Whoops, using crypto and cannabis don’t mix after all

Using crypto as an intermediary step ‘could potentially be seen as bank fraud,’ says Smoakland

Life comes at you fast. A couple of months ago I wrote how Smoakland was testing a loophole to sell cannabis by credit card. The test failed, apparently.

“Upon further review, it has come to our attention that the way the process was described in the article could potentially be seen as bank fraud. As a result, our process partner has terminated our relationship,” said Smoakland’s director of marketing and e-commerce Jeff Dillon, in an email to TechCruch.

It seems as if Smoakland isn’t the first vendor who’s gotten bitten by this.

Posabit is a specialized point-of-sales system for dispensaries. It did at some point offer the ability to buy crypto on a credit card and use that to buy weed, but that has disappeared from its current offering. In fact, the site updated its FAQ with a statement, saying “Why is credit card processing illegal? (…) Simple: Cannabis is categorized as a Schedule 1 controlled substance at the federal level, which makes it illegal. This hinders credit payment processors from deliberately working with cannabis businesses.”

Eaze, another of Smoakland’s competitors, also gave this a try, using the Circle stablecoin USDC to charge customers. However, the U.S. district court of the southern district of New York looked pretty dimly at its workarounds, stating in an omnibus memorandum, that “The Scheme involved the deception of virtually all of the participants in the payment processing network, including issuing banks and credit unions in the United States and Visa and MasterCard, through the use of fake merchant names, fake merchant locations, fake descriptions of the merchant activities, and fake merchant descriptors.”

The memorandum continues, “[the Eaze founders] also worked with and directed others to apply incorrect merchant category codes (“MCCs”) to the marijuana transactions in order to disguise the nature of those transactions and create the false appearance that the transactions were completely unrelated to marijuana.”

In other words: It seems that the government is continuing to take a dim view on circumventing the federal legislation around payment processing. That isn’t slowing down the Smoakland team much, though:

“We will now be moving forward with a bank-sponsored merchant services solution that allows users to pay by credit card,” Dillon said, and notes that the company is still pushing forward on being able to sell its wares and charge credit cards: “We approach the upcoming 4/20 date and having the ability to process credit cards would be a significant strategic advantage for us.”