Do Blockchain Solutions Work for the Legal Cannabis Industry?
Blockchain solutions seem an ideal fit for the legal cannabis industry. More than half of all states in the U.S. (as well as Washington D.C.) have legalized cannabis in some form. Yet it remains illegal under Federal U.S. law. Banks are unable to service the industry because they are subject to federal regulations. This state of legal limbo has left regulated and licensed cannabis industry players with very few options.
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Which Blockchain Solutions Are Used in the Cannabis Industry?
The nascent legal cannabis industry is characterized by rapid growth, the absence of incumbent infrastructure, and a complex regulatory environment. It is a perfect example of an underserved market begging for a blockchain solution. Quite a few altcoins have been created and proposed to fill this need. Yet none have been able to gain significant traction, despite extensive marketing campaigns and celebrity sponsorships.
While the industry appears to have dismissed the viability of alternative blockchains, a handful of companies have had some success offering services based on the Bitcoin protocol. One such company is 1620Solutions.com. In conjunction with Grow Hemp Colorado, they spoke at the 2017 Crypto-Cannabis Conference about their bitcoin-based payment options for the hemp sector.
Primarily for regulatory reasons, they have chosen to service only hemp-based companies at this time. Hemp is a non-psychoactive form of cannabis. With a THC concentration of less than one percent, hemp has traditionally been cultivated for the industrial applications of the fiber in the stems and the nutritional content of the seeds.
The recent surge in the formal popularity of CBD and other non-psychoactive cannabinoids has significantly increased demand for hemp.
Despite its non-psychoactive properties, hemp farmers and processors still face the same financial censorship that both recreational and medical marijuana companies experience. This includes being cut off from banking, as well as other common payment forms like credit cards and PayPal.
1620Solutions and Grow Hemp Colorado primarily provide an open source payment solution to their clients through Mycelium Gear and SWISH. Currently, Grow Hemp Colorado only supports payments through the Bitcoin blockchain.
These services work for legal cannabis merchants because they are completely independent of any banking or traditional payment systems. There is no risk for merchants of their payment service providers suddenly shutting down services.
Blockchain Has Disadvantages Too
There are, however, some challenges. Using a blockchain solution for payment processing requires that the customer already has, and knows how to spend, bitcoin.
To compensate for this, Grow Hemp Colorado and any merchants that utilize their services must also invest time and money into educating their target market. This can be a cumbersome process, especially when dealing with non-technical individuals.
Another issue with basing a business around blockchain payment systems is volatility risk. Most cannabis merchants utilizing a blockchain payment method price their products in U.S. dollars, but accept payment in bitcoin.
Since these particular merchants do not have access to banking, they cannot sell the bitcoin and must hold it themselves. This exposes them to the risks of the wild price fluctuations common in cryptocurrency. For example, the $100 worth of BTC that they collect today can, at any point, be worth significantly more or less than $100, depending on market conditions. Currency fluctuations are not conducive to effective business strategy and planning.
Another issue is that while the merchants themselves may be happy to accept bitcoin, their creditors are less likely to be quite as enthused. In order to pay their bills, they need some form of fiat.
For the most part, 1620Solutions has solved this problem by offering Bitcoin debit cards. However, this too exposes the merchant to the same volatility risks. In addition, most Bitcoin debit cards have started to restrict service to customers in the United States, making it even harder to use in this application.
Despite the Downsides, Blockchain Tech Still Helps Underserved Markets
While volatility risk is something that legal cannabis merchants must contend with, it may be the price they need to pay to protect themselves from potential civil asset forfeiture.
Even though they are fully legal under state law, are fully licensed, and pay both state and federal taxes, they remain at risk of having their assets seized at any moment by the Federal Government. Keeping assets in crypto may provide some protection against this.
With all the challenges involved in using a blockchain solution, why use it? The answer is there are few viable alternatives for protecting assets. As long as the legal cannabis industry in the U.S. faces regulatory uncertainties, cryptocurrency assets will become increasingly attractive for merchants and their customers.
Do you think Bitcoin is a good solution for the legal cannabis industry? What do you think about other blockchain solutions for cannabis? What role will changing regulations play? Share your opinion in the comments below.
Images via Jon Southurst, Bitsonline