Cannabis, Bitcoin And Indian Reservations A Perfect Match
Every new trend inevitably hits growing pains, and two of the hottest trends in investing are certainly not exceptions. Cannabis, Bitcoin And Indian Reservations A Perfect Match
From small trial programs in a small handful of states, medical and recreational cannabis has grown at a blistering pace. There are now 28 states that have legalized medical cannabis, and eight states with full legalization.
Within about a year, all of Canada will fully legalize, and a slew of countries are either about to implement or are exploring medical or recreational use, including Mexico, Germany, Brazil, and Australia, to name just a couple of the larger ones.
The North American cannabis market posted $6.7 billion in revenue in 2016, up a full 30% from 2015, according to a recent report from Arcview Market Research.
And that phenomenal growth isn’t an outlier. Arcview projects sales to grow at a compound annual growth rate of 25% through 2021.
The cannabis market is growing as fast as Internet companies were in the 2000s.
Within four years, it’s expected to be a $20.2 billion market.
All of this has come about in a matter of years.
Then there is Bitcoin. The cryptographic and digital currency is approaching 10 years of existence.
From a small group of ardent supporters and hobbyists of sorts, there are now 16.4 million of the absolute cap of 21 million in circulation.
All told, there are over $44 billion worth out there now.
Yet both faced similar problems: Figuring out the infrastructure that allows businesses and individuals to buy and sell them efficiently.
That is rapidly changing, and the cannabis market is finding a solution to one of its few remaining major problems thanks to Bitcoin.
Giant Piles of Cash
Bitcoin has the advantage here. Not only is it digital and only requires an Internet connection, it also exists in a completely gray zone. Nothing stood in its way except attracting users.
Today they are accepted by well over 100,000 companies, including far too many major companies and online retailers to list. Security is robust now that early, amateurish players have been left behind.
It is no coincidence that major banks are very interested in digital currencies. The blockchain technology is considered a modern marvel by modern finance. Banks are studying how to use it to revolutionize transactions and security.
In a world where the word “innovation” is so watered down that apps that match you with someone that will pick up a cheeseburger for you at midnight quality, Bitcoin is the real deal.
Cannabis companies have a much harder road to travel. The sector had to overcome prior bans through referendums, state laws, and court cases. It now enjoys relative safety.
First there is the Rohrabacher-Farr amendment, which prohibits the use of federal funds to interfere with states’ implementation of their own state marijuana laws.
There is a Ninth Circuit court ruling that prohibits pursuing enforcement of the federal Controlled Substances Act against individuals operating marijuana businesses in compliance with state law.
However, there are still the pesky problems of businesses that have to operate in the real world. Cannabis companies have to grow a product, securely ship it, and pay rent, payroll, and insurance.
All of the problems of small- and medium-sized businesses apply, with a couple extra layers of regulatory compliance.
Yet they have to do this with limited, if any, access to payment processing and large national banks.
And so they accumulate giant piles of cash, which they must use for every expense. And at greater expense, due to the expensive armored car services required.
Plus they can’t accept credit or debit card transactions, in an increasingly cash-free economy.
This is where Bitcoin presents a novel solution.
Cannabis companies are now turning to Bitcoin in an effort to get rid of all that cash and open up new forms of payment.
At least two fintech start-ups are up and running to use Bitcoin as an intermediate step to allow credit card transactions for cannabis purchases — POSaBIT and SinglePoint Inc.
As Jon Baugher, co-founder of POSaBIT, told Bloomberg recently, “There’s no industry — whether it’s the production and sale of cannabis or the production and sale of a cup of coffee — that can operate safely, transparently or effectively without access to banks or other financial institutions and traditional services. That’s where we thought we could leverage the use of digital currency.”
The example he cited is Trove Cannabis, a Washington state store. It sold $3 million worth of cannabis last year, all in cash, and does close to 3,000 transactions weekly.
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Since adopting the POSaBIT system in February, Trove customers are given the option to pay with a card. They use an ATM-style kiosk to put the amount of Bitcoin equivalent to the value of the cannabis they want, plus a $2 transaction fee.
When the purchase is processed, POSaBIT then sends the value in U.S. dollars of the sale to Trove’s local bank account.
Not only does this reduce the security risk and cost of handling so much cash for what is essentially a small business with low margins, it also drives extra sales.
About 13% of customers have chosen to pay with credit or debit cards where POSaBIT kiosks are installed, and they tend to spend more than cash-paying customers.
