Without Banks, Cannabis Companies Are Turning to Crypto

Here's one way that cryptocurrencies can help businesses that can't access traditional financial services.

Medicinal cannabis is now legal in 36 states, and 17 states allow recreational use.

However, banking is difficult for cannabis companies. Banks are nervous about working with cannabis businesses because federal law still prohibits the sale and distribution of marijuana -- no matter what local legislators say.

As a result, cannabis cash could be considered laundered money, and banks are reluctant to expose themselves to that kind of risk. Similarly, credit card companies and payment processors don't want to be liable if there's any kind of lawsuit.

There is a cannabis banking bill in the pipeline that may make things easier. But in the meantime, some cannabis companies are turning to cryptocurrencies to meet their banking needs.

Why cannabis companies have embraced crypto

It isn't easy to do business when you can't accept credit or debit card payments and don't have access to other financial services like loans. It forces many cannabis companies to rely heavily on cash. And cash isn't ideal.

Cash-only businesses are more likely to be targeted by thieves. And if a store is robbed, it can be difficult to file an insurance claim for stolen cash. From managing payroll to paying rent, it's more complicated to run a business when you can't access traditional banking services.

Cryptocurrency offers a solution. Cryptocurrency exchanges are not regulated in the same way as banks. So it's a lot easier for companies to open accounts with them.

Here's what crypto can offer cannabis companies:

• Cash-free transactions. Accepting Bitcoin (BTC) or other digital currencies as payment means cannabis companies can move away from cash.
• Lower fees. Some banks will provide services to cannabis companies, but they charge high fees to do so. In contrast, crypto banking comes with relatively low fees, and cannabis companies aren't charged a premium.
• Transparency. Cannabis companies need to comply with a number of compliance protocols. Blockchain technology provides a secure and tamper-proof ledger, which could help cannabis companies to track each step in the supply chain.
• International transactions. Cannabis companies that need to work overseas can make payments quickly and cheaply using digital currencies.

Cryptocurrency won't solve everything

Cannabis companies who choose to use crypto banking may be able to minimize their reliance on cash, but this strategy isn't without problems.

For example, the way cryptocurrencies are taxed is different from regular business income. Not only do you need to track every transaction, you'll also need to track the value of that cryptocurrency against the dollar at the time of the transaction. It can be time consuming and costly.

Volatility is another important factor to consider. The prices of Bitcoin and other cryptocurrencies can fluctuate wildly. In the last few months, we've seen a drop of almost 50% in six weeks, although prices then rebounded slightly.

If you sold something for 0.02 Bitcoin, you might find that your assets are worth a lot less if the crypto price drops dramatically over the coming weeks. This could wreak havoc on your company's finances.

Of course, the opposite could also be true. You may opt to hold on to that Bitcoin in the hope that in five or ten years' time, it will be worth a lot more. But that's not an option for many small businesses that need to pay their suppliers and manage their cash flow.

One way around this problem is to use stablecoins. These are digital currencies that are pegged to something like the dollar or the price of gold. As such, you won't find the capital you need to run your business is suddenly worth a lot less than you expected. You could also immediately convert your crypto into fiat (traditional) currency after each transaction.

Cannabis and crypto may be natural bedfellows

Cryptocurrency and cannabis businesses have a lot in common. Both are entering the mainstream after years of operating on the fringes. And the two industries may be able to help each other.

If cannabis companies embrace digital payments and engage with the issues created by these alternate systems, they may pave the way for other businesses to do the same. And cryptocurrencies may well help the cannabis industry to access the financial services it needs and become less reliant on cash.