As more and more states edge toward legalization, the national ban on cannabis continues to create obstacles for users and small businesses. Financial security has become a particularly thorny problem for individuals and state economies reaping huge profits from the booming legal cannabis market.
Because cannabis is illegal at the federal level, traditional banks have been hesitant to accept money from cannabis-related businesses, for fear of losing FDIC and NCUA insurance or even risking federal prosecution. This inconsistency between federal and state laws has resulted in a variety of startup solutions that cater to the specific needs of small cannabis businesses in states where recreational use is legal.
Businesses in Colorado, Washington, and Oregon are forced to do business entirely in cash, making them conspicuous targets for theft; in Denver, about 50% of all cannabis business were robbed between 2013 and 2014. There are concerns about non-violent crime as well: cash businesses can serve as easy fronts for money laundering. Also in Denver, a 2014 bust uncovered an illegitimate interstate network that protected $1.4 million in hidden cash by hiding behind a variety of different small cannabis businesses.
The lack of access to banks has led some desperate business owners to take very roundabout courses of action for storing and investing their money — options range from renting out vaults and safes to investing in high-end, insanely expensive glassware for resale.
The Work Around
Technically, there are now federal provisions for banks that get around the cannabis ban:
in February 2014, the Justice Department issued guidelines that grant amnesty for institutions accepting cannabis-related money, provided that they file regular Suspicious Activity Reports to prove that their cannabis customers are not engaging in fraud.
In reality, though, this workaround of thorough vetting is expensive and time-consuming for banks, forcing them to raise fees for cannabis customers and rendering the solution impractical. On top of that, these guidelines lack the binding force and authority of law, making them vulnerable to negation under a new presidential administration come November.
Some efficient answers to this conundrum have arrived in the form of tech. A slew of digital services have emerged in the last year that aim to cut down on administrative compliance or to remove cash from the equation entirely.
Legal Options for Illegal Cash
PayQwick allows customers to fill up a debit card for use at participating cannabis stores or dispensaries.
Transactions are deducted from the customer’s prepaid card and go into a sort of digital holding account maintained by PayQwick.
Business owners can then transfer the balance to their bank account — but if they’re not lucky enough to afford an expensive checking account at a cannabis-friendly bank, PayQwick offers to set up an account on their behalf at one of several “partner banks.” This streamlined system is only hampered by a question of access: in order for PayQwick to cover every facet of a cannabis business’ transaction, all parties — consumer, business owner, and product supplier — must use the card or maintain a digital account.
Hypur also makes cashless transactions between customers and cannabis business possible by means of a app. Its mobile functionality also allows cannabis vendors to authenticate their transactions with geo-location. On top of this point-of-sale functionality, the company (staffed by former banking and finance professionals and a former Department of Justice attorney) also provides counseling to banks and credit unions in the form of automated software that can sift through cannabis companies’ various forms and permits to ensure legal compliance. By making the time-consuming and costly burden of compliance quick and easy, Hypur could pave the way for banks to take on more and more cannabis companies with less hesitation.
Tokken based in Colorado, is betting on Bitcoin to address the scrutiny around compliance. Tokken equips cannabis companies with software that mirrors every real-life cash transaction with a very small Bitcoin transaction; Bitcoin’s secure, built-in tracking system, called blockchain, serves as a paper trail that might convince federal regulatory agencies of each cannabis company’s legitimacy. Once fully integrated with Bitcoin, Tokken will begin testing its services with local Denver dispensaries.
The cannabis finance company that’s attracted perhaps the most attention is KIND Financial. KIND produces secure kiosks that allow customers to deposit cash for dispensary purchases; these kiosks have gained some traction in legalized states, but they still rely on banks to maintain accounts for cannabis businesses. But KIND may also have an answer to the bank problem:
their Agrisoft software reaches deep into the cannabis supply chain, attaching a unique tracking number to every plant grown and every concentration prepared.
That tracking number follows cannabis products all the way to sale. Rather than offering this sales documentation to banks or to cannabis businesses though, KIND is marketing itself directly to federal and state governments. Such transparency has the potential to legitimize cannabis commerce and change some very entrenched perspectives. The so-called “seed-to-sale” tracking functionality may even have application in the cannabis connoisseur market, keeping growers and sellers honest about exactly which strains and levels of potency they’re offering to patients. All of this comprehensive functionality and promise has drawn in Microsoft as a corporate partner: in June 2016, the software giant tapped KIND to join its Health and Human Services division.
Billionaire Peter Thiel recently bought a minority stake in cannabis conglomerate Privateer Holdings. With the cannabis market projected to reach $6.7 billion in sales in 2016, it seems inevitable that even more high-profile investors will be drawn to profitable cannabis startup opportunities. Such huge exchanges of money demand discretion and security — it remains to be seen whether any of these cannabis finance companies can keep up with the constantly-shifting industry to guarantee such long-term stability.