01.17.2019
By John D'Antona

Cannabis and Crypto – Like Peas and Carrots?

Cannabis. Cryptocurrency. Two of the hottest keywords, hashtags or assets that people are talking about.

So, these are two great tastes that go great together, right? Just like peas and carrots or peanut butter and chocolate. Well, maybe. And maybe not.

Liz Prehn, Moskowitz LLP

Traders Magazine recently discussed the potential union between cannabis and crypto with San Francisco-based Liz Prehn, lead tax attorney at Moskowitz LLP, who discussed some of the benefits and pitfalls of the pairing of cannabis and cryptocurrency.

First, the advantages or cryptocurrency in a canna-business.

“Well first, it is legal,” Prehn began. “Despite its volatility as an investment, and the tax and regulatory issues surrounding it, there is nothing illegal about using cryptocurrency. Also, it’s secure. Cryptocurrency’s blockchain technology provides a secure payment and tracking process for cannabis transactions – that doesn’t require an armored contingent.”

Also, cryptocurrency accounts and transactions are anonymous, an additional benefit to customers who don’t want their marijuana purchases known. Prehn continued that digital assets provide for the immediate settlement of funds and the underlying or when combined with blockchain technology provides for nearly instantaneous validation of all transactions, as opposed to waiting hours or days for a credit card payment to post.

“There are lower transaction fees. Even cannabusinesses that manage to arrange for credit card processing, as a high-risk industry the transaction fees can be significant,” she continued. “With cryptocurrency, the fees are generally less than 1% and it’s available everywhere. Cryptocurrencies, including cryptocurrencies developed specifically for the marijuana industry, can buy most anything, anywhere in the world.”

Furthermore, Prehn pointed out that using crypto promotes transparency. She explained the sale of marijuana requires a thorough record of the movement of the product from the grower through to the end user. Cryptocurrency provides this record through Blockchain technology, which keeps incorruptible and transparent digital records.

“And there are additional benefits. Some companies provide digital tokens or cryptocurrency rewards that can be used for marijuana purchases,” Prehn said. “For example, PotCoin community members get benefits for prescription medical marijuana through WeedMD.”

But, using crypto with cannabis isn’t without concerns or disadvantages. Prehn explained that for a business with little or no traditional banking support, cryptocurrency seems prima facie like a great idea. However, it is important to acknowledge the following concerns – many of which have been publicly voiced.

First, it may undermine the legitimacy of the state-legal marijuana industry. The marijuana industry, she explained, is struggling for legitimacy in the eyes of the public and the U.S. government and that aligning itself with another federally unregulated industry may undermine these efforts.

“It will also complicate your taxes,” Prehn continued.Marijuana-related businesses are already at a disadvantage tax-wise – they can’t deduct their business expenses so careful planning is required to avoid paying extraordinarily high taxes. Cryptocurrency is treated as property for tax purposes, and detailed records of all transactions must be kept to determine tax owed. For this reason, buying and selling marijuana with cryptocurrency is likely to provide an additional layer of tax preparation complexity.”

Relatedly, not enough people use crypto it yet. Although many people are using cryptocurrency, many cannabusinesses find that they don’t have enough crypto-paying-customers to make the implementation of a cryptocurrency payment system worth the effort,” she said.

“No one knows the future of cryptocurrency. While itis gaining momentum, it is still a risky investment,” Prehn said. “It may end up being regulated or otherwise lose many of its advantages.”

She continued to note that traditional banking is changing.In the near future, banks may be an option for all cannabusinesses – with many of the advantages that cryptocurrency currently provides. Despite Attorney General Sessions’ revocation of the Cole Memo, data shows that an increasing number of banks are working with marijuana businesses to some extent. Using a bank, he explained, provides greater protection than cryptocurrency, FDIC insurance, and an easier method to pay taxes and fees. Furthermore, the ever-increasing influence of blockchain technology on the banking industry may make many of the advantages of cryptocurrency, such as lower fees and instantaneous posting, irrelevant.

So, is crypto a solution for either the long- or short-term? Or neither?

“The cannabis cryptocurrency market is a prime example of creative and innovative entrepreneurship” Prehn said. “Whether this new trend solves the marijuana industry’s banking problems in the long-term, or ends up serving merely as a temporary solution until it outgrows its opposition, we’re here to support cannabusinesses.”

 

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