At first glance, the 21st-century businesses of cryptocurrency and legalized marijuana seem incompatible. A closer look reveals a potentially more harmonious picture, however.
That's not only because pot companies, which currently have problems accessing even the most basic services provided by the traditional financial industry, might benefit from the use of assets like Bitcoin (BTC -0.06%) and Ethereum (ETH -1.09%). It's also because blockchain technology holds the promise of streamlining the operations and accounting of an industry where such efforts can be complex.
Motley Fool contributor Eric Volkman recently had a chance to discuss the potential marriage of crypto and weed with Mark Lozzi, founder and chief executive officer of next-generation cannabis industry financial services company Conifa. Here's what he had to say.
Eric Volkman: What are some of the best use cases for crypto tokens and coins in the marijuana industry?
Mark Lozzi: The cannabis industry would be best served with a stablecoin. The industry already faces enough market volatility, so introducing additional risk is unnecessary and should be cautioned.
I would simplify the use cases into two practical tracks; consumer payments and business-to-business transactions. Consumer payments are an easy way to introduce crypto into the industry. The benefit is to increase the purchasing power of consumers by unlocking new forms of accepted payments, but also to ensure the industry remains current with societal interests and innovation.
I believe that managed crypto payments will transition into broader acceptance and application whereby crypto via stablecoins are held by cannabis companies as account balances and used for day-to-day purchases.
Volkman: In the same vein, how can blockchain technology be harnessed to help marijuana growers/processors/retailers?
Lozzi: The idea is to provide banking infrastructure that is completely immutable and auditable. The blockchain provides the most compelling application of chain of custody for the industry.
The greatest risks posed by the cannabis industry to the financial system are the source of funds and product tracking. It is our goal to bridge this gap, and support the financial system by providing a platform using blockchain to tie the product and money together.
Volkman: At some point, some form of the SAFE Banking Act (allowing banks to serve the cannabis industry) will become law. Once it does, will this make all the aforementioned use cases for crypto/blockchain obsolete for the pot industry?
Lozzi: Let's separate crypto and blockchain. I agree, SAFE Banking will come to life at some point, then decriminalization will follow. I believe the reality around these legislative reforms will heighten compliance and increase the need to manage cannabis programs across the financial system.
It goes without saying the SAFE Banking Act will increase the financial institutions participating in the industry, but it will not rid the compliance and oversight required to support cannabis clients.
Blockchain and the chain of custody it brings will be even more valuable and beneficial to both the industry and financial system. Crypto will have its own path of adoption, whereby the acceptance and use will be driven by access and comfort, generally speaking. Crypto provides payment flexibility and speed, which in business are important aspects of successful operations.
Volkman: It's notoriously hard for marijuana companies to make money. Do you feel crypto/blockchain technology could be the "game changer" pushing them into habitual profitability?
Lozzi: I do not think blockchain technology is the answer alone. Punitive cultivation and excise taxes, along with Section 280E of the IRS Code, need to be reduced and removed, respectively. These factors are unfortunately unrelated to any blockchain technology and innovation.
Volkman: Technically, cannabis remains illegal at the federal level. What challenges does this present for take-up of crypto/blockchain solutions by pot companies?
Lozzi: Let's look at these solutions separately.
Crypto carries a negative stigma, associated with nefarious activity. The federal issues ultimately challenge the compliance program and quality of the infrastructure set up to manage the complexity of cannabis. Blockchain solutions can support compliance and mitigate risks by providing immutability and auditability for its program.
Crypto use will need to live within a strong compliant infrastructure so the chain of custody regarding the flow of money can be supported as per regulatory requirements and guidelines.
Volkman: Cryptocurrencies have had a rough time of it lately, with many losing quite a bit of their value. Can they still be useful to pot companies even in their weakened state?
Lozzi: As I had mentioned above, I think over time the winner for this industry and all other industries is going to be the stablecoins. A fast, simple way to transact and store value, while having the ability to bank 24/7.
I personally believe in Bitcoin as well, but my advice for any business owner is to mitigate as much risk as possible, and stablecoins are designed to do that for you. The industry is already quite volatile, so it is better to rid additional volatility where you can.