Do Bits and Bytes Make Dollars and Sense?
FinTech Silicon Valley recently hosted a Green Marijuana FinTech panel to discuss the convergence of cannabis and financial technology. I reflect on this topic here as the legal cannabis industry seeks to gain access to the same mainstream financial services afforded legitimate business owners in nearly every other industry in the United States.
As a current or prospective operator in the legal cannabis industry, you are probably already aware that there is a dearth of financial services available to this multi-billion-dollar industry. Nowhere else is such a large and rapidly growing industry so grossly underserved by the financial services companies whose very business models are predicated on playing the role of intermediary.
As a result, like any efficient market, fintech innovators are salivating at the potential to introduce new and disruptive financial services to fill this void. Perhaps the most notable fintech tool these innovators are using in an attempt to serve the cannabis industry: cryptocurrency.
The question is, “Why does the void that cryptocurrency is attempting to fill exist in the first place?”
The answer is easy to identify but harder to implement.
As it stands today, the federal government’s Financial Crimes Enforcement Network (FinCEN) cites approximately 400 banks and credit unions that actively and knowingly serve the legal cannabis industry. This is against a backdrop of more than 10,000 federally regulated banks and credit unions in the United States, as reported by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA)*. Hence, less than 4% of the nation’s financial services firms serve what is arguably the fastest-growing industry since the advent of broadband internet.
Further, most of the largest, non-bank businesses that provide ancillary services such as payment processing are also standing on the sidelines. The largest payment networks, such as Visa and Mastercard, do not currently permit (at least openly or knowingly) electronic payments from the cannabis industry over their global networks. The same is true for the largest payment processors, such as Worldpay and First Data, which initiate the payments that are routed over the aforementioned payment networks.
From behind closed doors, if you ask the leaders of these firms why they are not serving the cannabis industry, most will tell you they would like to. As profit maximizers, there is plenty of financial incentive to do so. Further, these firms genuinely believe that the financial services they offer result in safer, more transparent and more efficient economies.
And while there are arguments for and against a legal and regulated cannabis industry, I surmise that nobody seeks a less safe, less transparent and less efficient market where a market exists.
The reality is that the lack of services available to the cannabis industry stems not from an inherent deficiency in the existing financial products and services themselves. Rather, it is the availability and application of those existing products and services that needs to be addressed. Cryptocurrency is not necessarily more capable of serving the cannabis industry. Instead, cryptocurrency and the de-centralized, non-bank operators of cryptocurrency are more willing to serve the cannabis industry.
Innovation in financial technology is not required. Innovation in financial policy is.
While policy changes can be inhibited by the fear of the unknown, the legal cannabis industry has already implemented numerous controls that alleviate this concern. For example, most operators in that state of Washington, where some basic banking services are available from forward-thinking and community-driven institutions such as Numerica Credit Union and Salal Credit Union, are subject to the following oversight:
- Thorough and continuous vetting by the Washington Liquor and Cannabis Board as part of the license application and approval process and mandatory traceability reporting**
- Thorough and continuous vetting by the bank or credit union providing basic depository services, which is mandated by the federal regulators that oversee the financial firms providing these services
- Specialty software and platforms such as Green Bits, which facilitates these interactions through collaboration with both the state agencies and the financial firms involved, resulting in fewer errors and greater compliance
At Green Bits, we work hard every day to provide – directly or indirectly – cannabis operators with the products and services that help them thrive. This includes the financial products and services that are available to essentially every other business owner in the United States.
If you would like to learn more about our vision for the future of the industry, including the role of technology and financial services, check out the Future of Cannabis Commerce, authored by industry thought leaders Lewis Koski and John Hudak.
* The FDIC and the NCUA are the organizations that insure deposits at banks and credit unions, respectively.
* Traceability, also often referred to as seed-to-sale tracking, is a program mandated by most legal cannabis states whereby all regulated inventory is tracked by the state throughout its lifecycle from “seed” to “sale.”