It is a small step, but it tackles a major access problem, and fintech and banking services are converging on the solution.
SinglePoint, for example, just signed an agreement last week with First Bitcoin Capital Corp. to develop a solution for cannabis and other high-risk industries without access to traditional banking.
The Rapidly Maturing Market
All of this points to the cannabis market maturing, and finding solutions for the few remaining hurdles that separate it from more traditional retail operations.
And this is just for the front-facing portion of the businesses. Behind the scenes, financial issues are rapidly being addressed by innovative new models as well.
Part of the problem with a lack of access to major national banks is the availability of capital to get businesses off the ground, or capitalize on opportunities to capture the explosive growth in market share.
But a new “streaming” model is evolving in the cannabis industry that circumvents the issue entirely.
And while it is new to cannabis, it’s a tried-and-true method that was pioneered with precious metals in the 1990s and early 2000s.
Small companies enter an agreement, offering up future revenue for shares and a percentage of their sales. In turn, they receive the funds they need to grow, and the investors essentially double dip through the subsequent share appreciation and revenue growth their funds enabled.
The legal cannabis market has never had a demand issue, that’s for sure. All of the problems it has faced have been from figuring out solutions for the logistical and financial issues.
Now those issues are being addressed in novel ways that will continue to drive the industry’s growth at a rate that rivals the early days of the Internet boom, all while opening up unprecedented ways for investors to ride along.
Cops Stumble On Bitcoin Mine In Hunt For U.K. Cannabis Farm
When British police raided a warehouse, they were expecting to find a cannabis farm. Instead they found banks of computers illegally siphoning the electricity needed to mine for Bitcoin.
Cops in West Midlands, England seized around 100 computer units that were working to bypass the local power grid. They discovered the warehouse after sending a drone over the site, which detected a considerable heat source.
Mining for Bitcoin devours massive amounts of power, racking up huge bills for dedicated miners. The process, which needs computers to solve complex math problems to create new coins, now uses 66 times more electricity than in 2015, Citigroup Inc. said in a recent report.
The Centre for Alternative Finance at the University of Cambridge estimates it uses more electricity globally in a year than the Netherlands.
“It’s certainly not what we were expecting,” Police Sergeant Jennifer Griffin, said in a statement Friday. “It had all the hallmarks of a cannabis cultivation set-up.”
The police said they hadn’t yet made any arrests but believed thousands of pounds worth of power had been taken from the grid.
“Mining for cryptocurrency is not itself illegal but clearly abstracting electricity from the mains supply to power it is,” Griffin said. It is just the second illegal mining operation the local force have discovered in the region.
New York’s Indian Nations Ramp Up Marijuana Sales While State Licensing Lags
Union Springs. Hogansburg. Kill Buck.
These small Upstate towns and villages aren’t the places that come to mind when you think of New York state’s top retail shopping destinations.
But they are the kinds of places where you could find yourself now if you’re looking to buy “legal” recreational marijuana.
Shops operated by Native American nations in small places like these are currently the only retail stores where you can legally purchase marijuana.
It’s been eight months since New York state legalized the possession and use of adult recreational marijuana. Yet the state still hasn’t created the regulations or issued the licenses for sales.
So there are no legal shops selling recreational marijuana outside of Indian territories — and it may be more than a year before they start.
Several New York Indian nations, citing their sovereign nation status, have filled the void. The Mohawks, Senecas and Cayugas have set up, or at least allowed, shops to deal marijuana on their territories. Non-native people can buy them, but experts advise customers to remember that state law allows possession of no more than three ounces.
“Dispensaries (marijuana shops) are legal if they are on federally recognized, sovereign tribal land,” Freeman Klopott, the OCM spokesman said. He also said the OCM “has the ability to enter into agreements with tribes through tribal compacts to integrate them into the state program if all parties can agree to terms,” though no such agreements exist yet.
Here’s A Look At The Status Of Legal Weed Sales On New York’s Indian Nations:
The Akwesasne Mohawks, whose territory is near Hogansburg in Franklin County, were the first to move into the pot sales.
After a period in which individual members of the nation opened their own unauthorized shops, the Mohawks’ governing council in July set up its own rules and began to license shops.
Several Mohawk shops are now selling marijuana in joints, as well as gummies, tinctures and more.
The Cayuga Nation, whose members mostly live in Cayuga and Seneca counties, have added marijuana to the list of products its sells under its Arrowhead Cannabis brand, according to an Instagram post.
