Bitcoin’s Lightning Network Offers Promising Alternative for Cannabis Industry’s Banking Needs

Cryptocurrency and related payment solutions like the Bitcoin’s Lightning Network may soon revolutionize the cannabis industry and push the federal government to allow traditional banking institutions to fully participate in this growth sector of the economy.

Michigan’s cannabis industry had a banner year in 2021, with adult-use sales exceeding $1.3  billion and total sales nearing $1.8 billion.  In Illinois, recreational sales reached nearly $1.38 billion, more than double the sales from 2020. 

Despite the trajectory of this market and its expanding impact on state tax revenues, financial services for “cannabusinesses” continue to lag behind, undoubtedly because cannabis remains illegal under federal law. Banks and credit unions are hesitant and often unwilling to provide financial services to legitimate cannabis-related businesses because of the risk of losing assets, insurance and licenses. Consequently, “ganjapreneurs” find themselves dealing with mountains of cash. 

In addition to cost and safety issues associated with operating a cash business, legal cannabis companies face criticism of tax evasion, theft or fraud, merely as a consequence of their difficulty in accessing basic financial services. Fortunately, the number of financial institutions in Michigan and Illinois offering business account options to marijuana retailers continues to grow, albeit not at a sufficient rate to satisfy industry demand.

By contrast, the emerging cryptocurrency industry already offers alternative solutions that could immediately benefit cannabis companies, whether with transactions or storing assets. A primary example is the Lightning Network, a layer-two scaling solution to the Bitcoin network. Lightning Network transactions take place off the Bitcoin blockchain and are later consolidated and recorded on the main (layer-one) blockchain, thus enabling extremely fast transactions at near-zero costs.  

There are a variety of software wallets available on popular app stores that offer consumers the ability to make purchases in bitcoin or dollars by linking a bank account. Likewise, a number of companies offer automatic payments interfaces to merchants, providing the flexibility of accepting Lightning Network payments and storing the proceeds in bitcoin or automatically converting to U.S. dollars.

What does this mean for the cannabis industry? Cryptocurrency solutions like the Lightning network have the potential to front-run the traditional banking sector by normalizing electronic payments and reducing the cannabis industry’s reliance on physically settling transactions with cash. Cannabis companies could benefit by reducing overhead related to securing, storing and transporting revenue as they denominate more of their assets in cryptographically secured digital currencies like bitcoin.  Additionally, an industry shift to cryptocurrency usage might incentivize financial institutions to accelerate their offerings to “cannabusinesses,” as well as encourage the federal government to pass legislation, such as the SAFE Banking Act, to de-risk financial institutions that wish to provide banking services to legitimate cannabis-related businesses. 

We at Plunkett Cooney are monitoring the opportunities for synergy between the cannabis and cryptocurrency sectors. If you have any questions, please contact us to see how our full-service firm can help your business navigate these evolving industries. 

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