Charles Alovisetti may be a senior associate and co-chair of the company department at Vicente Sederberg LLC, and works with legal cannabis businesses within the U.S.
In this opinion piece, Alovisetti warns such enterprises to be wary of using bitcoin or other cryptocurrencies as an answer to the pot industry’s continued difficulty obtaining or keeping bank accounts (a familiar problem for blockchain startups.)
One of the main challenges facing legal marijuana businesses is lack of consistent access to banking services. Many marijuana businesses do have banking accounts, but the sword of Damocles dangles above them, always threatening an unappealable termination of an account.
Enter digital currencies, which promise an sweep around a wary economic system . there’s an excellent deal of pleasure within the marijuana industry about the chances regarding bitcoin and other cryptocurrencies.
But before the cannabis industry gets over excited with images of marijuana businesses sidestepping hostile federal banking regulators, we’d like to require a tough check out the longer term of digital currencies.
One strategy that’s been pushed is for cannabis businesses to require an existing digital currency and easily use it as a way of transacting business to avoid the necessity to believe banks.
This way, marijuana companies without bank accounts could eliminate the necessity to work in cash, instead accepting payment directly from customers or other businesses in digital currency – although converting digital currency into dollars will still require a checking account .
Another possible use of digital currencies would be to develop a replacement token, often mentioned as an app coin, protocol token, or altcoin, specifically for the marijuana industry. Again, the goal would be to scale back or eliminate the utilization of money and integrate blockchain technology into the compliance and other needs of marijuana businesses.
Finally, some business offer bitcoin-based payment processing services. These services allow customers to get bitcoin via a credit or open-end credit then purchase a marijuana product with the recently acquired bitcoin. the shop then converts the bitcoin back to dollars. the thought is to supply an alternate to traditional payment processing services and mastercard companies which will not work with marijuana businesses.
However, regulators present a true and present threat to cryptocurrencies as they currently exist; for instance , recent Chinese regulatory restrictions have seen the closure of platforms allowing people to shop for or sell tokens.
And these threats become even more important for digital currencies servicing marijuana-related businesses (“MRBs” within the parlance of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN).
As longtime CoinDesk readers will recall, in March 2013, FinCEN published its initial guidance on virtual currencies. The agency defined three categories of participants: users, exchangers and administrators. A user is “a person who obtains virtual currency to get goods or services,” whereas an exchanger is “a person engaged as a business within the exchange of virtual currency for real currency, funds, or other virtual currency” and an administrator is “a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”
FinCEN concluded that, barring any specific exemption, exchangers and administrators are money service businesses (MSBs) and intrinsically are subject to FinCEN registration and therefore the framework of the Bank Secrecy Act (BSA), which was designed to assist FinCEN’s investigations of potential criminal activity.
Subsequent administrative rulings have clarified that FinCEN considers digital currency exchanges, ATM operators, and payment processors to be exchangers within the agency’s tripartite framework.
On the marijuana side of the equation, it’s important to notice that, while marijuana remains illegal federally, the industry within the U.S. exists in its current form because it’s tolerated pursuant to federal policy, as set forth within the Cole Memo (put out by the Department of Justice on Aug. 29, 2013).
The Cole Memo states that while marijuana remains illegal federally, federal enforcement shouldn’t consider prosecution of state-legal marijuana businesses if those business don’t implicate any of eight enumerated enforcement priorities (e.g. preventing revenue from the sale of marijuana from getting to criminal enterprises and preventing state-authorized marijuana activity from getting used as a canopy or pretext for the trafficking of other illegal drugs or illegal activity).
A potent brew
While it’s unfair to associate all digital currency use with illicit activity, there’s a perception, reinforced by certain bad actors, that digital currencies are getting used to launder money, divert revenue to criminal enterprises and traffic illicit drugs. Any risk that a business might be seen as violating the Cole Memo priorities must be treated extremely seriously because it could provoke a federal enforcement action.
While the Cole Memo addressed violations of the Controlled Substances Act (CSA), it had been silent on financial crimes that might inevitably result from the utilization or banking of proceeds of a federally criminality . In response to financial institutions’ concerns regarding accepting MRBs as clients, on Feb. 14, 2014, in two memos often mentioned because the “Valentine’s Day Letters,” the Department of Justice and FinCEN each outlined their respective attitudes to concealment concerns associated with the violations of the CSA.
The FinCEN memo contained detailed guidelines on the way to provide banking services to an MRB while remaining compliant with the BSA. These guidelines included the requirement to file differing types of suspicious activity reports (SARs) in response to activity on the a part of an MRB. The new DOJ memo updated the sooner Cole Memo to increase the realm of non-priority violations to incorporate provisions of the cash laundering statutes, the unlicensed money remitter statute and therefore the BSA triggered by underlying violations of the CSA.
But the DOJ reiterated that any exercise of discretion regarding its resources was subject to the supply of services to an MRB whose activities don’t trigger any of the eight priority factors. The DOJ also noted that following the FinCEN guidance was critical to remaining within the low enforcement priority category of the Cole Memo.
Again, FinCEN has also made it clear BSA compliance obligations also apply to several businesses dealing in digital currencies – exchanges, ATM operators and payment processors are all required to register as MSBs. meaning that to suits the Cole Memo and FinCEN’s marijuana policy guidance, any digital currency business that’s required to register as an MSB must make the specified SAR reports outlined within the Feb. 14, 2014, FinCEN guidance.
Just say no
When it involves marijuana firms using cryptocurrencies, discretion should remain the higher a part of valor.
The marijuana industry within the U.S. exists solely thanks to permissive federal policies that need businesses to follow certain guidelines, including filings SARs with FinCEN. If these guidelines aren’t being followed to the letter, which may be a challenging and sometimes onerous task, a business is not any longer within the guidance of the Cole Memo and is at higher risk of facing federal enforcement action.
And albeit these guidelines are religiously adhered to, while FinCEN-compliant use of digital currencies isn’t explicitly prohibited by federal policy, their use is usually linked by enforcement with concealment , illicit drug sales and other illegal activities.
As these crimes are listed as prevention priorities within the Cole Memo, digital currency use could potentially provide an excuse for Attorney General Jeff Sessions (no fan of legal marijuana) to clamp down on state-legal pot enterprises.