At least one marijuana dispensary in Colorado has reportedly begun accepting bitcoin.
Colorado's decision to legalize cannabis has been filling headlines for weeks, and the hype is still going strong.
Investors have been piling up in the marijuana market, ranging from reputable medicinal marijuana companies to highly speculative penny stocks.
The general public seems to be very interested indeed – outside some dispensaries the queues of pot lovers are incredibly large, resembling the lines frequently formed in front of Apple Stores following an iPhone launch.
However, there are a number of problems. Demand has been so strong that many dispensaries are having trouble getting enough marijuana to sell, although this is likely a temporary issue.
Banks playing it safe
A somewhat bigger problem for dispensaries lurks in federal law. They cannot accept credit card payments, so all purchases must be in cash – or bitcoin.
“Federal law has forced marijuana dispensaries to accept cash, and cash only – but bitcoin is a tempting alternative.”
Bloomberg's Matt Miller believes that this is because banks are simply not willing to enter the market, which is understandable.
Most US credit card companies are headquartered in Delaware rather than Colorado – and cannabis is still very much illegal in Joe Biden's home state.
Banks and credit card companies are playing it safe. They must comply with federal legislation and although it might be possible to come up with a workaround, they do not appear interested at this point.
Federal law has forced dispensaries to accept cash, and cash only – but bitcoin is a tempting alternative. Anonymity does not matter, since recreational marijuana is legal in Colorado, but with no credit cards in the mix, it is practically the only alternative.
Sales of recreational marijuana in Colorado are reportedly exceeding $5m a week, and banks simply cannot enter the fray until regulators give them the green light.
Drugs, cash and prohibition
Some pundits are comparing Colorado's decision to legalize marijuana to the demise of the 18th Amendment, which prohibited sales of alcohol in the US back in the roaring twenties.
When the 18th Amendment was enacted, the government lost a fair slice of tax revenue, but the prohibition also loosely coincided with the introduction of federal income tax in 1913. In other words, the government could afford to lose a bit of revenue in order to appease the temperance movement.
The prohibition did not work, as it forced millions of Americans to break the law on a daily basis, becoming scofflaws. It also ushered in a golden era for organized criminals running rum from the Caribbean, whisky from Canada or distilling potentially deadly bathtub 'moonshine'.
The 18th Amendment was repealed at a time when the US needed as much tax revenue as possible, just as the country was starting to emerge from the Great Depression.
Bitcoin's critics like to point out that digital currencies are often used for illicit transactions, like buying illegal drugs. This is, of course, the case with practically every currency on the planet.
Drugs are the reason why the largest denomination of the US dollar is the Ben Franklin-themed $100 bill.The Nixon administration discontinued all larger denominations in 1969, arguing that the move would make it more difficult for drug traffickers to transport and launder their profits.
There are about 350 licensed dispensaries in Colorado, and many analysts believe annual marijuana revenue could be as much as $500m, which is relatively high for a population of 5.2 million people (no pun intended).
The National Cannabis Industry Association predicts medical marijuana sales of $250m, along with more than $200m in recreational sales. Nationwide, the government-regulated marijuana market is expected to double to $2.3bn.
With as much as half a billion dollars up for grabs, banks will no doubt try to enter the market, but this may not be as easy as it seems. For example, if they get an exemption, the next administration might simply revoke it.
However, Colorado may have a vested interest in getting banks on board. In other words, bitcoin has a chance, but banks will inevitably crack the market sooner or later.
The state wants to raise $70m in tax revenue from cannabis sales this year. However, the figure may end up even higher due to high demand (pun intended).
Cannabis Plant Image via Shutterstock