“Arrowhead Cannabis 💯% legal Marijuana Dispensary owned by the Cayuga Nation,” the post says. Representatives of Cayugas could not be reached for comment.
The Cayugas recently started to sell the recreational marijuana at their tribal Lakeside Trading shop in Union Springs (Cayuga County) and at the Cayuga Corner Store on Route 89 near Seneca Falls (Seneca County), according to reports at fingerlakesdaily.news.com and in the Auburn Citizen /auburnpub.com. They also sell CBD and other non-marijuana (THC) products.
In the case of Union Springs, the village board had voted in November to “opt out” of allowing retail marijuana sales (which state law permits them to do), but agreed to a special exemption for the Lakeside Trading shop, according to the Auburn Citizen.
In Western New York, meanwhile, shops on territory belonging to the Seneca Nation of Indians have been offering marijuana to customers who receive it as a “gift” when making other purchases, according to a report at WGRZ.com in Buffalo.
A reporter for the station found that happening at three dispensaries along Route 417 in Kill Buck, just south of Ellicottville in Cattaraugus County.
A spokesman for the Senecas did not respond to questions about marijuana sales.
Closer to Central New York, two other tribes have not yet launched any attempts at authorized marijuana sales.
The traditional leadership of the Onondaga Nation near Syracuse has no plans to enter the marijuana market, the nation’s lawyer, Joe Heath, has told syracuse.com.
The Oneida Indian Nation just east of Syracuse has been studying the question, a spokesman said, but has not yet taken any action.
New York’s Cannabis Control Board is still working out its plans for legal retail sales of recreational marijuana. The board’s chair, Tremaine Wright, has recently indicated the licensing of such businesses may not happen until spring 2023.
Meanwhile, sales are legal in neighboring state Massachusetts, and in Canada, although federal law prohibits carrying it across state borders or the international border.
Recreational marijuana is legal in both New Jersey and Connecticut, and both states are working on starting up retail markets.
Cherokee Council Legalizes Medical Marijuana On Tribal Land In North Carolina
The tribal council for the Cherokee in western North Carolina voted Thursday to legalize medical marijuana on tribal lands. The tribal land will be the first area in the state with legal possession of pot.
The vote makes possession of up to one ounce of marijuana by people 21 and older legal on tribal land, called the Qualla Boundary.
It’s still illegal to grow or sell pot on the tribe’s land. But Principal Chief Richard Sneed said this vote is just the first in what will be a series of moves to legalize marijuana on tribal lands.
“There’s so much science now supporting cannabis as a medicine,” Sneed told the tribal council before the vote. “This really is a quality of life issue as well for folks who have debilitating diseases, chronic pain, chronic back pain, cancer.”
“This is really just the first step, or kind of the cornerstone of moving toward medicinal. We have to have this in place first,” Sneed said.
“The people want cannabis, the world is changing, society is changing,” Jeremy Wilson, the EBCI’s government affairs liaison, said in an earlier interview.
“We want to have dispensaries here on the Qualla Boundary and to be able to sell, but we have to start with this phase first,” he said.
The Cherokee have sovereignty and make their own laws on the Qualla Boundary, which includes about 100 square miles over five counties in western North Carolina.
“Go out and visit with some of the elders, it’s their medicine,” council member Albert Rose said before voting to approve the law.
Council member Richard French said legal medicinal marijuana could help the opioid epidemic in the area.
“All of us have been affected by the opiods,” he said. “All of us have lost someone.”
“It’s for the betterment of our people,” French said in the meeting.
The tribal council removed part of the ordinance that would have allowed people to give away small amounts of pot without selling it.
Pot is still illegal in North Carolina, but possession of less than a half ounce is punishable only with a fine.
A commission in North Carolina recommended decriminalizing possession of small amounts of pot in the state recently.
Federal laws on marijuana have been loosened in recent years, but it is still illegal.
States around the country have been decriminalizing or outright legalizing marijuana in recent years. Recreational or medical marijuana is legal in 36 states and the District of Columbia. Virginia will legalize recreational pot starting July 1.
Other Native American tribes have legalized marijuana in states where it was otherwise illegal. The Oglala Sioux in North Dakota legalized marijuana in October, according to Marijuana Business Daily, a magazine that tracks the marijuana industry.
