Crypto-Cannabis Collaboration: Implications and Considerations

BY DR. SEAN STEIN SMITH, CPA, LEHMAN COLLEGE AND MELISSA DARDANI, CPA, MD ADVISORY

Adult-use cannabis is now legal in New Jersey. Yet, as of the date of this writing, federal law — specifically the Controlled Substances Act (CSA) — deems cannabis to be an illicit Schedule I Controlled Substance. As a consequence of the legal disparity, the cannabis industry is plagued with issues that make operations expensive and often impractical, including the following:

> Banking and payment processing. In order for a plant-touching cannabis business to accept customer payments, they must either be in cash or supported by an infrastructure of intermediary solutions such as cashless ATMs or ACH payments. These payment processing challenges and banking risks are discussed in a series of NJCPA Focus blog posts at njcpa.org/focus.

> Access to capital. While some banks have come around to servicing the traditional banking needs of the industry, traditional lending is simply not an option due to banks’ concerns over their customers’ collateral being subject to federal forfeiture as well as the bank’s Federal Deposit Insurance Corporation (FDIC) insurability. Business owners must grapple with the decision of incurring hefty costs associated with short-term lending options or sacrificing ownership of their business to equity investors.

THE CRYPTO-CANNABIS PARTNERSHIP

Blockchain and the use of smart contracts — programmable code embedded into blockchain that helps enable blockchains to communicate and interoperate with other technology systems — can offer a solution. One such application of the smart contract is the stablecoin, which is a type of cryptocurrency whose value is stable with a reserve asset such as the dollar and that offers potential as a payment processing solution for a cannabis business.

THE CHALLENGES

The complications of adopting a cryptopayment method include the following:

> Lack of interoperability with businesses not transacting through blockchain. This would require them to maintain a traditional banking option. Ultimately the business will need to not isolate themselves in their business environment due to lack of compatibility.

> Implementation of financial controls. Additional financial controls might need to be implemented, especially with stablecoins potentially forming the basis of a crypto-based payment system. For example, if an organization chooses to use one specific stablecoin provider, the due diligence that should be performed should mirror that of any fiat-based payment solutions provider.

> Interoperability with existing technology tools. How will the mapping and processing occur between crypto exchanges or wallets, the in-house accounting system already in place and potentially converting these stablecoins back into fiat currency?

THE BENEFITS

Despite these potential challenges, a collaboration between the cannabis and crypto sectors can deliver several benefits to both sectors. For the cannabis industry, adopting a blockchain and crypto-based payment system can allow cannabis firms, and the cannabis sector at large, to gain better and more consistent access to the U.S. commercial banking system. For the crypto sector, the benefit centers around encouraging more individuals and firms to actually use different cryptocurrencies as a viable medium of exchange.

Cannabis, at the end of the day, is a produce susceptible to spoilage, lowerquality versions and other issues more commonly associated with fresh food sectors. Partnering cannabis and crypto could create an inventory and quality management system that enables blockchain to enter into wider business applications and deliver real, quantitative benefits to the cannabis sector. For CPAs, combining these two high-growth areas creates numerous opportunities.

Disclaimer: Cryptoassets are sophisticated investments that require specialized knowledge. Please be sure to consult your team of professionals, including CPAs and industry experts, before introducing blockchain-based payment options and operations.

Dr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, is a professor at the City University of New York – Lehman College. He also is the host of the NJCPA TechTalk Podcast (njcpa.org/techtalk). He can be reached at drseansteinsmith@gmail.com. Melissa Dardani, CPA, MAcc, is the founder of MD Advisory, a boutique forensic firm. She is the leader of the NJCPA Cannabis Interest Group. She can be reached at melissa.dardani@mdas.cpa.