An estimated 500 banks will work with medical marijuana companies, but the majority still won't.
Experts say the cannabis industry could be a front-runner in adopting bitcoin as a safer alternative to cash.
The cannabis industry may offer clues to the future of bitcoin.
Although medical use marijuana is now legal in more than half the states and recreational use is in some others, the drug is still illegal on the federal level. As a result, most major banks shun the marijuana business.
The cannabis industry, projected to grow to $50 billion from $6 billion by 2026, has long been in need of a financial solution.
Many in the industry are hanging their hopes on cryptocurrencies.
Technology companies like SinglePoint and POSaBIT are working to generate a payment method for dispensaries and consumers using bitcoin. In recent years, some cryptocurrencies have cropped up specifically for cannabis transactions, like PotCoin and HempCoin.
Before bitcoin was dominating headlines with its spectacular runup, there were people using it to buy illegal drugs. But now, ironically, some people in the marijuana industry are hoping bitcoin will bolster its legitimacy.
"That reputation is being turned around," said Wil Ralston, president of SinglePoint, which is creating an app called "SingleSeed" in which consumers and dispensaries can exchange bitcoins.
Some even say that the cannabis industry can lead other businesses to embrace virtual money.
While the number of banks that will work with medical marijuana companies is growing — estimated to be around 500 today — the majority still don't.
Another complication for most dispensaries is that they can't access typical merchant services, which companies need to accept credit or debit cards. There is no "cannabis" store identification, as there is with a flower shop or restaurant, and so most dispensaries remain cash only.
In 2014, SinglePoint, a mobile app payment company, placed terminals in medical marijuana dispensaries, in which people could use debit cards to make their purchases.
"They were going great," Ralston said. "Then overnight the banks shut them all down. There were no guidelines about how banks were supposed to interact with the cannabis industry. They didn't want to risk it."
Ralston said the attitude around cannabis at most banks remains: "We don't want to even bring up that word in our bank."
And so, he said, "we had to stop, and say, what other solutions are we going to provide?"
A vendor weighs buds for card-carrying medical marijuana patients.
Ralston and others at SinglePoint started looking into cryptocurrencies. Now, SingleSeed will allow dispensaries to accept bitcoin and consumers to pay with it.
SinglePoint won't stop with pot. He said 14 percent of the population is locked out of the banking system because they don't have credit or are involved in high-risk businesses.
Cryptocurrencies offer to provide these people an alternative, he said.
"Blockchain is applicable to any industry," he said. "We're letting consumers know, this is just an additional way to pay."
"Everybody wants to discuss the solution to the financial constraints of the cannabis industry," said Bryan Meltzer, a partner at Feuerstein Kulick, a law firm that represents people and companies in the cannabis business. "Cryptocurrencies and the marijuana industry have a natural intersection."
Meltzer said that in states where medical marijuana is legal, the government wants to know where the plant comes from. And all transactions need to to be recorded.
Blockchain, which shows a clear trail of the virtual money, could supply that level of transparency.
Jeffrey Zucker, co-founder of Green Lion Partners, a cannabis strategy firm, said the fact that most dispensaries are only able to accept cash poses dangers for buyers and sellers. He said he knows of a family that owns a dispensary and was recently robbed, losing all their cash for the day.
"It's an unnecessary risk," he said. Cryptocurrencies "could help the operator to avoid cash on hand, and therefore make it a little less dangerous for them."
Still, purchasing in bitcoin can mean additional costs for the consumer. The IRS has ruled that bitcoin and other cryptocurrencies are property, not currency, for tax purposes — meaning that transactions trigger either short- or long-term gains or losses that must be reported.
For consumers who are worried about securing their privacy, blockchain technology — the mechanism that's behind cryptocurrencies — tracks people by an identification number, called a "key," meaning that their name is concealed.
Leslie Bocskor, president of cannabis advisory and services firm Electrum Partners, pointed to the recent string of security breaches at major banks and credit unions as a comparison.
"We're seeing there are fewer risks with blockchain transactions than with your normal credit card," he said.
He said the cannabis industry, with all its idiosyncrasies, could end up being the first to fully embrace cryptocurrencies.
"If it finds a way to avoid the traditional banking system, other businesses would follow suit," Bocskor said.