The legal marijuana industry has grown rapidly in the U.S., with 38 states, three territories, and the District of Columbia legalizing its use for medical and/or recreational purposes. However, despite the industry’s growth, marijuana businesses continue to face significant challenges with payment processing and banking, primarily due to the federal prohibition of marijuana. This conflict between federal and state laws has led to an exploration of alternative financial systems, including the use of cryptocurrencies.
The Banking Challenge for Marijuana Retailers
The primary challenge for marijuana retailers is the inaccessibility of traditional banking services. Despite the state-level legalization of marijuana, the substance remains illegal under the Controlled Substances Act, 21 U.S.C. § 801, et seq., meaning that banks who provide services to marijuana businesses could be perceived as violating anti-money laundering laws.
While federal regulators have issued guidance clarifying how financial institutions can permissibly service marijuana businesses, many financial institutions remain hesitant, primarily due to the lack of complete assurance of protection from the federal government, as well as from the increased administration and oversight required to bank marijuana businesses. Moreover, for the financial institutions who do bank marijuana businesses, the costs of these services can be prohibitive.
The final result is that many marijuana businesses cannot find a depository institution to do business with. Marijuana businesses are thus forced to transact in cash, which creates several challenges related to receiving customer payments, sending payments to third parties, and securely storing large amounts of currency.
Cryptocurrency: A Potential Solution?
Cryptocurrencies may provide a viable solution to some of the cannabis industry’s banking problems, albeit with some potential challenges and risks. A cryptocurrency is a digital currency that enables users to store value, and engage in direct, peer-to-peer transactions with counterparties. These transactions are enabled by decentralized blockchain technology, which obviates the need for the traditional financial system. Cryptocurrencies thus present an opportunity for marijuana businesses to bank themselves.
While cryptocurrencies provide many benefits to marijuana businesses, marijuana businesses must also consider the concomitant risks, as detailed below.
The Potential Benefits of Leveraging Cryptocurrency in the Marijuana Industry
- Cryptocurrencies Are Readily Available to Consumers: For customers, purchasing cryptocurrency is typically a straightforward process. They can purchase and send cryptocurrencies using various mobile applications, which “host” the customers’ cryptocurrency wallets (i.e., accounts). This low barrier to entry means that potential customers can purchase cryptocurrencies in minutes, including from “off-premises” bitcoin ATMs.
- Cryptocurrency Transactions Are Seamless and Instant: Once purchased, cryptocurrencies can facilitate easy and fast transactions, allowing customers to pay for goods by simply scanning a QR code. While cryptocurrency transactions experience unpredictable settlement times and transaction fees at times, recent technological developments, like Bitcoin’s “Lightening Network” and Ethereum’s “Layer 2” solutions, have enabled instant transactions that cost a fraction of a cent. These innovations, however, require a higher degree of technological sophistication than traditional cryptocurrency transactions. However, as they mature, much of the difficulty will be abstracted away from the consumer, and thereby increase ease of use.
- Cryptocurrency Networks Are Impenetrable: In 2022, several cryptocurrency service providers collapsed due to alleged high-risk lending practices, commingling of customer funds, and fraud. As a result, some individuals mistakenly conflate these providers’ failures with cryptocurrency networks themselves, which are not the same. The Bitcoin network, for example, is one of the most secure networks in the world. Its security derives from the fact that control of the network is decentralized over tens of thousands of network participants, with no single individual able to alter it unilaterally. As a result, the only security concern individuals must address is the security of their own funds, which can be stolen by hackers and those with access to the private keys associated with a given cryptocurrency wallet. These risks, however, are fairly easy to mitigate.
- Stablecoins Mitigate Volatility Risk: Traditionally, cryptocurrencies like Bitcoin have seen significant price volatility, which may deter some businesses from accepting payments in cryptocurrency. However, several reputable companies now issue a cryptocurrency variant known as “stablecoins.” Stablecoins are cryptocurrencies whose value is pegged to a given currency. Stablecoins are backed by hard assets in a reserve account maintained by the issuer. To maintain the peg, issuers allow stablecoin holders to redeem them for dollars.
Stablecoins, however, present unique risks. Stablecoin holders must trust the issuer to maintain adequate reserves to satisfy user redemption requests. If an issuer experiences a liquidity crunch, the issuer may be unable to do so, and the stablecoin could lose its peg to its quote currency. This risk, however, has been mitigated by regulations requiring issuers to maintain reserves in pre-determined, liquid assets, like U.S.-backed securities.
- Cryptocurrencies Enable Marijuana Businesses to Bank Themselves: By allowing marijuana businesses to maintain custody of their funds without involving financial intermediaries, marijuana businesses can effectively provide banking services to themselves. They can store value on the blockchain, receive funds, and transact with third parties without involving a bank or other financial intermediary.
The Challenges and Risks
- Self-Custody Presents Risks of Loss: Unlike consumers, marijuana businesses cannot use hosted wallets to facilitate transactions. Attempting to do so could potentially reintroduce the challenges associated with the traditional banking system, since third-party wallet hosts and/or their payment processors may decline to facilitate cryptocurrency conversions for marijuana businesses. As such, marijuana businesses that receive cryptocurrency payments must custody their own cryptocurrency wallets. While relatively simple, self-custody requires some technical skills and additional safeguards. Moreover, marijuana businesses that custody their own cryptocurrency must exercise additional diligence to ensure wallets are adequately segregated from related entities’ and owners’ personal funds. A final concern with self-custody is that cryptocurrency transactions are irreversible, meaning that simple user errors cannot be remedied.
- Converting Cryptocurrencies Into Fiat Currency: Once a marijuana business amasses a significant amount of cryptocurrency, it may face challenges with converting the cryptocurrency into traditional currency. These conversions would also reintroduce some of the pre-existing challenges associated with traditional banking, since these counterparties may also be hesitant to facilitate large transactions with marijuana businesses.
- Tax Issues With Converting Cryptocurrency: In addition, converting cryptocurrency into fiat currency may create additional tax liability. Cryptocurrencies are currently taxed as property, meaning that any fluctuations in a cryptocurrency’s value may be taxed as capital gains or losses. While certain tax planning measures can reduce or eliminate the increased tax burden, implementing them may increase operational complexity in a manner that deters cryptocurrency adoption.
In conclusion, while cryptocurrencies offer potential solutions to the banking challenges marijuana businesses face, they also come with their own set of risks and challenges. As such, it is crucial for businesses considering this approach to evaluate the implications with professionals experienced in both the marijuana and cryptocurrency sectors.
 While this article discusses “cryptocurrencies” in general, specifics can vary based on the type of cryptocurrency used.
 Cryptocurrency “wallets” are the primary means by which cryptocurrency transactions occur. A cryptocurrency wallet is a digital wallet that allows users to store, send, and receive digital currencies.
 In contrast, marijuana businesses will need to “self-custody” their own cryptocurrency (meaning they manage their own funds without a hosted wallet) to avoid association with the traditional financial system. Self-custody is discussed in further detail below.
 For example, a major wallet host shut down a marijuana dispensary’s wallet, citing “federal regulations” and declining further comment.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.