As the U.S. government attempts to rein in cannabis and cryptocurrency, now may be the perfect opportunity to join these two game-changing industries together officially.
Since the creation of the first tax law, collectors and taxpayers have been engaged in a perpetual game of cat-and-mouse. And regardless of how you count the cheese, the taxman is always after his share.
Cannabis and cryptocurrency have one obvious commonality: They operate in the gray, at least from a federal perspective. Yet, in spite of their gray legal status, both industries have managed to build an impressive market. According to data, the cryptocurrency market topped $2 trillion in April of 2021, and the MJBizFactbook suggests the economic impact of cannabis sales could reach $160 billion by 2025.
Without federal laws to govern the industries, there are billions of tax dollars left unchecked. However, as both industries are gaining a foothold and losing stigma, there may never be a more opportune time to bring the two together.
A Tale of Two Industries
The U.S. Treasury Department recently issued a report regarding reporting regulations for cryptocurrency in an effort to discourage businesses from concealing transactions. Specifically, the report emphasized that cryptocurrency “poses a significant problem by facilitating illegal activity broadly, including tax evasion.”
Similarly, several attempts to legalize, regulate, and tax cannabis have been explored in recent years, with little movement from federal legislators. This legal limbo has left legal cannabis producers in a bind, restricting most traditional financial transactions and burdening the industry with an overabundance of cash.
So, on the one hand, we have a highly regulated industry, cannabis, which must follow a strict operational compliance regime as well as support financial services providers’ rigorous compliance oversight – all of which requires seed-to-sale traceability and financial transaction information down to the minute detail. On the other hand, we have a rich supply of digital crypto assets that lack not only regulation, but also ideal opportunities to use them properly.
In other words, what better industry to support the wave of cryptocurrency than cannabis? By piggybacking on the diligence, monitoring, and reporting already required for cannabis, cryptocurrency can leverage the existing infrastructure. At the same time, cannabis gains a solution for the cash problem by accessing the digital banking structure and a large pool of digital assets.
Current financial regulations already mandate that cash transactions over $10,000 are subject to IRS reporting requirements. Likewise, the IRS plans to invoke similar compliance filing for crypto activities over $10,000.
Additionally, the IRS tries to discourage businesses from banking alternatives by requiring payment services providers to file 1099 reports, but this has been unavoidable for cannabis businesses due to banking restrictions. This conundrum may be the perfect use case for cryptocurrency.
Beyond Safe Banking
Safe banking for the cannabis industry is going to move forward whether cryptocurrency is involved or not. Crypto isn’t a replacement to safe banking; rather, it should be considered a tool to open financial possibilities for cannabis producers and retailers.
For cannabis businesses, crypto provides the opportunity to lock in access to capital – something hard to come by through traditional financial institutions. Moreover, as consumer behavior changes, many want the ability to use their crypto assets for tangible purchases. Having the ability to accept cryptocurrency unlocks new customer channels and considerable sales potential.
For crypto, partnering with the cannabis industry also offers the ability to satisfy the requirements of the IRS through global reporting. By using blockchain or an immutable ledger, all transaction data and activity that happens at a business is locked into place, so what has been done in the past can’t be undone, and all activity can be easily audited.
Creating a Trusted Environment
No one likes over-regulation, but without the right rules and oversight, no one is protected. At the end of the day, building a business is about reputation and mitigating reputational risk, and that starts with compliance and transparency.
Managing risk and avoiding reputational blunders is critical for a business’s long-term success. Certainly, any business can produce a great product, but rarely do people want to do business with a company that carries a poor reputation for sketchy or nefarious business practices.
Dropping crypto into the highly regulated environment of cannabis isn’t just a best-case scenario to launch crypto into the mainstream; the move would also ensure crypto assets are being used in a legitimate and controlled regime, avoiding illegal activity.
Crypto exists; there’s no denying a $2.4 trillion industry. Now is the time to welcome it into our ecosystem, and embrace its use in proper fashion.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Mark Lozzi, CEO and Founder of Confia, is an experienced entrepreneur and investor with a deep understanding and background in finance, PropTech, and RegTech. Before founding Confia, Lozzi served in founding and leadership roles at various investment banking, venture capital, and early state technology companies. As a true disruptor in the Cannabis industry today, Lozzi has led Confia’s strategy since its inception in 2018 to pioneer change for cannabis businesses and create an efficient and liberated ecosystem. He can be contacted at firstname.lastname@example.org.
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