status at the state and federal levels. Despite their category's regulatory complexity — or perhaps motivated by it — a new breed of merchant acquirers is slicing through the thick government red tape to process cannabis payments, one state at a time.
“The medical and recreational cannabis industry is relatively new with many gray areas in terms of regulation,” said Ken Ramirez, co-founder and CEO of Alt Thirty Six, a Tempe, Ariz.-based payments platform for the cannabis industry. “These gray areas and different regulations within each state can cause confusion, but also promote innovation.”
Alt Thirty Six is applying for money transfer licenses in Oregon, Nevada and Colorado and is considering an application in Vermont, which recently became the first state to legalize marijuana legislatively rather than through a ballot initiative. The company is already active in California and Arizona.
While state laws vex legal cannabis payment providers, cryptocurrency regulations are also a challenge, given the volatility of rulemaking. In late July, the Financial Action Task Force published a report that contained recommendations for risk mitigation in cryptocurrency. Alt Thirty Six hopes this provides clarity to ease regulations for cryptocurrency.
Alt Thirty Six recently entered into a partnership with CannTrade to support the cryptocurrency Dash for cannabis payments. The blockchain technology allows real-time payments that take less than one second, cutting the exposure to rapidly changing cryptocurrency valuations.
“FATF published reports with the aim to help financial institutions fight cryptocurrency money laundering and terrorist financing,” Ramirez said. Alt Thirty Six’s goal is go above and beyond current regulations, or to evolve its compliance protocols as new guidelines and laws develop. “In fact, many law enforcement and state governments frequently propose rules, bills and acts to regulate cryptocurrency financial institutions, which often causes confusion.”
Cryptocurrency can work as a cannabis payment alternative, but it is a heavy compliance lift on the federal level as well. Cannabis is still illegal under federal law and cryptocurrency regulations are, to be kind, confusing. The federal government has taken a more permissive stance recently, with prior foes of legal cannabis such as former U.S. Rep John Boehner actually investing in the industry.
As the legal cannabis market expands, it has taken on the challenges of more traditional merchant acquiring, such as CRM and inventory management around seasonal spikes such as the 4/20 "weed holiday" before shedding the rudimentary compliance challenges such as figuring out where cannabis is legal as a product.
“The federal government can still apply its regulations, such as CFPB rules, as the cryptocurrency is likely to fall under prepaid regulations,” said Tim Sloane, vice president of payments innovation at Mercator Advisory Group, adding compliance with the Bank Secrecy Act could also be in play. “It would probably be wiser to identify the regulations that would be the easiest to comply with and then address all aspects of them, such as a prepaid closed loop or restricted authorization network.”
Alt Thirty Six isn’t alone. Tokes uses a blockchain to manage compliance for the entire cannabis supply chain, anticipating risks beyond cryptocurrency and the legal status for cannabis as a product. And CanPay Tuesday announced it has launched its payment platform to 115 retailers in New York, Pennsylvania, New Hampshire, Massachusetts, Maine, Maryland and Florida, placing CanPay in 16 states plus Puerto Rico. It plans to enter Rhode Island, New Jersey and Vermont sometime this year.
CanPay’s model is different, using a closed-loop network of about two dozen banks to support debit payments for legal cannabis. This makes compliance easier because dispensaries in its network must be in a regulatory-approved cannabis banking program, said Dustin Eide, CEO CanPay, adding there are some complications since not all states allow in-store, e-commerce and delivery for cannabis.
CanPay also avoids blockchain and other emerging payment models to keep things simple for users, Eide said. “The more traditional service we can provide, the more likely it is that consumer and businesses will adopt it.”
But like Alt Thirty Six and Tokes, the goal is to reduce cash payments and other regulatory workarounds that are risky for merchants and consumers.
“Cash is definitely still a major form of payment in the industry because of the banking issues that cannabis companies face,” Ramirez said. “There are many 'reverse ATM' platforms out there that use roundabout methods to enable customers to use their debit/credit cards to make purchases. However, many customers have been burned by these companies because they often lack proper licensing and are working through loopholes.”