The Currency of Cannabis
By L.P. Olden.
As an industry in its infancy, there is an opportunity for the Cannabis trade to be pioneering in numerous ways; from ESG and sustainability practices, to customer engagement and how transactions are settled throughout the supply chain.
One major obstacle that all Cannabis companies face is managing their finances. Banks and payment processors have not been particularly facilitating for Cannabis companies and in the US, banks cannot offer a bank account to Cannabis companies. In many cases, Cannabis companies have to pay their federal taxes in cash and holding substantial amounts of cash comes with material risk. The Legal Cannabis trade is a multibillion-dollar industry in the U.S. alone, but Cannabis entrepreneurs still face money troubles. Owners of dispensaries encounter major roadblocks when it comes to banking or financing options for their businesses.
Even though dispensaries that supply recreational or Medical Cannabis may be perfectly licensed under state law, federal law still classifies Cannabis as a Schedule 1 drug and considers any Cannabis businesses illegal. The banking system is regulated by federal law, so banks risk charges of aiding and abetting which is a federal crime or money laundering if they choose to do business with Cannabis-related ventures.
There is a loophole that a small number of banks have chosen to use, but it requires the banks to file “suspicious activity” reports for every transaction made by Cannabis-related businesses. Most financial institutions have decided that the risk is not worth it, and they are “just saying no” to the Cannabis industry. Within Europe many banks, PayPal, iZettle and Square refuse to deal with CBD companies and there are many obstacles just to find a compliant payment processor. Even once a relationship with a payment processor is entered into, a fee close to 5% of all online sales is applied due to the risk the payment processor is deemed to be taking.
There is an obvious solution to this, cryptocurrency. As a young industry of its time, the Cannabis industry has the opportunity to use cryptocurrency in a revolutionary way.
A cryptocurrency is a form of digital cash that enables individuals to transmit value in a digital setting. It’s primary function, though, is to serve as an electronic cash system that isn’t owned by any one party.
A good cryptocurrency will be decentralised. There should be no central bank or subset of users that can change the rules without reaching consensus. The network participants (nodes) run software that connects them to other participants so that they can share information between themselves. The decentralisation of cryptocurrency networks makes them highly resistant to shutdown or censorship, which in the case of Cannabis could be vital as a change of government policy in one jurisdiction could have serious ramifications throughout the global industry. Cryptocurrencies allow for the transfer of value anywhere around the globe without the intervention of intermediaries. They are often referred to as permissionless, i.e. anyone with an Internet connection can transmit funds.
The cryptocurrency with the largest market capitalisation is Bitcoin. Bitcoin has a finite supply, but not all units are in circulation yet. Having a finite nature of Bitcoin is essential its value. While governments around the world print money out of thin air and borrow excessively like there is no tomorrow, the supply of fiat currency is seemingly infinite making it impossible to ascertain the true value of a currency. The only way to create new coins is through a process called mining, the mechanism for adding data to the blockchain. By mining, participants add blocks to the blockchain. To do so, they must dedicate computing power to solving a cryptographic puzzle. As an incentive, there is a reward available to whoever proposes a valid block. As of the 29th of May 2020 there are currently 18,384,000 bitcoins in existence of a total that culminates at 21,000,000.
A guide to how Bitcoin payments function can be found here.
Ethereum is another option for the industry. Ethereum, like Bitcoin and other cryptocurrencies, allows the user to transfer digital money. However, it’s capable of a lot more, you can deploy your own code and interact with applications created by other users. Due to its flexibility all sorts of sophisticated programs can be launched on Ethereum.
J.P. Morgan have developed Quorum, an open sourced blockchain platform that combines the innovation of the public Ethereum community with enhancements to support enterprise needs. Quorum has the capacity to assist companies with Supply Chain tracking; Starbucks has implemented Quorum in conjunction with Micorsoft’s Azure Blockchain to work on improving their customer experience. This could be implemented within the Cannabis industry, as customers develop preferences on strains, THC:CBD ratios and delivery methods companies can target their customers more effectively and provide them with products that most suit their desires.
Dubai based Emaar, launched platform that will reward customers EMR tokens for their loyalty and business referrals. Tokens can be redeemed for Emaar’s real estate, hotels, e-commerce operations and shopping centres, as well as being exchanged between users. A similar system could be used throughout the CBD industry that would eventually graduate into the legal Cannabis sector. Customer loyalty is integral for any consumer brand to have longevity and the use of blockchain technology could be key to the companies that build market share.
Cannabis users need to be 18, Uqudo is an excellent example of how companies using Quorum can ensure that all of their customers are of age.
Travacoin is another instance of a digital payment system built on blockchain which enables airlines to refund and compensate passengers in a timely manner when a disruption occurs. This would have been brilliant if it was properly in place in recent months. A similar system could be used by Cannabis cultivators, as there are often disparities between harvests and issues when transporting large quantities of flower.
Private blockchains like Quorum are useful when you have an organisation or industry problem that consists of geographically distributed members of a network, trust between these members, and no reason or need for central control. Typically this is seen with multi-party and organisational decision making via multi-signature contracts in the form of distributed trust. It is also useful for real-time auditing, operational transparency and for data integrity uses.
Last month, the People’s Bank of China (PBOC) disclosed that a group of top banks started trials in electronic payment in four different Chinese regions using the new digital yuan. There’s no timetable yet for the official launch of what is called the Digital Currency Electronic Payment (DCEP). DCEP should be interpreted as the road map for China leading to an eventual, even more groundbreaking replacement of the U.S. dollar as the world’s reserve currency.
