How Blockchain Could Solve the Cannabis Industry's Problems With Banking and Credit Card Processing
There are three primary reasons the cannabis industry has so much trouble obtaining routine banking and credit card processing but it is all really the same reason -- fear. Card associations, banks and regulatory agencies worry they can not prevent what they fear most.
The card associations fear illegal transactions. The banks fear money laundering and fraud. Regulatory agencies fear tax fraud. The “work arounds” the cannabis industry might consider -- such as offshore accounts, miscoding, virtual ATM’s, cryptocurrency, vouchering and even customer facing mobile apps -- have all failed. Many have resulted in accounts being closed, fines and penalties.
All the fear is, however, unfounded, because blockchain banking technology now exists that makes illegal transactions, money laundering and tax and bank fraud impossible. The technology consists of three elements: a digital wallet, a closed-loop ecosystem and a blockchain ledger.
A digital wallet functions just like an online bank account. It is FDIC insured, earns interest, you can write checks from it, etc. The major difference is that you can also make wallet-to-wallet transfers.
The closed-loop ecosystem simply means that digital wallets are only issued to organizations that have passed a strict know-your-customer background check.
The blockchain ledger is the secret sauce. This ledger is a record of every penny from the time it goes into the wallet to whatever is done inside the wallet or wallets and ends with the deposit from the wallet to a bank account outside the ecosystem. The key is that this immutable record is made available in real time to the card brands, the banks, and the regulatory agencies.
Because all transactions are fully transparent, it keeps everyone honest! Let me give you a few examples of how technology can eliminate illegal transactions, bank fraud and tax evasion.
Let's say hypothetically that a dispensary in Washington state with traditional credit card processing wanted to fill orders from Idaho, where cannabis is illegal. All that dispensary would need to do is get a backup terminal and take it to Idaho. The card brands and the banks would have no way of knowing these illegal transactions were occurring. Compare that to blockchain technology, which captures a geolocation for every transaction. The geolocation would show the transaction was occurring in Idaho and decline the transaction!
Let's use the same Washington/Idaho scenario to demonstrate how blockchain prevents bank fraud. As you know cannabis transactions can not cross state lines. If a dispensary in Washington attempts to take money from their digital wallet and deposit it into a bank in Idaho, the technology would see the Routing numbers are attached across state lines and decline the transaction!
Tipping is a perfect example of how tax fraud is eliminated. Today a dispensary would have to show that they collected tips and paid those tips to their budtenders in order to transfer the tax liability from the dispensary to the budtender. Blockchain technology provides that record in real time, with every penny and every transaction!
Compliant banking and credit card processing is possible for the cannabis industry with the proper reporting, transparency and protections the latest technology provides.