By Steven Schain

Imagine selling a product subject to 38 conflicting sets of labelling and marketing regulations that can neither cross state lines nor be purchased with a credit card.

Now envision a global marketplace platform free of “transportation, purchase or regulatory restrictions” which also reduces costs, accelerates transaction processing, and provides access to a massive, untapped market.

While offering to solve Cannabis’ most severe woes, it is unclear whether “shared, immersive virtual world” Metaverse’s reach exceeds its grasp or whether cryptographic, blockchain asset Non-Fungible Tokens are “all flash and no cash”.

Cannabis Industry’s Regulation and Limitations

Whether deemed “medical” (purchasable only with state-issued card to treat residents’ statutorily defined “covered medical condition”) or “adult-use” (purchasable by anyone over 21 from any state with a valid identification), Cannabis takes four (4) forms: “flower” that is smoked; “oils” ingested by vaporizing; “concentrates” consumable after being heated to a high temperature; and “infused” products ranging from eye drops to “edibles”.  Those cultivating, processing, infusing, transporting or dispensing Cannabis are deemed to be “plant-touching” Marijuana related businesses (“MRBs”) and, despite being legal in 38 American states, Cannabis remains federally illegal.

The Controlled Substance Act, 21 U.S.C. §§ 801, Et. Seq(1970) (“CSA”) currently lists Marijuana  next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision”.  21 U.S.C. §812(b)(1).  The CSA prohibits Marijuana’s cultivation, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s Supremacy Clause, state laws conflicting with federal law are generally preempted and void.  U.S. Const., Art. VI, cl. 2; Wickard v. Filburn, 317 U.S. 111, 124 (1942)(”[N]o form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).

As a result of this federal illegality, plant-touching MRBs are denied federal privileges like trademark protection.  In re Brown, 119 USPQ2d 1350, 1351 (TTAB 2016). Further, because the CSA prevents Cannabis from being sold outside of each respective legalized-Marijuana state and, thus, no “interstate Cannabis commerce” can occur, state regulators like Pennsylvania’s Department of Health, and not federal agencies like the Food and Drug Administration, issue licenses and regulate MRBs.  Thus, 38 states (and myriad respective state agencies) issue and enforce Cannabis labelling and marketing regulations which, in turn, often conflict with each other.

Another federal-illegality-created-issue is that any transfer or deposit of monies yielded from Cannabis’ sale may deemed “money laundering” in violation of 18 U.S.C. §1956 for the “seller” and a Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970, 31 U.S.C. 5311, Et. Seq(“Bank Secrecy Act”) violation for the bank accepting the deposit and “failing to identify or report financial transaction involving proceeds of Controlled Substance Act violation”. “FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses,” FinCEN, February 14, 2014 (“because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana related business would generally involve funds derived from illegal activity”).

Stated another way, MRBs are hamstrung by being barred from interstate commerce, denied or limited in the marketing and advertising tools that every other industry enjoys, and often denied and impeded in obtaining standard banking and payment processing services.

Cryptocurrency, Blockchain and NFTs

Like any form of legal tender, “Cryptocurrency” serves as a “store of value and “method of value exchange”.  Unlike other legal tender, Cryptocurrency is neither paper nor plastic, operates independently of a central bank, and lacks depository insurance. Instead, it is an anonymous and decentralized virtual medium of exchange using encryption to regulate currency unit generation and verify fund transfers.

Specifically, Cryptocurrency takes the form of “tokens” stored in a virtual “Digital Wallet” having a unique username-and-password-created address, which, by omitting the owner’s personal information, confers complete holder anonymity.  Cryptocurrency exists on a continuously growing list of records, that, when linked together using cryptography, forms a “Blockchain”, i.e., an open, distributed ledger recording transactions between parties in a verifiable and permanent way.  Thus, although anonymous as to the transacting parties, Blockchain-network-transactions carefully track the subject “exchange” and remove intermediaries (ex., banks) creating permission-less interactions between users, reducing costs, and accelerating transaction processing.  For example, Ethereum is a decentralized, open-source blockchain for which “Ether” serves as the platform’s native cryptocurrency and enables instantaneous funds-settlement with zero fees.

Unlike respective cryptocurrencies (which are identical and serve as a medium of exchange), Non-Fungible Tokens (“NFTs”)  are cryptographic blockchain assets with unique identification codes and metadata distinguishing each from the other which cannot be traded or exchanged at equivalency, i.e., “non fungible”.  Think of NFT’s as “one-of-a-kind electronic baseball cards” with no objective value (other than to owner and speculators) which can be traded by utilizing blockchain technology.

Recently online auction site Christie’s valued an NFT titled “The First 5,000 Days” at $69 million, artists including Kings of Leon, Shawn Mendes, and Grimes have released songs in the NFT format, and, according to ReportLinker.com, the global NFT market size will grow from $3.0 billion in 2022 to $13.6 billion by 2027.

