Joshua Radbod, a D.C.-based attorney and entrepreneur, is Co-founder/CEO of Avantpay. CannabizMD went to Josh to explore cryptocurrency as the solution for the complex financial challenges faced by the cannabis industry.
CBMD: You’re advising companies in both the cannabis and cryptocurrency industries. How did you make the connection?
Joshua Radbod (JR): This may sound crazy, but over my last three years working as a cannabis and cryptocurrency attorney, I’ve noticed that both industries are growing on parallel paths. Both of these industries face similar (and sometimes the same) regulatory and compliance challenges, and have opportunities to learn from each other and even work together in some instances. Three points stick out in my mind.
- The cannabis industry has a cash problem, meaning, the existing regulations force most cannabis (and cannabis related businesses) to only deal in cash, which brings certain security risks, accounting nightmares, and hinders the industry scaling and growing to its potential.
- The cryptocurrency industry has an adoption problem, meaning its use can’t scale until a certain mass number of users adopt and actually use cryptocurrency. In this case, I am specifically referring to the use of cryptocurrency as a form of payment.
- With similar regulatory and compliance challenges, specifically around access to banking and Anti-Money Laundering (AML) laws coupled with the cannabis industry searching for a non-cash payment solution and payments related cryptocurrencies looking for adoption, there are opportunities for these industries to collaborate and cooperate.
CMBD: Is the cryptocurrency a messiah of sorts for the cannabis industry?
JR: Let me be very clear here, in no way am I suggesting that cryptocurrency payments are the solution to the current cannabis industry’s payments challenges. I’m merely suggesting that there is potential for both industries to work together in this specific payments niche, and also work together more broadly on addressing access to banks, compliance with BSA/AML, educating lawmakers, regulators and customers, etc. Both industries have mass potential, and in my eyes, the payments and banking challenge is key to both industries growing exponentially.
CBMD: All entrepreneurs share conviction that their idea is a solution. What’s the first step you took?
JR: When I realized that the payments and banking challenge is key to both industries growing exponentially, I looked around to see who else was focusing on this aspect, wanting to get involved, but didn’t find anyone working it. So, I decided to create Avantpay to focus on bringing both the public and private sector experts together to address these payments and banking challenges in the cannabis and cryptocurrency industries. The best method I knew of to accomplish that was via a conference, and more specifically, a conference in DC that would truly bring together the government decision makers as well as private industry leaders. Avantpay will host its inaugural conference this September in DC.
During these annual conferences, we plan to bring together all of these stakeholders in an unbiased setting (we are neutral, we do not recommend or push any specific product, service, or solution – nor do we accept any referral or commission fees from anyone).
CBMD: What are the key challenges you see to the cannabis industry?
JR: Because cannabis is a Schedule 1 substance under the Controlled Substances Act (CSA) it is therefore illegal under U.S. Federal Law to grow, consume, or distribute. The Drug Enforcement Administration (DEA) is the lead Federal law enforcement agency responsible for enforcing the CSA. The DEA is an agency that is under the control of the U.S. Department of Justice (DOJ).
Since cannabis is federally illegal, financial institutions that decide to take the risk and open accounts for cannabis companies face enforcement risk from the Department of the Treasury, FinCEN, FDIC, OCC and DOJ, among others. Most of the issues relate to money laundering under the Bank Secrecy Act (BSA) which is enforced (in some form) by all of these agencies. BSA violations could lead to criminal prosecution, fines, penalties, and worst case scenario losing their FDIC insurance, which would eventually lead to a bank’s closure.
The potential for criminal prosecution toward banks who work with cannabis related companies is a major issue. For example, if a bank opens an account for a dispensary, federal prosecutors could argue that the bank is assisting and helping the dispensary conceal and hold it’s laundered cash so that the dispensary can sell more cannabis (which is federally illegal) and therefore could be considered to be operating an illegal racket. Also, if the dispensary gets caught distributing it’s product over state lines, you again hit the trip line for federal prosecution.
