Crypto, Cannabis and SAFE Banking

Better banking regulation must pass, but why wait for banks to protect cannabis when crypto offers solutions today? This post is part of Payments Week.

AccessTimeIconApr 27, 2022 at 12:48 p.m. UTC
Updated Sep 19, 2023 at 4:03 p.m. UTC
AccessTimeIconApr 27, 2022 at 12:48 p.m. UTCUpdated Sep 19, 2023 at 4:03 p.m. UTCLayer 2
AccessTimeIconApr 27, 2022 at 12:48 p.m. UTCUpdated Sep 19, 2023 at 4:03 p.m. UTCLayer 2

The U.S. Senate continues to deny the cannabis industry access to digital payments and banking, forcing retailers to endure increasingly deadly and more frequent armed robberies. Crypto payments offer an immediate alternative to involuntarily unbanked businesses forced to operate in cash. Promoting this form of payment adoption is a prudent, timely and well-tailored public policy response from lawmakers and regulators who can’t wait for Congress to protect cannabis businesses and their communities.

Continued federal failure to provide legal cannabis retailers with access to banking and electronic payments has deadly real world consequences for the cannabis industry nationwide. While state and local cannabis regulators across the country plead with Congress to pass the Secure and Fair Enforcement (SAFE) Banking Act to fix this, all-cash cannabis businesses continue to provide attractive, opportune and lucrative targets for armed robberies by violent criminals willing to kill employees and others in their way.

Khurshid Khoja serves as board chair emeritus of the National Cannabis Industry Association. The views expressed herein are his own. The piece is part of Payments Week.

This year’s “4/20” [April 20] holiday alone was forecasted to generate $130 billion in sales for legal cannabis retailers in the U.S. However, currently less than 800 U.S. banks are willing to bank the cash proceeds of those sales or provide access to cashless payments.

The predictable result is the presence of large honey pots of cash on-site at most cannabis retail businesses. When combined with the purported unwillingness of some law enforcement in certain jurisdictions to protect legal cannabis businesses, the criminal opportunities are irresistible to some.

The number of institutions that currently bank cannabis businesses is miniscule. They take on significant regulatory risk, proceeding under existing (but non-binding) Obama-era U.S. Department of Treasury guidelines that neither codify any safe harbors or provide any legal certainty, but do significantly increase their costs of complying with federal banking regulations nonetheless.

Notwithstanding the grave threat to public safety, the Senate has repeatedly failed to take action on the SAFE Banking Act, which would provide safe harbor under anti-money-laundering laws – and legal certainty – to those federally chartered institutions willing to bank cannabis.

In theory, this would multiply the ranks of these institutions and make banking services more accessible to the cannabis industry as a whole. The Senate’s failure is underscored by the fact that the House of Representatives has passed some version of the SAFE Banking Act on at least six occasions – most recently by including it in the House version of the America COMPETES Act.

Cryptocurrency payments are not only a viable and necessary public policy alternative to the all-cash status quo, they offer a superior alternative to the federally regulated banking system and traditional payment rails even after the Senate acts to provide cannabis businesses with access under the SAFE Banking Act.

When weighing the mounting costs of continued inaction, it would be difficult to argue that exploring digital payments that are technically feasible, commercially available and lawfully accessible right now isn’t an obviously necessary step.

What might be less obvious is the advantages crypto payments have, relative to the banks and their digital payment rails even if the SAFE Banking Act passed.

Banking on crypto

Most regulators and industry advocates implicitly assume that passing SAFE will immediately improve access to banking and digital payments for all industry operators and quickly supplant cash payments. While passing SAFE is still a necessary legislative step toward providing equitable industry access to banking and merchant services, it is far from the only necessary step to minimize cash payments, and it is unlikely to produce quick results.

While the Act would ensure that a licensed cannabis retailer’s sales revenue would no longer be deemed the “proceeds of unlawful activity” under federal anti-money laundering (AML) laws, these deposits would still be subjected to heightened scrutiny and exhaustive “suspicious activity reporting” requirements by the banks under the same federal AML laws. Accepting these deposits would thus significantly increase a bank’s cost of compliance with federal regulations, costs which would be passed on to account holders through significantly increased fees; this is essentially the approach taken by U.S. banks currently willing to bank the dank.

It’s difficult to see how this would materially improve access to banking, especially for small, woman- and minority-owned businesses that are already unable to absorb those fees. Indeed, the Act includes an implicit admission that it may take years and additional steps before these businesses are able to access financial services on equitable terms.

When contrasted with the ease of tracking transactions through a transparent, open and widely accessible public blockchain, the advantages of crypto payments seem obvious. Payments recorded upon the blockchain already provide relevant and immutable transaction data to determine whenever any volume of unlawfully originated funds flow through a licensed cannabis business – provided law enforcement does the constitutionally-necessary work of identifying public wallet addresses that are of legitimate concern.

No reporting mandates are necessary, and no third-party intermediaries need to be compelled to provide access to transaction data.

Under the circumstances, promoting the adoption of cryptocurrency payments among cannabis retailers is not just our best alternative, it is a moral imperative.

Congress absolutely must act to pass the SAFE Banking Act as soon as possible. But cannabis businesses, consumers and regulators should stop waiting for Congress to act first to protect public safety. Instead, they should press state and local lawmakers on the urgency of adopting cryptocurrency payment alternatives and demand enabling legislation to facilitate this adoption – like bills permitting the payment of cannabis business taxes in cryptocurrency.

And while some far-sighted elected officials in legal cannabis jurisdictions are already championing the idea of accepting crypto for taxes (like Colorado Governor Jared Polis and New York Mayor Eric Adams), we need many more like them and much more to be done. State and local legislators should step in immediately to protect public safety by empowering their cannabis regulators to take deliberate steps toward fully integrating crypto payment solutions into existing cannabis point-of-sale and compliance systems. Doing so will keep lawful, tax-paying and job-producing businesses afloat.

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Khurshid Khoja

Khurshid Khoja is Principal of Greenbridge Corporate Counsel and chair emeritus of the Board of Directors of the National Cannabis Industry Association.