 What is the Metaverse

 Accessible via a computer, virtual reality headset, or smartphone, the Metaverse is a shared, immersive virtual world in which players (represented by avatars) interact with each other, construct experiences, and create in-world objects and landscapes.  Like a virtual, all- inclusive Disney resort, each Metaverse has its own economy and accepts currencies in which users buy, sell, and trade items and gain access to live events.

The Metaverse’s current real-world applications include shoppers trying on virtual clothing on a digital self-representation before making a purchase or homeowners previewing a remodel or furniture in a digital recreation of their house.

A “crypto metaverse” incorporates blockchain into its underlying technology and crypto assets, such as metaverse tokens, into its economy. Metaverse crypto assets and items are represented by different types of metaverse tokens, the ownership of which is recorded on the blockchain and can even be exchanged for digital assets (ex. Bitcoin and Ether) on decentralized exchanges. 22a2aqq2Businesses have established virtual headquarters in crypto metaverses holding virtual events and festivals. For example, in 2021 auction house Sotheby’s opened a digital replica of its London headquarters in Decentraland, a multi-room virtual art gallery regularly hosting live concerts, conferences, and meetups.

Marijuana Related Businesses Leveraging the Metaverse to Dodge Obstacles

The Metaverse enables MRBs to harness tools prohibited by the dominant digital advertising platforms (ex. Google, Facebook and Instagram) which ban advertising and content attempting to “buy, sell, trade, donate or gift” Cannabis and bar “sale or use of illicit or recreational drugs” promotion.

Instead, Metaverse platforms’ Cannabis internal policies range from prohibiting “discussing, depicting, or promoting illegal or highly-regulated activities” to Decentraland and Voxels, which welcome MRBs satisfying guidelines including “not serving users in countries where the product is prohibited” or “prohibiting Cannabis sales, but allowing open simulated dispensaries”.

MRB’s Kandy Girl, and Golden Ark have already set up shop in the Metaverse accepting purchasers of both digital items (like NFTs and Metaverse wearables) and actual Cannabis products styling their Metaverse storefronts as virtual dispensaries.  For example, Kandy Girl is selling THC-infused gummies (consisting of no more than .3% delta-9 THC extracted from hemp legal under federal law) with accompanying NFTs in Decentraland.  Although purchasers are presently limited to states in which Cannabis products are legal, with Federal legalization on the horizon brands already known to purchasers will have a head-start after nationwide sales commence.

Metaverse-operating MRBs also use digital storefronts to enhance customer service.  For example, budtenders can showcase the full range of products and strains while simultaneously gathering and assimilating consumer data.

Before entering the Metaverse, MRBs must clearly understand both the respective advertising and marketing regulations of the states in which they are licensed (and aspire to operate) and the particular Metaverse’s specific terms of service.  For example, Decentraland’s Terms of Use state: “In the event that fraud, illegality … is connected with your account, a decentralized autonomous organization (DAO) may suspend or block your account.”

Utilizing Imbedded NFT Coupons to Sell Cannabis

As a workaround to current “Cannabis commerce restricting laws” (ex., CSA, Bank Secrecy Act, §280(e) of the Internal Revenue’s Tax Code), edgy MRBs are exploring using “imbedded coupons or vouchers” carried by NFTs to purchase Cannabis in the Metaverse.  For example, like a stick of gum accompanying a baseball card, an MRB-issued-coupon could be attached to a purchased NFT that then is exchanged for Cannabis.   No money changes hands and, technically, the transaction is neither tracked nor taxed.

While Cryptocurrency, NFTs and the Metaverse are rapidly developing (and will be subject to domestic and international legislation, taxation, regulation and reporting), leveraging these currencies and platforms to circumvent existing laws and vendor policies is a recipe for disaster.

If heading down this path, MRBs should only create and implement imbedded coupons or vouchers which:

•  all look alike;
•  are not currency, security or investment;
• have no commercial value in and of itself (and so states on the coupon);
•  have a “value” created solely by product’s vendor (and not the market) to drive a promotion (ex., vendor simultaneously having several discounted products and each coupon for which carries a different value);
• are not fungible (carrying no exchangeable value from vendor to vendor, or in the public) and worth only what a particular vendor is offering for promoted item;
•  are not inherently unique but carry a serial number for identification and                                               counterfeiting-prevention purposes;
• are attached to an NFT and, as containing a unique serial number, is traceable to the discounted-product being offered; and
• are terminated from further use after it has been exchanged for goods and services.

Copyright ©2022 by Steven M. Schain, Esquire

Reprinted with permission from the November edition of The Legal Intelligencer©2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].