For these reasons, many financial institutions shy away from cannabis companies. The banks who do bank the industry rely on the following documents for guidance/justification: Cole Memo, FinCEN’s 2014 Guidance, the Rohrabacher–Farr Amendment for medical cannabis, and the 2018 Farm Bill for CBD and hemp.
There are many types of financial institutions, some of them include national banks, state chartered banks, and credit unions. One of the differences between a national bank and a state chartered bank is that national banks are regulated by the OCC and have FDIC insurance. There is a small set of national banks and state chartered banks (financial institutions that are regulated by their respective state’s laws and the FDIC) that are willing to work with cannabis related companies. Out of this small subset, an even smaller number actually publicize that they bank the cannabis industry. The “big” national banks avoid knowingly serving cannabis related companies because of the risk of federal prosecution and the potential to lose their FDIC insurance, among other reasons.
Over the last few years more credit unions, which are insured by the National Credit Union Administration (similar to the FDIC) or privately insured by American Share Insurance, have begun to work with cannabis related companies. Directors of credit unions do not own an ownership interest in the company and have less to lose than directors of state banks if found guilty of violating federal law when the credit union services a cannabis company.
CBMD: How about the challenges with cryptocurrency?
JR: For the purposes of our conference, we’re focused on the use of cryptocurrency as a form of payment. There are a few major regulatory and business challenges that face the cryptocurrency industry. From a regulatory standpoint, the SEC, DOJ, CFTC, FINRA, U.S. Department of Treasury, and FinCEN all want a piece of the cryptocurrency pie and for good reason.
Due to the inherent nature of cryptocurrencies and distributed ledger technology (Blockchain is one form), value can be transferred from one entity to another without the need of approval from a bank or federal government. As you can imagine, this technology could allow criminals to launder money. Similar to the cannabis industry, cryptocurrencies need to comply with the money laundering provisions set forth under the BSA and if not, face enforcement by FinCEN, among other agencies. In 2013, FinCEN released guidance that advised all cryptocurrency related companies that transmit and exchange currency from one person or entity to another, must register as a money service business with the federal government, and therefore, depending on the state(s) they operate in, must register and comply with each state’s money transmitter laws. Almost every cryptocurrency related company is a money service business which includes merchant payment gateways, Bitcoin ATM machines, and cryptocurrency exchanges.
From a banking standpoint, cryptocurrencies are viewed as “high risk,” similar to cannabis (but not federally illegal), and therefore share the same struggle when it comes to getting approved for a bank account. Banks don’t want the added risk of enforcement actions from six different federal agencies. There are only a hand full of banks that bank the cryptocurrency industry, and an even smaller number that bank both the cryptocurrency and cannabis industry.
There are also major securities issues around certain cryptocurrencies, i.e., whether or not a specific cryptocurrency should be considered a security under the SEC or a commodity under the CFTC. Like FinCEN, violation of securities laws carry some of the biggest fines, and potential jail time.
From a business standpoint, the cryptocurrency industry’s biggest challenge is adoption. Although cryptocurrency has been around for almost a decade now (Bitcoin was created in 2008), it is still in its early stages. As of December 2018, there were a reported 32 million bitcoin wallets that had been set up globally with 5% of those being located in the US. In an attempt to increase adoption, cryptocurrency communities and companies are looking for ways to enter new demographics and industries–the cannabis industry being one of them. Merchant payment gateways and payment platforms allow consumers to purchase and spend cryptocurrency at retailers, which is an entry point for new adoption. Some of these payment platforms on board merchants to allow funds to flow freely from one entity to another, without the need for a financial institution.
With the help of these merchant payment gateways and payment platforms like Flexa (which allows users to spend crypto at major retailers like Starbucks), social networking sites like Facebook (Libra Coin), Bitcoin ATM machines, and cryptocurrency exchanges like Gemini and Coinbase, cryptocurrency is becoming more widespread as a form of payment.
“Because the cannabis industry has a banking problem, it also has a payments problem. If a company has limited or no access to banking, it’s forced to operate its business in cash. . . there are security risks as well as logistical issues which make transferring cash difficult for merchants … it’s also more expensive.”