“The Oglala Sioux Tribe is the first Native American tribe to move forward to legalize marijuana use in a state that has yet to similarly regulate it,” according to a statement from NORML, a marijuana advocacy organization.
South Dakota voters decided in the November election to legalize both medical and recreational marijuana in the state, but those regulations are still in the works, according to the group.
An earlier legalization effort by the Eastern Band of Cherokee failed a couple of years ago.
“Over the course of three years that I’ve been working on this, we’ve gained a good momentum of support in the public and more and more people are starting to grasp the idea of cannabis, marijuana to be exact, to be our next game-changer,” Wilson told Spectrum News 1 earlier this year.
Developing a marijuana industry on the Qualla Boundary could help offset losses at the casino, the biggest economic engine for the Cherokee.
The Catawba Nation is planning a casino at Kings Mountain, just outside Charlotte, which could cut the main revenue stream for the Eastern Band of Cherokee.
“Getting us to a place and a legal framework to where we can have a dispensary here to supply the medical marijuana that the public would need and create a new revenue line for us,” Wilson said.
Marijuana Banking Has Grown Quickly. Here’s A Look At Who’s Who
I spoke to half a dozen investment bankers about how their firms work in the cannabis space in terms of what they’re able to advise on — and what they’re not — and what trends they’re seeing in dealmaking. Let’s break it down bank by bank.
New York-based Cowen’s first cannabis-related transaction was the 2013 initial public offering of GW Pharmaceuticals on the Nasdaq. The firm in 2014 hired research analyst Vivien Azer, who co-founded the cannabis practice alongside banking Managing Director Gavin O’Reilly, a 19-year Cowen veteran.
Sitting within the bank’s consumer and retail investment banking coverage, Cowen doesn’t work with US-based THC businesses to raise growth capital — but it has advised on most other types of transactions within state and federal legal confines, O’Reilly said.
“We had the benefit of a huge head start to understand the landscape and how to choose the right companies and the right transactions to work on.”
On top of research, Cowen also has a Washington-based policy group that keeps tabs on federal laws as well as a separate analyst who studies state rules.
O’Reilly sees increasing consolidation in the industry as well as tobacco and alcohol players making more investments in the space. Technology that services cannabis companies is also interesting to watch.
“It’s been hampered by a lack of capital access, but the industry’s been creative in structuring transactions where sellers take earn-outs and seller notes and obviously stocks,” O’Reilly said.
The Los Angeles-based boutique investment bank established a cannabis practice in late 2019 led by Senior Vice President Sam Scanlan, a father of two and an avid golfer.
The bank has two dedicated bankers as well as reinforcement from its consumer, food and retail banking, capital markets and financial valuation advisory operations. Houlihan Lokey draws on experience in its bread-and-butter middle-market advisory business.
“There are a lot of the same attributes in terms of leaner management teams, organization and needing a lot more than just a banker,” Scanlan said. On top of deal advisory, the bank provides tax and accounting services, as well as due diligence and valuation consulting for clients that may not have in-house resources, he added.
Scanlan sees plenty of consolidation and is working on bringing in traditional, noncannabis investors. “Our belief is that a lot of those pockets of capital are the ones that are going to cross over and help fill the supply and demand gap on the capital side.”
On top of being the only female banker I profiled in this space, Jefferies Managing Director Ariella Tolkin also uniquely sits within the bank’s health-care practice instead of consumer.
With a background in biotechnology transactions, she started covering cannabis in 2017 right before Canada legalized recreational usage. A year later, she made it her full-time job.
Based in Miami, Tolkin covers cannabis companies globally, including those in Germany and Australia. “Unlike other banks, Jefferies is a truly global bank, so I have resources in many countries,” she said.
In the US, the bank doesn’t provide any advisory or capital-markets services to directly plant-touching businesses, she said.
She expects to see a lot of stock-for-stock M&A activity for consolidation in the next six to 18 months, followed by a wave of capital inflow from sector specialists such as mortgage investors that could look at cannabis mortgage REIT assets.
Started in 2018, Moelis’s cannabis business is led by Managing Director Grant Kassel. He spoke to me in August about his practice, which includes 15 bankers across all levels.
Kassel and the bank estimate that cannabis will be a $100 billion market annually. He sees the larger investment banks eventually moving into the space, but thinks it will take time.
The collaboration between the bank’s M&A and restructuring experts are part of what differentiates Moelis from other practices, he says.
“We’re the leader in restructuring advisory in the cannabis sector, which is extra complicated given the lack of federal bankruptcy,” he said.
