During the recent years there was natural growth in two industries — bitcoin ATM installations reached almost 6000 as of end 2019 and cannabis industry legalization was happening steadily over time in various US states. In this article we check how the two industries fit together and factors that can be beneficial for both sides from synergy.
Bitcoin ATM industry
A short history about bitcoin ATM industry. The first development and first installation happened in 2013. Since then industry grew and matured with large companies operating this as a business nowadays. Bitcoin ATM allows to convert cash into cryptocurrency and in some cases vice versa to sell cryptocurrency and receive cash (35% of crypto ATM’s). In contrast to traditional bank ATM when it is normally just an interface to connect to your bank account and withdraw cash in the same currency as your bank account, cryptocurrency machines allow an exchange of fiat currency to cryptocurrency and vice versa.
Bitcoin ATM operators usually have a full cycle of currency exchange covered. That means when customer converts cash to bitcoin using ATM, an operator needs to convert bitcoin back to cash behind the scenes with a guaranteed commission rate. Usually, operators have cash collection services in place, that deliver cash to bank and then wire funds to cryptocurrency exchanges for conversion. The smooth operation requires the liquidity being available at various stages of money flow. For more details please check the following article on how the bitcoin ATM operations happen. What important here is that it is a primary business for bitcoin ATM operators to organize the exchange of funds, including organizing secure cash collection services, bank relations availability in order to wire funds to cryptocurrency exchange. This all by itself requires a lot of effort and not an easy process , especially getting bank relationships, which is a general problem of all businesses that constantly operate with cash and deposit large cash amounts to banks due to KYC/AML policies on traditional financial institution side.
Cannabis business industry
Cannabis industry has been steadily growing as well. The cannabis business is now legalized in many US states. It varies whether it is legalized for medical or recreational use, however, the trend is that more and more states adopt legal status of cannabis usage, which brings previously existing demand into official business areal, where companies can do this as a legal business.
The main disadvantages those companies face is the lack of bank relationships, as irrespective of being fully compliant and legal business on state level, on federal level marijuana is still considered illegal, and banks are still not willing to open accounts to such companies. This results in unbanked status for companies and they are forced to operate in cash, which produces many problems, including increased risk of theft and impediments on financial transactions. As an example, a Colorado-based cannabis company had to bring $3 million in cash to local IRS office in order to pay their taxes.
The primary business of cannabis companies is distributing goods. However, due to financial services access restriction the companies face they need to deal with many issues about storing large amounts of cash and distribution of it. This impedes contractual relationship with suppliers (payments to vendors) and employees (salary payouts), as one can’t pay via standard wire transfer. Cannabis vending machines are not supposed to hold large amounts of cash. The following video gives an overview how cash is handled by cannabis companies:
As reported in the video by Christian Hageseth, CEO of Green Man Cannabis, company operates 100% in cash and spends $12000-14000 monthly to handle cash, which is very expensive.
Cannabis vending machines
Cannabis vending machines are a great way to automate sales. The machines work in the same way as normal vending machines, but dispenses cannabis. Here is a video of a cannabis vending machine in Vancouver:
The owner claims machine generated hundreds of thousands of dollars revenue per month. The difference from normal vending machines, which have average item price of $1-2, cannabis vending machines have average price tag of $40-50 per item. Machines allow to control the eligibility of buyer, e.g. customer needs to scan digital ID card, which requires a pre-approval access, e.g. age restriction or proof that marijuana is needed as a medical treatment.
Another differentiation factor from standard vending machines, is that at latter one can buy items with credit card, however, due to limited access to bank services cannabis businesses can’t accept credit cards and cash is the only way of purchasing items.
Digital currencies might change the game here. And it already started as there are some cannabis vending kiosk providers already integrating acceptance of digital currencies. For example, American Green a company announced in 2014 that their cannabis vending kiosk will support acceptance of bitcoin. Checking up to date information, there seems to be no option to pay with cryptocurrency, machines requires finger vein scan in order to prove access to account:
American Green has many issues with investors, so in this case it could have been an advertising of cryptocurrency acceptance at kiosks back in 2014, being a PR on top of cryptocurrency hype, which never materialized. However, the idea of accepting cryptocurrency at cannabis vending kiosks in general is not that difficult to implement. There are many other vending machines types that accept cryptocurrency as a payment option. Here is a very early video from January 2012 of a purchase at vending machine with bitcoin:
Another company publicly known for moving forward with cannabis vending kiosks is Grasshopper Kiosks. The following interview with CEO of the company Ron Christensen brings some insights on their solutions and current state of cannabis industry in California, Illinois, and Washington:
Although it is not clear whether the main kiosk model “Grasshopper Kiosks” can accept cryptocurrency directly, the company also develops a “Grasshopper Pay” kiosk, which will allow to make payments for orders made from mobile app and be collected at kiosk. “Grasshopper Pay” allows to accept cryptocurrency and by itself can be run as a bitcoin ATM. Interestingly, the company uses the same hardware kiosk from Genmega, which is used by Genesis Coin for Satoshi1 and Satoshi2 bitcoin ATM models:
Cannabis vending machine and bitcoin ATM
Speaking about synergy that can be achieved between cannabis industry and bitcoin ATM industry. If the cannabis machines allow to buy items with cryptocurrency, crypto ATM’s can easily cover the function of converting funds from one form to another. Surely enough, users can buy bitcoins through other ways, e.g. online exchanges with lower fees, however, bitcoin ATM’s will be an easy conversion point for cash to cryptocurrency at particular location. Fast and easy.
