Legal Marijuana Is a Chance for Bitcoin to Shine

Sales of legal marijuana in the United States are expected to hit $7.9 billion this year, up from $5.7 billion last year - with just one obstacle preventing sales from growing even faster.

Legal marijuanaHere's the problem. Dispensaries in states that have legalized marijuana have run into a roadblock when it comes to methods of customer payments. The big credit card companies and most banks refuse to do business with marijuana dispensaries, despite legalization.

That means no credit cards or checks can be used to buy, forcing a cash-only policy among most legal marijuana stores.

The good news is that a solution already exists: the digital currency Bitcoin...

Why Legal Marijuana Sales Make Banks Nervous

Banks are skittish about marijuana dispensaries because while an increasing number of states have legalized marijuana, the substance is illegal at the federal level.

As a highly regulated industry, banks want nothing to do with any business that deals in a substance that violates federal law. Technically, dealing in cannabis remains a federal crime even in states that have legalized it because federal law trumps state law.

And that doesn't figure to change any time soon.

In August, the Drug Enforcement Administration (DEA) reiterated is intent to keep marijuana classified as a "Schedule I" substance - illegal for any purpose, including medicinal needs. Heroin is also a Schedule I substance.

Must Read: Former Google Exec Quits Dream Job to Launch Marijuana Empire

As long as the DEA continues to dig in its heels, banks will continue to shun the nation's growing number of marijuana dispensaries. Recreational marijuana is now legal in eight states and the District of Columbia. Medical marijuana is legal in 28 states as well as the District. At least six more could legalize marijuana in 2017.

legal marijuana sales

Remaining cash-only businesses might seem to be an acceptable solution for the marijuana dispensaries, but it carries serious risks.

For one thing, cash makes managing the business's finances much more difficult. Taxes must be paid in cash. Large bank deposits of cash must be made in person.

Worse still, all that cash presents an irresistible target to thieves. And armed robberies of marijuana stores are on the rise.

In a June 19 robbery of the Green Pot dispensary in the Denver suburb of Aurora, a security guard was shot in the head and killed. Four days later, a guard at a medical marijuana dispensary in San Bernardino was also shot in the head; he survived.

Medical marijuana dispensaries need a better payments solution, and Bitcoin fits the bill...

Why Bitcoin Makes Sense for Marijuana Stores

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Bitcoin is a decentralized system that isn't owned by any government or financial institution. That makes it immune to the kinds of fears and concerns keeping the banks at bay.

And yet Bitcoin is easily convertible to U.S. dollars via one of the many Bitcoin exchanges. Most businesses that accept Bitcoin now do just that to avoid the volatility associated with the digital currency.

Bitcoin also offers customers a degree of anonymity they don't have with credit cards.

Some intrepid marijuana dispensaries accept Bitcoin now. In addition to accepting Bitcoin outright, some stores use the ZaZZZ vending machine, which takes cash as well as Bitcoin.

In Colorado, a group of frustrated hemp farmers founded their own Bitcoin-based payments company, 1620Solutions, specifically to serve marijuana dispensaries.

Stores who use 1620Solutions make it easier to accept Bitcoin by handling the conversion of revenue to U.S. dollars and transferring the funds to a Visa debit card.

And more Bitcoin-based solutions are on the way...

Bitcoin Companies See Opportunity in the Legal Marijuana Boom

One of the most promising is Tokken, also based in Colorado. The company is expected to launch its service early in 2017.

Until recently, Tokken's founder and CEO, Lamine Zarrad, served as a federal bank regulator, an examiner with the Office of the Comptroller of the Currency (a division of the Treasury Department). He's using his experience to build a system he believes will bring banking to the cannabis industry.

Tokken will provide customers with a smartphone app that can be linked to regular bank accounts and credit cards. When the customer pays, the money is moved into Tokken's system.

There the transaction is recorded on Bitcoin's blockchain (the network technology that underpins the digital currency) and the appropriate amount of "Tokkens" is placed in the marijuana dispensary's account. The stores can then either use the Tokkens to pay others using the system (like hemp farmers) or convert them to U.S. dollars.

Routing the transactions through the blockchain avoids the risk of money laundering, according to the company. That's the biggest fear banks have about doing business with marijuana stores.

The most complete solution may come from First Bitcoin Capital Corp. (OTCMKTS: BITCF), a fintech company dedicated to creating Bitcoin-based payment solutions.

First Bitcoin Capital announced in October that it had signed a merchant account processing agent agreement with an unnamed credit card processor to operate in the states of California and Oregon.

First Bitcoin Capital said the agreement will allow it to "provide a full suite of financial services for the medical marijuana industry: merchant processing and [point-of-sale] solutions through its alliance network, a fully compliant, user-friendly solution to accept credit and debit cards through traditional merchant card processing networks."

The company said that it intends to add more states as it becomes legally feasible.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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