“From a growth vertical perspective, we’re spending a lot of time from a branded cannabis perspective because we think a consumer packaged goods-style coverage of this sector is where the industry will eventually go,” he added. The bank is also expanding internationally, with Europe being the first stop.
Partner James Wappler and Executive Director Chris Boffi lead the cannabis advisory business at boutique investment firm Perella Weinberg, which in 2018 began advising in the Canadian market.
“We provide strategic advice on mergers, acquisitions, capital structure initiatives, restructuring situations and liability management,” Wappler said.
“We’re a strategic advisory firm, so we’re not a ‘bank’ in a traditional sense,” he added. “We don’t provide loans or capital directly into companies. We advise on those initiatives.”
Buyers’ objective in M&A has changed recently to creating cash flow and improving profitability, versus the prior goal of establishing bigger footprints, Wappler said.
With a background in regulated consumer products including alcohol and tobacco, Wappler also envisions the sector becoming more mainstream and relevant to consumer companies in the longer run.
What You Need To Know
* A health ministry panel in Japan, said the country — which has strict laws against the use of marijuana — should consider approving the import, manufacture and use of medicines derived from cannabis.
* Canopy Growth’s stock climbed after the Canadian cannabis producer said it’s reducing its retail business with deals to divest its Tweed and Tokyo Smoke stories.
* An appeals court affirmed a bong maker’s win in a suit alleging it violated California’s Proposition 65 by failing to warn consumers that its products expose them to marijuana smoke that could cause cancer or reproductive harm.
* Irwin Naturals agreed to buy Keta Media, doing business as Ketamine Media, a platform for clinics offering ketamine-assisted therapy.
* Rutgers Law School plans to launch a six-month certificate in cannabis law and business in January, the New Jersey school said.
* Dutchie, a cannabis industry payment services provider backed by high-powered investors, has hired John Kelleher as its general counsel. Kelleher comes to Dutchie after more than a decade as legal chief for HubSpot, a sales software company he joined in 2012.
* Cannabis initiatives on state ballots this year include recreational legalization in Missouri along with bills in Arkansas, North Dakota, South Dakota and Maryland, Bloomberg Government writes.
* Atai Life Sciences announced the start of its phase-1 trial for its MDMA derivative.
California Cannabis Producer Adopts Blockchain To Track Its Weed
Clones will be certified with a smart contract on the blockchain to verify their authenticity and genetic lineage.
A California-based cannabis nursery has turned to blockchain and smart contracts to verify the authenticity of its medicinal plants.
The cannabis nursery, known as Mendocino Clone Company, was named in a partnership announcement from the EMTRI project and tech firm Global Compliance Applications on Jan. 13.
It will be harnessing the project’s blockchain capabilities to certify all clones, or baby plants, with a batch certificate.
Cannabis nurseries are establishments that specialize in plant genetics, producing clones and baby plants and seeds for the purpose of wholesale distribution.
The move allows the nursery to “document the beginning stages of a cannabis plant’s journey to becoming a premium product for consumers based on the gram weight it flowers,” it stated.
The batch certificate is a self-generated smart contract for each clone batch. It provides each baby plant with its own “unique identity block,” created by the nursery and linked to its Ethereum-based blockchain.
Its clients, which include commercial farms and retail dispensaries, can use this to verify the authenticity of their clones and their genetic lineage, it added.
The first round of batch certificate clones will be available starting the first week in February.
Additionally, licensed cultivators who purchase Mendocino clones will get access to EMTRI token (EMT) rewards and better rates for participating in the blockchain project.
EMT was launched in November to provide rewards for project participants. The tokens can be traded on Uniswap for USDC or staked for further yield. EMT is not listed on any centralized exchange or crypto market data platforms such as CoinGecko.
The co-founder of EMTRI Corp, Scott Zarnes, commented:
“We are excited to be at the forefront of the cannabis industry becoming the first in the United States to adopt this cutting-edge technology in this manner.”
Combining crypto with cannabis is not a new concept, however.
In November, a cannabis-themed Metaverse project called Cannaland was launched to create a virtual world for cannabis enthusiasts. In January 2022, a custom pipe maker launched tokenized bongs with celebs like Snoop Dogg and Santana snapping up the NFTs.
Projects such as PotCoin (POT) and CannabisCoin (CANN) aimed to provide a digital currency specific to the industry as far back as 2014, but they never really gained traction.