Payments and marijuana: alternative uses for blockchain

Rage Comment : Blockchain is often regarded as omnipotent, from providing traceable information for clothing to making private cars their own company, but some of its application cases are beginning to be realized in strange places and in unexpected ways, such as companies that can provide banking services to companies in the cannabis industry. These companies usually spend 20-25% of their cash operating costs because regulators spend a lot of money to review these funds, so it is difficult for banks to open accounts for cannabis companies. But with blockchain, all transactions above can be notarized, and transaction records cannot be tampered with. There is no need for intermediaries in the middle, which can save a lot of costs for the cannabis industry.

Translation: Nicole

When people mention blockchain, they often paint a grand vision: providing free, instant payments to everyone in the world. Serving the world’s 2 billion unbanked people. Making all the counterfeit brands in the world invisible by providing traceability for clothing. Making self-driving cars their own companies, letting them find the passengers they need, charge them, pay for gas, and get insurance, all without having to pay any company or anyone behind them. Some of these visions sound more like fantasy than reality.

But some of these visions are starting to come to fruition in strange places and unexpected ways. Everyone from a Brazilian software developer waiting for payroll to a legal marijuana dispensary in Colorado is connecting with blockchain solutions in use.

When you think about international payments, you probably think about migrant workers in Mexico, or sending money to family members, or paying call center employees in the Philippines, or paying large invoices to manufacturers in China. These are all interesting scenarios, but Brazil presents some surprising obstacles. Paying developers there costs 4%-8% of gross revenue and takes up to 15 days, so wire transfers are said to be a dead end. How can blockchain change this?

Cassio Goulart

I was sitting in a development shop in Brazil, trying to learn more by working with a US client, Cheesecake Labs. Cassio Goulart, CFO of Cheesecake Labs, said:

"We built the Chicago Lab to use software development as a bridge to create new opportunities and reduce global inequality. But there was one problem: payments. When we received payments from our US customers, for whatever reason, the payment process was too slow, too expensive, or both. If we used a regular international wire transfer, the fee could be as low as 4%, but it would take up to 15 business days to arrive. If we used Paypal, it was faster, but the fees were over 7%."

We first started learning about blockchain technology when we started working on a project for Jed McCaleb (who is now running Stellar). He wanted to use Bitcoin as a means of payment to pay us. At first we were afraid to try out new technology. As we started to learn about it, we realized it could solve our problems. When we first tried Bitcoin, we realized it really worked, not only was it faster, but it was also cheaper.

Right now, the main blockchain tool we use is Bitwage, because our clients don’t need to create an account. It takes two days to complete the transaction with a fee of between 0.5% and 1.5% to deposit the BRL into our bank account.

While software can reduce global inequality through intellectual capital, blockchain today can help reduce global inequality through financial capital, not just in the countries we traditionally hear about in the news. So how exactly does this happen?

Typically, international payments require a chain of intermediaries to settle funds. Each intermediary delays the transaction and charges a fee. This system was built before the internet and required the types of digital currencies that exist today to run blockchains. Now blockchains are able to take on the role of intermediary, creating a direct peer-to-peer experience for financial institutions on both ends of the chain.

Perhaps you have been paying enough attention to the blockchain space and the payments space. Another often-talked-about story is the potential to provide banking services to the 2 billion underbanked people. While some progress has been made in this regard in African or Caribbean countries, there is one industry that is poised to benefit from blockchain – the cannabis industry in the United States.

I recently sat down with Lamine Zarrad of Tokken, a company that provides banking services to companies in the cannabis industry. The cannabis industry is notoriously difficult to get a bank account in. As a result, cannabis companies end up sitting on a pile of cash that has to be manually transported and can effectively be "laundered" through the banking system.

Lamine Zarrad

Zarrad explained:

“Cannabis companies typically incur 20-25% costs when operating with cash. Losses are usually incurred through security, storage, and cash shrinkage, which is a euphemism for employee theft. To return cash to the banking system, cannabis companies will work with holding companies that hold funds on behalf of the dispensaries, which the dispensaries can then access. To get the funds into their accounts, these dispensaries hire legions of runners who deposit cash in small batches into ATMs throughout the city.”

The reason it is so difficult for banks to open accounts for cannabis companies is because of the high costs of audits and reviews by regulators who need to manage accounts that regulators deem high risk. At Tokken, all of our transactions are notarized on the blockchain. This creates an unalterable ledger for every transaction that has ever occurred. Because of this, the costs of audits and reviews associated with cannabis dispensaries can be greatly reduced. This means that we can invest in these companies in a cost-effective manner, and dispensaries no longer have to operate in a cash-only environment.

We spoke with regulators at FinCEN and the OCC (my former employer) and received a positive response.

How would these things be possible without banks?

Blockchains are purpose-built to solve all of these problems, but they are especially powerful when it comes to meeting audit requirements. Today companies use audits to make sure transactions are balanced and they are not leaking money or goods, while governments use audits to make sure they are getting all their taxes paid and that funds are not being used illegally by criminals or terrorist organizations.

There isn’t much of an independent audit process when it comes to businesses using blockchain or notarization; all transactions are open to the public, and crypto miners who protect the entire system can prevent them from being hacked. Tokken uses a notary service called Tierion, which puts an immutable, encrypted summary of business records on the blockchain, which can be verified while maintaining customer privacy.

When Bitcoin (the first iteration of blockchain) first gained popularity in 2009, it was influenced by notorious illegal use cases such as Silk Road. Three years earlier, the original Silk Road darknet market was shut down after $1.2 billion in drug transactions passed through it.

Today, blockchain has a ton of fresh, real, legal use cases. Tokken saves this type of cannabis from a bad reputation, where it can be regulated, taxed, and become part of our normal economy. The only thing holding Cheesecake back is that the traditional banking system can’t keep up with the reach and speed of the internet. These are two real, legal use cases, and there are many more like them that we can slowly discover.