The top prosecutor in the State of Arizona just approved an experimental “digital payment club” program designed to mitigate the all-cash problem medical marijuana dispensaries currently have in the state. Right now, these businesses—which are legal—can only pay their bills with cash.
Attorney General Mark Brnovich’s decision greenlights a company called Alta to create the “digital payment club” service and market it to dispensaries. They can’t legally access banks thanks to ongoing federal law.
The digital payment program will allow dispensaries and other medical marijuana businesses to convert their cash into digital “tokens.” They can then use those tokens to pay each other, their suppliers, and anyone else who will take them.
Among the first to receive Alta’s tokens will probably be Arizona’s Department of Revenue, which currently mandates that dispensary owners pay their tax bills by physically taking cash to a state office to getting it counted in person—you know, like you do in 2019. Alta cannot currently be licensed directly by the State of Arizona, necessitating Brnovich’s decision for now. The attorney general of Arizona has been authorized by the state legislature to make exemptions from financial laws for some companies—part of a “sandbox” program for innovative financial programs.
The program will have two years to show they can handle the cash and make the program work. After that trial period, they will be required to get a regular state license and be subject to state oversight as any other business would.
There is certainly a need for some kind of stopgap solution as states struggle to implement their cannabis legalization or medical marijuana laws in spite of federal prohibition. Dispensaries in particular and others in the industry are likely to cover some percentage of any of digital transaction costs to avoid managing so much cash.
The inability to access banking services means that businesses with multiple employees, bills, and vendors are paying tens of thousands of dollars of bills in cash. They need to create solutions for online financial systems but can only use cash—something that’s untenable for a business in 2019, and another passive push toward prohibition.
It is not atypical for a cannabis cultivator to engage in $30 million of business annually with a given dispensary. It costs approximately $2,500 per stop to engage an armored car service, and you’d better, because robbery is a real risk for a business of this size—both from internal and external sources.
But as long as federally-regulated banks are prohibited from doing business with “criminal enterprises,” and cannabis use is criminalized, this situation will persist.
One solution might be the Secure and Fair Enforcement Banking Act, currently under consideration by some members of Congress. It technically would not decriminalize banking with cannabis businesses, but it would prevent federal regulators from punishing banks that do work with those businesses in states where they are legal.
The legislation has a long way to go, though, and that’s where digital currencies might come in—but only for businesses, at least in Arizona. Patients will still be cash only.
However, an armored car company will then pick up those mountains of patient cash for Arizona dispensaries that join Alta’s program. Then they will get an Alta digital token credited to their account for every dollar.
The value of those tokens will be fixed, unlike with Bitcoin, so businesses would have assurances. Anyone accepting the tokens, from the Department of Revenue on down, will also be protected from financial crimes and regulated by the state. For example, Alta, like any other business, remains subject to the Arizona Consumer Fraud Act.
So, who pays for this system? Dispensaries and their suppliers—who will probably pass on some of that cost to patients. Fortune Magazine reports that, “on average, the transaction might take about a third of the 3 percent fee that a credit card company charges.”
This problem isn’t limited to Arizona. In fact, it is a nationwide problem.
Last month, for example, local Philadelphia publication Billy Penn reported on the same issue in Pennsylvania. There, the medical marijuana law is far newer, so the state is just beginning to deal with the issue—and seeing the potential for problems.
And while various apps and startups have developed in this space to deal with this problem, the real issue is simply that banks can’t launder money, and until the federal law is sensibly changed to comport with reality, this problem with create dangerous situations.
