OP-ED: Cannabis and cryptocurrency: A match made in Trenton

Simultaneous solutions to two thorny problems

Guillermo C. Artiles & Benjamin D. Heller//March 22, 2019

OP-ED: Cannabis and cryptocurrency: A match made in Trenton

Simultaneous solutions to two thorny problems

Guillermo C. Artiles & Benjamin D. Heller//March 22, 2019

Cannabis and cryptocurrency have the potential to become two of the most innovative and lucrative industries in American and international markets. While the two may be quite different substantively, the collaboration of these burgeoning industries may further promote the growth of each, and possibly rejuvenate New Jersey’s economy in the process.

The cannabis industry is predicated on the utilization of hemp and marijuana and those plants’ chemical derivatives for medicinal, research and recreational purposes. But even in states where cannabis is legal, payment systems are nonexistent because non-hemp cannabis is an illegal substance at the federal level. Cryptocurrency, while federally legal and acceptable in every state as a decentralized currency system that facilitates direct monetary-like transfers between parties, suffers from a usage problem starving for consumption.

Simply put, cannabis provides crypto with a captive, burgeoning user market, and crypto solves cannabis’ payment problem.

Early regulatory days

Though certainly distinctive, both industries are similar in that both are in the early stages of federal, state and local regulation. Non-hemp cannabis, although still outlawed at the federal level, has been comprehensively decriminalized in ten states and the District of Columbia and is on an upward trajectory in that regard with decriminalization bills pending in numerous state legislatures, including New Jersey. Cryptocurrency regulation, however, is just beginning to take shape, as the actions of federal regulators, including the United States Securities and Exchange Commission, make it increasingly clear that most, if not all, cryptocurrency capital-raising offerings will be treated as securities that must be offered, sold and traded, if at all, in compliance with the Securities Act of 1933 and the Securities Exchange Act of 1934.

A few states – notably Vermont and Wyoming – have taken the lead in an attempting to attract cryptocurrency businesses. Vermont’s new law allows for the formation of blockchain-based limited liability companies – or BBLLCs – a corporate structure geared solely to the cryptocurrency industry’s unique characteristics. For example, the individuals involved in running a cryptocurrency infrastructure, which include node operators, token holders and miners, may not align cleanly with the traditional corporate hierarchy that could include a board of directors, members, or shareholders. Vermont’s law takes all of that into consideration and outlines the legal rights and duties of cryptocurrency industry-specific management roles.

There are several bills pertaining to both the cannabis and cryptocurrency industries working their way through the New Jersey Legislature.

Senate Bill 2703 and its Assembly counterpart, A4497, the “New Jersey Cannabis Regulatory and Expungement Aid Modernization Act” would legalize personal use cannabis for adults, create a regulatory commission to regulate personal use and medical cannabis and, critically, provide expungement relief for certain past marijuana-related crimes.

Senate Bill 10 (A10) would revise requirements to authorize and access medical cannabis, establish requirements for institutional caregivers, update permit requirements for alternative treatment centers and establish additional legal protections for patients and caregivers.

Assembly Bill 3817 would require digital currency businesses operating in New Jersey to register with the Department of Banking and Insurance and establish other consumer protections.

Assembly Bill 1906 would establish a regulatory framework for digital currency businesses to operate in New Jersey and create incentives for digital currency businesses to locate and operate in the State.

Assembly Bill 3613 would establish the “New Jersey Blockchain Initiative Task Force” to study whether state, county, and municipal governments could benefit from a transition to a blockchain-based system for recordkeeping and service delivery.

Assembly Bill 3768 would allow corporations to use electronic networks, including distributed electronic networks, in order to meet recordkeeping requirements.

Assuming these bills, or similar versions, are enacted New Jersey will become fertile ground for cannabis and cryptocurrency businesses — startups and publicly-traded companies alike. Critically, these two industries can collaborate to support and facilitate one another, allowing for the realization of enormous financial synergies between the two.

