Bitcoin is helping the pot business get over its banking problem
Cannabis companies are turning to the world's most popular digital currency in an effort to get rid of all that cash.
The inability to access traditional financial institutions is one of the marijuana industry's biggest impediments. Legal cannabis was a $6 billion industry last year and is expected to grow to $50 billion by 2026, according to Cowen & Co. But because pot is illegal under federal law, big banks and credit-card companies steer clear. That's forced most merchants to accept cash only, a logistical headache and constant security threat.
Enter bitcoin, the cryptocurrency that consists of digital coins "mined" by computers solving increasingly complex math problems. At least two financial-technology startups, POSaBIT and SinglePoint Inc., use the cryptocurrency as an intermediate step that lets pot connoisseurs use their bank-issued credit cards to buy weed.
"There's no industry — whether it's the production and sale of cannabis or the production and sale of a cup of coffee — that can operate safely, transparently or effectively without access to banks or other financial institutions and traditional services," said Jon Baugher, co-founder of POSaBIT, whose technology is used by 30 dispensaries in Washington state. "That's where we thought we could leverage the use of digital currency."
Trove Cannabis, one of the Washington stores using POSaBIT, sold $3 million of marijuana last year — in cash — and does close to 3,000 transactions weekly. Trove became a POSaBIT customer in February after being on a waitlist for six months, according to Yin-Ho Lai, Trove's founder and chief executive officer. Since doing so, about 13 percent of customers have chosen to pay with credit or debit cards, Lai said, and those who do tend to spend more.
Here's how it works:
Once a customer decides on which marijuana product to buy, an employee asks if he or she would like to use cash or digital currency, Lai said. If the buyer prefers the latter, the Trove employee explains that the customer can use a credit card to buy bitcoin through a POSaBIT kiosk, with a $2 transaction fee tacked on.
The customer, who would now own bitcoin equal to the value of the purchase, can then redeem the currency in the store. Or the buyer can keep their bitcoin and use it anywhere else that accepts the currency. If the customer finishes the purchase in the store, POSaBIT, which pockets the transaction fee, then sends the value in U.S. dollars to Trove's bank account.
POSaBIT says it's taken steps to comply with federal and state laws regulating both marijuana sales and digital currency. For example, customers must present a valid ID that is scanned, encrypted and stored. Buyers are allowed to acquire no more than $150 in bitcoin to prevent money laundering. The company also has a nine-point fraud-detection program designed to thwart criminals, and requires that its retail customers have a bank account, not necessarily a given in the cannabis industry.
Pot is legal for both recreational and medical use in California, Oregon, Washington, Nevada, Colorado, Massachusetts, Maine, Alaska and the District of Columbia, and approved in 20 additional states for medical purposes only.
While the early bitcoin adopters are claiming success, the currency still has a long way to go before it gains wide acceptance. For many in the legal weed industry, the virtual currency's association with illicit drug dealing on the so-called dark web is a big drawback.
Others have a hard time grasping how a virtual currency works, including Neil Demers, who runs a cannabis store in Denver. At least for now.
"I'm sure education could enlighten me and a lot of this industry on bitcoin being a feasible payment option, but we just don't see it," said Demers, a franchisee of Diego Pellicer Worldwide Inc., which leases space to pot dispensaries.
It may only be a matter of time before pot dealers have an easier solution. The reluctance of banks to handle pot transactions will probably subside before the digital-currency solution has a chance to take off, said Jeffrey Zucker, co-founder and president of Green Lion Partners, a strategy firm focused on early-stage development in the cannabis industry.
"The banking issues are going to be solved in such time that the people in this industry are going to gravitate toward traditional banking," he said.
At least some companies say bitcoin technology will make sense in the cannabis industry even after traditional banking becomes available. SinglePoint, a mobile-tech firm that specializes in payments via text message, signed an agreement last week with First Bitcoin Capital Corp. to develop a solution for cannabis and other high-risk industries without access to traditional banking.
Two years ago, the Seattle-based company put terminals into dispensaries in Washington. Within six months, however, banks shut them down, citing too much risk, said Greg Lambrecht, founder and CEO. SinglePoint had considered using bitcoin at that time, but the currency wasn't well known, he said. That's changed, and SinglePoint now expects retailers to begin testing its new product over the next two months.
"It's not foreign to them now, like some sort of weird scam that they don't know about," he said. "More and more establishments are accepting it, but it's kind of like the wild, wild west."