CBMD: How can the cannabis industry collaborate with the cryptocurrency industry?
JR: The cannabis and cryptocurrency industries share many of the same regulatory and compliance challenges, especially around banking. Both industries are considered “high risk” to banks and therefore both industries have difficulty getting bank accounts and therefore merchant services. BSA compliance in both industries is paramount. Almost all cryptocurrency related companies are regulated as money service businesses under the BSA, which means they need to comply with many of the same anti-money laundering provisions as banks that operate in the cannabis industry.
Because the cannabis industry has a banking problem, it also has a payments problem. If a company has limited or no access to banking (meaning it can’t make digital payments or accept digital payments, like credit/debit card or ACH payments), it is forced to operate its business in cash. Operating a business with cash has its challenges. There are security risks as well as logistical issues which make transferring cash difficult for merchants, it’s also more expensive, e.g. armored trucks/fees from third parties and the respective state.
Some cryptocurrencies have either begun to, or are starting to realize that the cannabis industry could be a potential use case for the adoption of their cryptocurrency, and the reasoning makes sense: merchants and individuals can use cryptocurrency (and transfer it, thereby transferring value) without the approval of banks or governments, which could help with the cannabis banking and payments problem. Since cannabis companies have difficulty getting bank accounts, and therefore have difficulty making payments and accepting payments in forms other than cash, cryptocurrency offers a potential solution. Cannabis is federally illegal, but it is legal to own and transfer digital currency from one entity or individual to another, if you comply with the current rules and regulations.
CBMD: What’s the downside for the cannabis industry using crypto?
JR: There is one big issue that arises when it comes to using cryptocurrency as a form of payment, price volatility. There are two different solutions to this challenge. First, payments platforms have initiated features that once a cryptocurrency payment is made to the platform, payments to the merchant are made in fiat (USD) at the price the cryptocurrency was worth at the time the initial payment was made and secondly, there are also new forms of cryptocurrencies called stable coins which kill volatility by pegging their value to a stable fiat currency like the USD (or even several different fiat currencies).
CBMD: Are crypoto companies already engaged with cannabis businesses?
JR: There are multiple cryptocurrency merchant payment gateways that operate in the cannabis industry today. These companies allow merchants to accept cryptocurrency as payment from consumers. Once a company has accepted cryptocurrency, they can then send that cryptocurrency to any digital wallet (the software or hardware that stores your secret keys used to digitally sign cryptocurrency transactions for distributed ledgers). Some cryptocurrency merchant payment gateways have built up a merchant database that allows any merchant who is a confirmed user of the platform to send digital assets to one another, essentially creating a closed loop payment system.
Cryptocurrency exchanges allow merchants and individuals to exchange their digital currency for fiat currency (USD), example exchanges are Gemini, Bittrex, and bitflyer. At this point in the transaction, the company will need a bank to send the fiat (USD) once the crypto has been exchanged. Once those exchanged funds hit the bank they can be spent wherever the merchant desires. Banks that receive these exchanged funds could have an issue with the flow of funds/source, as they originally derived from the operation of a cannabis related business.
CBMD: Clearly, this is incredibly complex but it sounds like there is a solution for both crypto and cannabis industries collaboration on shared challenges. What’s next for solutions for both?
JR: At Avantpay, we aim to be the place all banks, payments solution providers, cannabis (and marijuana related companies – aka MRBs), and cryptocurrency companies come together to network, find partners, find customers, clients, etc. At the same time, we aim to be the place where public sector leaders interact with industry leaders to stay up to date on industry trends and emerging technology to ensure legislation and regulation is current. Tying both sides of this are the lawyers, accountants, and compliance experts without whom these industries could not exist and grow.
Again, we do not know if cryptocurrency is the solution to the cannabis cash problem, but it seems to be one that is legal and works. However, there are multiple traditional solutions to the problem that could overtake cryptocurrency as the solution. To see what’s next, you will have to join us at Avantpay|19!
The inaugural Avantpay|19 Conference will be held at the Omni Shoreham Hotel in Washington, DC on September 30-October 1, 2019.