Federal barrier

Even if the New Jersey Legislature legalizes cannabis within the coming weeks, cannabis – or, more precisely, those high-THC varieties known as “marijuana” – will remain an illegal controlled substance under federal law. Thus many cannabis businesses – including those operating under state-legal medical marijuana programs – cannot receive basic financial services from banks, the overwhelming majority of which are insured by the Federal Deposit Insurance Corporation.

On the other hand, with the enactment of the 2018 Farm Bill this past December, low-THC varieties of cannabis known as “hemp” are no longer illegal under federal law. This change means that certain cannabis businesses dealing exclusively with hemp or hemp-derived products, such as cannabidiol (CBD) oil, should now have greater access to the banking system. That said, the full implementation of this change in the law by the relevant federal agencies remains a work in progress.

Given that cannabis legalization at the federal level is not expected any time soon, the cryptocurrency industry may be able to help fill the glaring financial services gap for cannabis startups. Cryptocurrencies may be able to provide capital to fledgling cannabis startups, offer a secure, well-organized platform to facilitate the transfer of funds, furnish a coherent accounting mechanism for all business-related transactions, and so much more.

Some of the largest potential benefits stemming from the marriage between the cryptocurrency and cannabis industries are safety and efficiency. Since cannabis businesses cannot use banks, they rely primarily on cash exchanges, which can breed corruption and misinformation, and attract criminal activity. For example, the State Treasurer of California, Fiona Ma, recently testified before a congressional committee that paying taxes has become a treacherous ordeal for cannabis businesses in her state. “Duffel bags and sometimes suitcases of cash would arrive quarterly at some of our designated offices and some business owners had to drive 350 miles to pay their taxes,” she said.

In an effort to curb the dangers associated with tax payments from cannabis businesses, lawmakers in California have recently introduced a bill that purports to allow cannabis-related businesses to pay their taxes via cryptocurrency. Doing so would authorize those businesses to pay their taxes virtually – both safely and efficiently – using advanced cryptocurrency technology. Such a system already exists in Ohio, which permits taxpayers to pay their state business taxes with cryptocurrency.

Bad examples

To attract both cannabis and cryptocurrency businesses, the New Jersey Legislature similarly should follow in the footsteps of California, Ohio, Vermont and Wyoming, and take proactive steps to promulgate laws that entice and embrace both industries. Doing so could allow New Jersey to lead in areas where others have delayed, especially its neighbors in New York and Pennsylvania.

New York, for example, instituted the BitLicense (business license of virtual currency activities), which places restrictions on individuals and corporate bodies engaged in sending and receiving cryptocurrencies in that state. This move has hampered the growth of crypto businesses and significantly affected some of the most innovative companies operating in this space. As a result, numerous crypto businesses have relocated to other states, including New Jersey. Urban centers like Jersey City have become hotbeds for New York’s crypto émigrés. New Jersey now has a real opportunity to learn from the mistakes of its neighbor and create a regulatory environment that both protects consumers and spurs innovation, cementing those cryptocurrency institutions already in Jersey City and encouraging others to enter the state.

Similarly, in the cannabis industry, New Jersey has an opportunity to set the market standard in the multistate region, both in the northern and southern parts of the State. While both have recently awoken to the possibility of legalizing cannabis, New York and Pennsylvania lag behind New Jersey in their efforts to produce sound industry policy. While public support in all three states continues to hit record highs for approval, only New Jersey is primed to pass legislation that would generate millions of dollars in revenue, all while continuing to improve many lives through medicinal use.

Legalizing cannabis and enacting a friendly regulatory framework for the cryptocurrency industry are the first steps toward realizing these multifaceted opportunities. The Legislature’s support of the union between these two fledgling industries, will likely benefit not just businesses, but the overall state economy.

Guillermo Artiles is a Newark-based partner in the government affairs group at McCarter & English, and is former associate counsel to Gov. Murphy. Benjamin Heller, who worked on issues related to the constitutionality of legislation as a state Supreme Court judicial clerk, practices in the firm’s products liability group.