On the surface it seems like a match made in heaven. Bringing together two of the fastest-growing things on the planet -- the marijuana industry and bitcoin -- should allow bitcoin to gain new exposure and legitimacy as a digital currency, and it gives the pot industry a means to get around its banking issues.
The marriage of bitcoin and marijuana
According to cannabis research firm ArcView, the North American legal weed industry could grow to more than $22 billion in sales by 2021, which would be triple what was sold legally in 2016. However, what's been keeping the industry from growing at an even quicker pace are a number of inherent disadvantages created by the U.S. federal government's scheduling of marijuana.
The U.S. government currently lists marijuana as a schedule I substance, meaning it has no medical benefits and is entirely illegal, just like LSD and heroin. This scheduling makes it very difficult to conduct the clinical studies lawmakers have requested on cannabis' benefits and risks.
Furthermore, there are tax disadvantages, with pot businesses being unable to take normal corporate-tax deductions. And finally, because banks report to the Federal Deposit Insurance Corporation (FDIC), a federally created entity, providing basic banking services to pot-based companies could be construed as money laundering under a strict interpretation of federal law. Thus, most deal only in cash, which is a security concern and growth inhibitor.
This is where cryptocurrency bitcoin enters. Some marijuana retailers have partnered with businesses that use the digital currency as a bridge between the consumers and the product (marijuana). A consumer has the option of paying a weed retailer in cash or using their credit card to purchase bitcoin that amounts to the value of their transaction in a weed-based store. The consumer then pays for the goods with their bitcoin, and the intermediary service then converts the bitcoin back to U.S. dollars for the pot-based retailer. This way consumers have a means of using their bank-issued credit card, retailers have a means to move beyond cash as their only option, and the intermediate service provider receives a transaction-based fee. Everyone wins -- especially bitcoin with the added publicity, and marijuana retailers since bitcoin customers who use their credits cards tend to spend more.
Bitcoin's "smart move" could wind up backfiring
However, investors who expect this marriage of bitcoin and marijuana to be successful could be sorely mistaken. While it's working in a select few states at the moment and helping to provide some legitimacy to bitcoin, it also gives bitcoin a pretty clear path to shooting itself in the foot.
The allure of bitcoin includes its relative anonymity, the fact that it's not backed by any global currency like the U.S. dollar, that it's a decentralized platform, and that it's essentially challenging monetary theory. But when introduced as a bridge currency between credit-holding consumers and marijuana, bitcoin becomes a prime target of U.S. regulators who still hold marijuana to be an illegal substance. Yes, the tide has turned substantially in the U.S. with regard to the percentage of consumers who want to see recreational and medical marijuana legalized, but that doesn't change the fact that it remains a schedule I substance in Washington, D.C.
Arguably the worst thing that could happen to bitcoin is that the U.S. federal government decides to put its foot down on the cryptocurrency. As we've seen, anonymity and security are already two of the biggest drawbacks of owning and investing in bitcoin, and acting as a bridge currency for a still federally illegal industry could only further prove the point of skeptics that bitcoin is a haven for criminals. The U.S. has previously used its banking might to financially starve criminals, foreign and domestic, but if there's a virtual currency system that's difficult to track, this route makes it difficult for the U.S. to cut off funding.
If the federal government were to implement regulations that made buying bitcoin more difficult, it could decimate a market that's still thinly traded compared to the daily share volumes you'd see exchanged on a reputable exchange like the NYSE. In other words, bitcoin's alliance with the marijuana industry is one gigantic gamble that could backfire.
Change is unlikely anytime soon
If the federal government changed its stance on marijuana at some point soon, this gamble might be worthwhile, but the chances of that happening are slim at best.
The U.S. Drug Enforcement Agency (DEA) had an opportunity to review two petitions for rescheduling last August and chose to keep everything as-is. The DEA determined that there was insufficient evidence of a benefit-versus-risk profile for cannabis, and also deemed it too dangerous to reclassify weed given a lack of proper patient oversight for administration of the drug. Since the DEA can take years to hear petitions, it's unlikely it'll review cannabis again anytime soon.
Additionally, the weed industry is unlikely to get any sympathy from the Trump administration. White House press secretary Sean Spicer commented in February that the administration would get tougher on federal marijuana regulations than the Obama administration, which is only reinforced by having Jeff Sessions, a clear-cut opponent of marijuana's expansion, as U.S. Attorney General.
The industry dynamics we've been accustomed to -- a long list of inherent disadvantages that often to lead to steep losses for marijuana stocks -- are likely to continue for at least the near-term, which bodes poorly for bitcoin's efforts to legitimize its currency through an alliance with marijuana companies.
The Motley Fool has a disclosure policy.