My firm’s cannabis lawyers are always getting pitched on “creative solutions” to the cannabis industry’s banking problem. Because marijuana is still federally illegal, most banks will not provide financial services to marijuana businesses, even though way back in 2014 FinCEN issued guidelines to allow financial institutions to provide bank accounts to the state-legal pot businesses. Many of those with creative solutions are touting Bitcoin (i.e., cryptocurrency) as the solution.

Bitcoin is viewed as the world’s first completely decentralized currency. Unlike the Dollar, the Euro, the Yuan, etc., no central government manages or backs Bitcoin. It is also called a “cryptocurrency” — a digital currency that uses encrypted services to generate units of the currency and to transfer funds. You can read primers on it here and here. Using a Bitcoin wallet enables customers and businesses to engage in transactions without using paper currency and without going through an intermediary institution like a bank. Its chief appeal to the marijuana industry is that allows for currency transfers with little to no need for a bank. There are though significant issues involved with using Bitcoin in the marijuana industry and law enforcement associates Bitcoin with the illegal narcotics trade (see the Silk Road).

Since cannabis legalization and “medicalization” have picked up across several states, two major questions about pot and cryptocurrency have arisen. The first is whether cannabis businesses can substitute Bitcoin for a bank account, and the second is whether marijuana businesses should be allowed to accept Bitcoin when selling marijuana products.

Using Bitcoin to replace a traditional bank account does not make a lot of sense in the short term now that we have the FinCEN guidelines. Plus, using Bitcoin instead of a bank account would be a logistical nightmare for marijuana businesses since it has a low adoption rate; for a cannabis business to do a significant volume of business with Bitcoins, it would need buy-in from its customers, vendors, shareholders, employees, taxing authorities, and others, which isn’t likely to happen. And if a cannabis business owner is going to accept Bitcoins as legal tender it will in turn need to pay its employees and vendors and others using Bitcoins or else need to exchange its Bitcoins for cash. Exchanging Bitcoins for cash will necessarily involve either selling the Bitcoins for cash that goes into a bank account (the original problem everyone is trying to solve) or engaging in activities that will look a lot like money laundering to law enforcement.

Though there exists a “Crypto Cannabis Conference” (apparently coming up on its third annual meeting, no less) and though a slew of marijuana entrepreneurs are likely trying out Bitcoin, at least one state is trying to drop the hammer on such practices. At the beginning of January, Washington State proposed a bill to ban Bitcoin in its marijuana marketplace. The eight-page SB 5264 adds to the definitions section of RCW 69.50.101 (Washington’s Controlled Substances Act) the term “virtual currency,” and then proceeds to ban it for marijuana sales. Under the bill, “virtual currency” would be defined as follows:

a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government. “Virtual currency” does not include the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.

The bill then states that “[a] marijuana producer, marijuana processor, or retail outlet must not pay with or accept virtual currency for the purchase or sale of marijuana or any marijuana product.”

The Bitcoin ban bill was debated at length and Senator Ann Rivers, one of the bill’s backers, cited to the Cole Memo prohibiting the “shrouding” of anyone who participates in Washington’s marijuana industry as its justification. Senator Rivers contends BitCoin can’t meet the 2014 FinCEN transparency mandates. Tom Parker and Kenneth Berke of PayQwick also testified that Bitcoin does not satisfy FinCEN transparency guidelines and allowing it for Washington State marijuana businesses will invite federal enforcement and thereby harm the cannabis industry as a whole. On the other side of the argument, Ryan Hamlin and Jon Baugher of POSaBIT testified that BitCoin is perfectly traceable, auditable, verifiable, and transparent, and that the state needs to better understand BitCoin transactions before it bans its use in the marijuana industry.

Given the uncertainty of the state-legal marijuana industry under President Trump and Attorney General Sessions, as well as the precarious staying power of the Cole Memo and the FinCEN guidelines, Bitcoin may just be too risky for Washington State’s marijuana industry. And if other states fearful of added federal scrutiny become convinced of the same, the marijuana Bitcoin ban may eventually extend to the U.S. marijuana industry at-large.