A mobile app developed by the Agricultural Bank of China (ABC) is already circulating on WeChat. This is in effect an interface linked to DCEP. Moreover, 19 restaurants and retail establishments including Starbucks, McDonald’s and Subway are part of the pilot testing. China is advancing fast on the whole digital spectrum. A Blockchain Service Network (BSN) was launched not only for domestic but also for global trade purposes. A large committee is supervising BSN, including executives from the PBOC, Baidu and Tencent, according to the Ministry of Industry and Information Technology (MIIT).
The official Beijing position is that the U.S. dollar should be replaced by an IMF-approved Special Drawing Rights (SDR) basket of currencies (dollar, euro, yuan, yen). That would eliminate the heavy burden of the yuan as the sole reserve currency.
One crucial aspect is that a digital, sovereign yuan may be backed by gold. That’s not confirmed, yet. Gold could serve as a direct back up; to back bonds; or just lay there as collateral. What’s certain is that once Beijing announces a digital currency backed by gold, it will strike the U.S. dollar like lightning. China has been hoarding gold for a number of years and has manoeuvred into a position of power to issue this new currency. Under this new framework, nations won’t need to export more to China than they import so they have enough yuan to trade. Beijing won’t have to keep printing yuan electronically and artificially, as in the case of the U.S. dollar to meet trade demands.
The digital yuan will be effectively backed up by the massive amount of Made in China goods and services and not, by a transoceanic Empire of 800 Military Bases. And the value of the digital yuan will be decided by the market, in the same vain as Bitcoin.
This is just an illustration of how some of the most powerful and intelligent people and organisations on the planet plan to use blockchain to streamline global commerce. The Cannabis industry can be at the forefront of this by using the technology in the construction of the industry’s infrastructure.
There is a key element to the Cannabis industry that has yet to be developed, a Cannabis Futures market. Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
Futures markets allow commodities producers and consumers to engage in “hedging” in order to limit the risk of losing money as commodity prices change. For example, a Cannabis cultivator who plants a crop runs the risk of losing money if the price of Cannabis falls before harvest and sale. The cultivator can minimise this risk by selling Cannabis futures contracts, which guarantee that the cultivator will receive a predetermined price. This is vital for cultivators and will ultimately lead to a more sustainable market in which Cannabis cultivators can operate.
The sub-categories of a Cannabis futures market would be extensive, with variations in THC:CBD ratios, outdoor/indoor, oil/flower and several other factors that could be used to differentiate numerous deviations of Cannabis products. This in time would allow Cannabis to be traded as a commodity. This would result in a large injection of capital through the futures market and institutional investors would then accept that Cannabis has long term value and the risks associated with Cannabis would dissipate.
A Security Token Offering is a potential solution to create a Cannabis Futures market using cryptocurrency. A Security Token Offering is a public offer of a security that is tokenized. The owner of the token obtains rights in a company or contractual claims to assets as promised by the security. With the Security Token Offering, there is a right to a share of an asset, in this case a specified quantity of a distinct Cannabis product and a strict legal framework will be applied as to what Cannabis produce is defined as the security. However, the prospectus must present these risks truthfully so that investors can make an informed decision. In the case of a Security Token Offering, there are additional blockchain-specific risks. For example, anyone losing the key to their private wallet will lose access to their investment and will be unable to restore it any other way. An advantage and at the same time also a risk is the fact that there are no intermediaries. Who will guarantee that all investors will actually receive a token? In the case of a “regular” bond, it is purchased and sold by banks that are subject to regulation. For Security Token Offerings, the company itself ensures that investors receive their tokens. One advantage of Security Token Offerings is the ease with which tokens can be transferred. For some it may also be important that an anonymous transfer can be facilitated. However, this may not be possible to this extent for much longer due to the increased regulation of crypto exchanges, which will in future be subject to stricter anti-money laundering obligations.
As the prospective benefits of Cannabis becomes ingrained within the consciousness of society, the investment into the various aspects of the Cannabis industry will increase. Institutional money will enter the industry as the taboo surrounding Cannabis fades and the opportunity becomes blatant. Existing corporations such as Nestle, Coors, AB inBEV and Mars are all configuring strategies about how to enter the market on both sides of the Atlantic and further afield. As the industry develops and Private Equity firms and existing corporations begin to acquire the majority of successful Cannabis start-ups, it is highly probable that the industry will be engulfed by the corporate machine. While many aspects of the industry are controlled by the traditional mechanisms of business. There is the capacity for an innovative sub-section of the industry to utilise the tools of the 21st century to create a groundbreaking sector that is fit for the internet age and ensures the user is at the forefront of the prosperity.
Laws across the world will have to change and no longer condemn Cannabis as an illegal substance, this will be a long and difficult process that will require patience from the industry. The Cannabis is already moves so quickly which is largely due to regulatory changes that impact tremendously on businesses. The European legislation surrounding the Novel Food status of CBD is an instance of this. The ambiguity of the legislation left many companies in limbo for several months until the FSA clarified the legislation on the 13th of February 2020. There have been many instances of companies working to secure a licenses with the view to flip them on to the highest bidder. It is inevitable that this will endure in the industry as there will be numerous instances where a smart regulatory play can earn millions of pounds.
Once sensible legal parameters are in place, the evolution of the Cannabis space will be beyond comprehension and unrecognisable to the industry that stands before us today. Read our comprehensive guide on the current laws of CBD in the UK to learn more about the current state of play. Finally, methods of working independently from traditional finance mechanisms would allow the people and advocates for the power of the plant to remain at the vanguard of this fascinating industry.