How cryptos can work with cannabis companies in compliance

September 3, 2021
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Cryptocurrency and cannabis are both growing industries amid much legal and regulatory uncertainty. But if you want to work with cannabis companies, it is possible to do so within compliance. Here are some suggestions.

A few years ago, we wrote a blog post about the compliance implications of cryptocurrency businesses operating in states where recreational marijuana use has been legalized. A lot has changed since then, so we thought it’d be prudent to revisit the topic for cryptos engaging with cannabis businesses in order to update best practices.

The previous blog post focused primarily on the 2013 memorandum from U.S. Deputy Attorney General James Cole (dubbed the “Cole Memo”) which detailed the department’s intentions and priorities for enforcing the federal prohibition of recreational marijuana use in states where it had been legalized.

At the time, cryptocurrency and cannabis were considered “fellow travelers” by some in both industries, with a lot to offer one another.

Cryptocurrency as a nascent, evolving industry faced regulatory ambiguities and battles all its own, while cannabis companies looked to cryptocurrency as a possible store of value given that banks were largely disinclined to serve their industry. A number of startups began to take shape which offered payment solutions that brought both industries together.

Changes for Cannabis Companies

Today, things have changed for cannabis companies. It’s a little bit easier for them to find banking services in traditional finance (not very easy, but easier than it is for cryptos).

Additionally, crypto and cannabis didn’t end up being the perfect match hoped for by some. Processing crypto payments is one more thing to learn for cannabis entrepreneurs, and they already have enough compliance obligations to manage, after all.

Still, while crypto’s overlap with cannabis is not as hot a topic as it was years back, it’s still a regular topic of discussion in the space (Joe is speaking on a panel this week at the PBC conference on this very topic).

Additionally, as crypto becomes more mainstream, bigger retailers adopt it as a payment option, and the user understanding and learning curve are lessened, more opportunities between the two industries could emerge in the near future.

This is all to say that there are more mature, experienced crypto entrepreneurs that are interested in the possible opportunities of working in the cannabis industry. Whether that’s adding services or investing in innovative payment startups.

If that sounds like you, then you already know that compliance is going to be part of the picture. But you might be coming up short on your research, or only finding a few dated articles analyzing the relevance of the Cole Memo.

That’s where we (and this blog post) come in.

As both industries continue to grow, we’ll discuss compliance best practices and give you actionable tips to get you going.

If you have a unique opportunity in front of you and need to develop a specific policy now, then you can reach out to us for a consultation here. Otherwise, this blog post should give you a solid idea of how to play ball in this space.

Important context about FinCEN’s expectations

While the Cole Memo has become a bit of a dated reference point for this discussion, the position of regulators regarding doing business with marijuana companies has not changed.

In 2014, FinCEN released guidance clarifying the Bank Secrecy Act (BSA) as it applies to the relationship between financial institutions (your crypto company is most likely considered a financial institution) and cannabis companies.

You can read the guidance here, but most pertinently for crypto companies, the guidance requires the filing of a suspicious activity report (SAR) for every transaction involving a marijuana business.

Let’s state that more clearly: if you process a marijuana business transaction, you must file a SAR.

The reason for this, as detailed in the guidance, is the enduring conflict between state and federal law regarding recreational marijuana use. Though it may be legal to use cannabis in a state like Colorado, it is still against federal law to do so.

This has created a sort of ongoing loophole where federal regulators have largely stepped back to allow states to experiment with recreational marijuana legalization without intervening with criminal charges.

Still, federal regulators aren’t totally looking the other way. After all, cannabis use is still considered a crime at the federal level. Therefore, they expect their reporting requirements to be followed, even if there’s no intent to press charges.

FinCEN also requires marijuana SAR filings to be categorized to better help the department organize and compartmentalize their filings.

If you want to get into the cannabis space, the unique requirements for SAR filing are something you will need to brush up on. There are no technicalities here, the 2014 guidance is clear.

The ‘big 3’ and unique cannabis requirements

As you can see from the reporting alone, getting into the cannabis space is not going to be as easy as you think.

But if you’re considering offering a platform or service to support cannabis-related businesses or individuals, there are a few other things you’ll need to keep in mind.

First, remember the compliance expectations of cryptocurrency MSBs. These include, but are not limited to, the “Big 3” (registering with FinCEN, developing an AML program, and making sure your state money transmitter licenses are in order, you can read more about the Big 3 here).

Second, there are some more unique considerations to take into account when dealing with cannabis companies.

One, because cannabis is considered a “high-risk” customer cohort, you’ll need to require these customers to undergo enhanced due diligence (EDD).

You’ll also need unique know your customer/customer due diligence (KYC/CDD) for onboarding cannabis companies. This can include (but certainly is not limited to) making sure they have proper licenses to operate in their state(s), are in good standing with regulators, and that you check for bad media/any reputation issues.

How meticulous should you be here?

Let’s put it this way. It’s not uncommon during the due diligence process to perform a site visit for certain customers of this cohort.

Make sure you do your own research on state requirements as well. Not just for money transmitters like you, but also cannabis in the jurisdiction. What are the expectations and rules the local regulators have handed down? Do they intersect with you? What points of emphasis should you be aware of?

Key takeaways for cryptos

We’re in an interesting era, watching the crypto and cannabis industries evolve in real-time, with both expectations and opportunities changing every single day.

There may be opportunities in the future for both industries to work together more closely and innovate, but whatever happens, the entrepreneurs that prioritize good compliance will have the advantage, while those that neglect it will stumble out of the gate.

If you see opportunities to offer services or technology to the cannabis industry and need help developing compliance with these services, please reach out for a free consultation.

Even performing an updated risk assessment will help you better understand your risk tolerance in this area before you launch.

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