ghost group

Banks can now work with marijuana companies, but is Bitcoin better?

February 17, 2014: 5:00 AM ET

Even with permission, banks aren't eager to work with marijuana companies.

140216175104-weed-marijuana-620xaFORTUNE -- Late Friday the U.S. government released new rules that allow banks to work with licensed marijuana businesses. Banks have been reticent to provide services to companies in the burgeoning marijuana industry because the legality is murky. Marijuana is legal for recreational use in Colorado and Washington, and for medicinal use in 18 other states.

The new guidance asks banks to identify any suspicious transactions related to marijuana, including distribution to children, and illegal trafficking.

The news is music to the ears of marijuana business owners, who have struggled to find banking options and often resort to using cash. In a New York Times article last month, the executive director of the National Cannabis Industry Association said banking was "the most urgent issue facing the legal cannabis industry today."

MORE: Marijuana manufacturing 2.0

But the new guidance doesn't explicitly authorize banks to do business with marijuana companies. After all, marijuana is still illegal under federal law. Because of this, marijuana companies are likely to continue to struggle to find banks.

Barry Silbert, CEO of Secondmarket and avid Bitcoin investor, said he believes the news won't change banks' stance on marijuana companies. He predicted that Bitcoin processors would be the first movers in this space.

Indeed, plenty of marijuana companies are looking into how they might use the Bitcoin platform in lieu of traditional banks. "It is definitely not too far in the future," says Aaron Houston, policy advisor for Ghost Group, a private equity firm which invests in marijuana companies like Weedmaps. "The future is now with respect to Bitcoin, regardless of marijuana or any business." He said plenty of people in the industry are interested in Bitcoin given the dearth of other banking options, but did not know of any companies currently using Bitcoin. The cryptocurrency is complicated for the average small business owner to implement.

Tony Gallippi, CEO of Bitcoin payments company Bitpay, said his company won't allow marijuana on its platform until it is legal on a federal level. Once that happens, he says, Bitcoin will be a lower cost option for doing business than other forms of payment offered by a bank, including credit cards or cash. It also offers a lower risk of fraud and theft for any business, not just marijuana, he says.

MORE: How marijuana munis could save the states

In the meantime, Houston predicts marijuana companies are more likely to flock to banks. He said many of Weedmap's clients, which are mostly small, local dispensaries, are openly working with major banks like Bank of America (BAC) and Wells Fargo (WFC). "They are completely up front with the banks," he says. "There is no category for them, but they're telling their bankers exactly what they're doing." But even those businesses with banks have horror stories about going to four different banks before finding one that would work with them.

Houston believes last week's news is a big step toward mainstream investors getting involved in the marijuana business. Last April, ArcView Investor Network pitch events, which are focused on marijuana companies, only pulled around 25 investors, Houston says. The latest one had 150 investors in attendance. Even public figures are getting in on the action: New York State Assemblyman Steve Katz is planning to invest $10 million of his own money into marijuana-related companies.

"The bankers might be saying [they won't work with marijuana companies], but the fact is the market is moving in one direction and those guys are living in the past," Houston says. He's obviously biased. Ghost Group's biggest investment, Weedmaps, has been growing like a, uh ... weed, hitting $30 million in revenue last year.

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