The fees charged at machine can be compensated by lower / discounted price provided by cannabis business for cryptocurrency payments, as the risks of handling cash are eliminated. The flow in this case could be:
- customer checks what is the amount required to purchase goods
- customer buys bitcoins or another cryptocurrency at crypto ATM with cash
- customer pays at vending kiosk, or via mobile app with delivery at particular kiosk
- customer gets goods
What are the pros of this process for both sides of business:
- increase of revenue for crypto ATM operator as additionally to the ordinary userbase, the potential users of vending kiosks will use ATM;
- potential increase of revenue or profitability for cannabis business. It probably won’t increase as a revenue per se, as normally vending kiosks accept cash as of today. But it gives an advantage on reducing costs and losses;
- reduced risks and facilitation of transaction processing for cannabis company: now the cash handling is not required, as it will be covered by crypto ATM operator company.
What are the cons of this approach:
- additional step for end users to conduct a transaction and finalize the purchase. Instead of one-step process, now they first need to use bitcoin ATM to purchase cryptocurrency (using probably mobile wallet on the phone) and then use cannabis vending machine;
- Purchases of cryptocurrencies at ATM’s are discrete, that means some amount will be left in bitcoin wallet of the users, and stay there probably till next purchase, where funds can be collapsed (usually purchases at machines are allowed in $10 or $20 notes).
- The transaction flow in bitcoin might be not straightforward. When the user purchases bitcoin at ATM in most wallets it is not possible to use funds immediately. They need to be confirmed in a block first. On average, a block is found once in 10 minutes, but in some cases due to variance in probability it can take much longer, e.g. 30-40 minutes. If the user needs to wait between using crypto ATM and cannabis vending machine — this would be a nightmare from UX point of view. Solutions here could be:
- splitting in time two processes: buying crypto and using vending machine, e.g. if user purchases cryptocurrency in advance. But this is out of scope of the use case explained above;
- Another option if lightning network becomes more widely used and applied by ATM operators. Cryptocurrency machine could send a lightning transaction to user, which then can immediately be used at a vending kiosk.
- Alternatively, crypto ATM and vending kiosk can support other cryptocurrencies like Bitcoin Cash, which has relatively more secure 0-confirmation transactions, while RBF is not used there. In this way, user could send received cryptocurrency to vending kiosk immediately (chain unconfirmed transactions) and depending on the risk policy and defined miner fee by user’s wallet software the cannabis business can accept such transactions with 0-confirmation. Because in order to use a vending machine user needs to verify himself, the risk of double-spend is much lower. Alternative coin is Dash, with it’s InstaSend functionality the transactions are locked in by masternodes and this allows to use funds immediately after they are received from ATM.
As of today, there is already quite an overlap between crypto ATM and cannabis business industry as there are 7% of all ATM’s in the U.S. are located at tobacco and vape shops. The potential collaboration of vending kiosks and bitcoin ATM could bring this connection to another level and allow both sides to benefit.
The following interview with Brooke Royse-Maller (Helling Hands Herbals) gives a very good overview of how bitcoin facilitates payments and more importantly can facilitate payments for their business:
Main problems with adoption:
- Customer don’t have bitcoin — this is exactly where bitcoin ATM can play an easy on-ramp role;
- Customers who have bitcoins don’t want to spend it because it appreciates. Interesting idea that her husband came up is for customers who pay in bitcoin they track “credit” as per exchange rate on date of purchase and in case bitcoin goes up in price, they share the growth profits with customers by allowing to get free staff at shop. So the right incentives matter.
Further reading and listening
- California Bitcoin Diaries – Cannabis, ATMs, JP Morgan battles podcast.bitcoin.com/e781-California-Bitcoin-Diaries-Cannabis-ATMs-JP-Morgan-battles-more
- Bitcoin and Cannabis With Bitcoin Mom, Bill and Jack Mallers www.whatbitcoindid.com/podcast/bitcoin-and-cannabis-with-bitcoin-mom-bill-and-jack-mallers
- California City Official Uses Bitcoin Cash to Purchase Cannabis news.bitcoin.com/california-city-official-uses-bitcoin-cash-to-purchase-cannabis/
- Regulatory and Business Challenges in Crypto and Cannabis with Joshua Radbod of Avantpay: Ep 61 www.youtube.com/watch?v=oZ48_twG8R0