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

Image credit: Haje Kamps / TechCrunch

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 that Smoakland is not the first supplier to have been bitten by this.

Posabit is a specialized point of sale system for dispensaries. It once offered the ability to buy crypto on a credit card and use it to buy weed, but that has disappeared from the 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, making it illegal. This prevents credit card payment processors from knowingly work with cannabis companies.”

Eaze, another of Smoakland’s competitors, also tried this, using the Circle stablecoin USDC to charge customers. However, the U.S. District Court for the Southern District of New York took a rather dim view of its solutions, stating in an omnibus memorandum that “the scheme involved defrauding virtually all participants in the payment processing network, including issuing banks and credit unions in the United States and Visa and MasterCard, through the use of false merchant names, false merchant locations, false descriptions of merchant activities, and false merchant descriptions.”

The memo continues, “[the Eaze founders] also worked with and directed others to use incorrect Merchant Category Codes (“MCC”) on the marijuana transactions to disguise the nature of those transactions and create the false appearance that the transactions were completely unrelated to marijuana.”

In other words: It appears that the government continues to take a dim view of circumventing the federal legislation around payment processing. However, that doesn’t slow the Smoakland team down much:

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