Bitcoin and Dispensaries: The Cannabis Connection

The South Bay Apothecary Collective medicinal cannabis retailer in San Jose closed this year. SBAC had been operating since 2009 (like Bitcoin), and since at least April 2013 it had accepted Bitcoin as a method of payment.

A perfect storm of proximity to the Emerald Triangle region, California’s relaxed stance on cannabis both medical and recreational – and access to technology know-how: San Jose is a hop away from Silicon Valley and hosts many tech firms of its own – resulted in one of the first experiments in legal Bitcoin sales at a brick-and-mortar cannabis retailer.

South Bay, Yelp and the Silk Road

SBAC was well loved by Yelpers (Dispensary review sites: Yelp is coming for you!) and the circumstances surrounding its closure appear to be unclear at this time. But if there is one thing we are used to seeing in the wide periphery of cryptocurrency circles, it is volatility.

Silk Road’s story is well known inside and outside of the scene. Less well known are other vendors operating in the burgeoning legal cannabis sector, who have accepted Bitcoin. After a year of small moves in that direction, it seems appropriate to present an overview of the state of cryptocurrency and legal cannabis.

There’s an obvious appeal to Bitcoin for legal cannabis retailers while the current state/federal legal dichotomy persists. For these businesses, Bitcoin and cryptocurrency in general has similar advantages to cash in that it does not require working with the big payment processing companies.

Banks and payment processing companies often have a stated policy of not working with businesses that directly deal with cannabis, and their services may be a non-starter for that reason. Additionally, the charges for running VISA or Mastercard are excessive compared to Bitcoin transaction fees – this is why small retailers often require minimum purchase sizes when paying with plastic.

In September, Bank of America announced it would be handling transactions related to Washington state’s newly minted recreational cannabis oversight programs. This was heralded as the beginning of a possible shift in financial industry policy, following the 2012 election season.

Publicity and talks

There have been a few public talks this year on the topic of Bitcoin and cannabis retail. Terry Floyd organized a Meetup.com event in January. His goal was to educate business owners about the potentials and methods of working with Bitcoin payment systems – including distribution of free software and education bundles. Terry had this to say about an earlier meetup at the same location in June 2012:
I asked if he used any of the bitcoin merchant tools, but he said the folks who organized the meetup took care of converting BTC to US$, so he still doesn’t use bitcoins for normal transactions.
So we see that a niche exists for reliable payment processing, a service that abstracts the cryptocurrency concepts for the business owners, and makes it easy for them to do their banking and other financial reporting in fiat currency.

Steve Kubby made a presentation in May at the Bitcoin Conference in San Jose. Here’s an excerpt from his summary:
California medical marijuana dispensaries pay over $100 million in state taxes each year, yet thanks to scare tactics by the federal government, medical marijuana dispensaries and their patients have been forced out of banks and credit cards. Now, everyone has no choice but to deal in cash. This creates a serious health and safety issue for those involved, as all that cash invites robberies and raids. KUSH Inc. has created a system using Bitcoins to provide both payment and physician authorization with one swipe of your smart phone or a card with just your photo and your Bitcoin address.
We don’t have too much to add to their analysis of the situation for these retailers – it’s fairly cut and dried.

Next steps?

In a cautiously encouraging move, the federal government has indicated it wants to change regulations to allow banks to work with businesses who are following state law. This would drastically ease operation for primary cannabis businesses, before any considerations about cryptocurrency come into play.

The conferences this year were a great start in terms of increasing awareness, and it’s inevitable that we’ll see more service providers competing to give good cryptocurrency payment processing consulting services to businesses in this sector.

More work almost certainly needs to be done in the areas of open source payment processing wrappers for Bitcoin and other cryptocurrencies. The adoption of Bitcoin will become much safer for businesses with an open source, peer-reviewed payment system to rely on. The current cloud solutions are simply non-starters for too many businesses who have watched thefts decimate service after service in the past few years, and would rather manage their own security.

The potential for cryptocurrency in terms of control, fast transactions, lower fees, and lack of vendor lock-in for all retailers is large, but the cannabis industry in particular has unique requirements which point to benefits from use of cryptocurrency. We’ll be following up as research continues to discover more use of Bitcoin in thriving medical marijuana markets – and in 2014, new legal recreational cannabis retail markets in Washington and Colorado.

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