Crypto-Currency; A Cannabis Banking Blight

The marijuana industry is a rapidly expanding sector that has proven profitable for licensed marijuana businesses and the financial institutions that serve them. These profits are often manifested by piles of cash that are costly and dangerous to handle. To solve this problem, some marijuana businesses have turned to crypto-currency as an alternative. However, crypto-currency only complicates the marijuana industry by exposing both crypto-currency users and the banks that serve them to liability for money laundering and tax evasion, thereby putting Washington’s entire legal marijuana industry at risk.

What is Crypto-Currency?

Neither paper nor plastic, crypto-currency is an anonymous and decentralized virtual medium of exchange. By using encryption techniques to regulate currency unit generation and verify fund transfers, crypto-currencies like Bitcoin, Coinye, Decred, Gulden, Gridcoin, Litecoin, MazaCoin, Monero, Namecoin, Nxt, Peercoin, PotCoin and Ripple operate independently of a central bank. To use and store crypto-currency, an individual creates a virtual “wallet” with a personalized username and password. Every wallet has a unique address, which is linked to its owner’s username. The wallet does not store personal information about its owner, granting the owner complete anonymity. To obtain crypto-currency, individuals can buy existing crypto-currency units or “mine” new ones. Mining is the process by which individuals can acquire undiscovered units of crypto-currency by solving mathematical equations. Unlike traditional currency, which has no finite limit and can be minted and multiplied as necessary, once the maximum number of a type of crypto-currency has been mined, no new amount of that crypto-currency can be created.

If this seems complicated, it is. In March 2014, the Internal Revenue Service (IRS) released Notice 2014-21 to explain “how existing general tax principles apply to transactions using virtual currency.” In Notice 2014-21, the IRS stated that while “in some environments, [crypto-currency] operates like ‘real’ currency… it does not have legal tender status.” In the last few years, the United States Securities Exchange Commission has charged numerous crypto-currency reliant companies with ongoing unlawful and fraudulent activities, citing that “[f]raudsters may…be attracted to using virtual currencies to perpetrate their frauds because transactions in virtual currencies…have greater privacy benefits and less regulatory oversight than transactions in conventional currencies.” SEC Pub. No. 153 (7/13).

Who Uses Crypto-Currency?

Crypto-currency’s anonymity and decentralization are especially convenient for drugs, arms and child pornography sellers. As illustrated by the Silk Road, one of the dark web’s most notorious marketplaces, crypto-currency allows these parties to anonymously engage in illicit transactions and avoid detection.
Illicit actors are not alone in recognizing crypto-currency’s advantages. Crypto-currency also appeals to state licensed marijuana businesses. Because of marijuana’s current status as a Schedule I controlled substance, many banks will not serve marijuana businesses. Consequently, these businesses rely heavily on cash, which is both cumbersome and extremely dangerous. To find a cash alternative, some marijuana businesses have turned to debit/credit card processing (swipe) machines that use crypto-currency.

What are the Dangers?

While crypto-currency may seem like a viable cash alternative, in reality, it allows marijuana licensees to launder money from illegal drug sales and avoid paying taxes. To minimize the risk, the Washington Liquor and Cannabis Board (LCB) has specified that marijuana businesses may only purchase marijuana with cash, checks, debit/credit cards, electronic funds transfers, prepaid accounts or via a licensed money transmitter. See, WAC 314-55-115. However, marijuana retailers are not banned from accepting crypto-currency as payment from consumers, exposing the banks that serve them to potential liability for the retailers’ illicit actions.

Swipe machines that allow consumers to pay marijuana retailers using crypto-currency could be used to facilitate money laundering in just a few simple steps. For example, a retailer sets up an account with the swipe machine provider and instructs the provider to send funds from crypto-currency transactions to a bank account not held in the retailer’s name. Once the swipe machine is set up, the retailer has a “strawman” purchase crypto-currency using a debit/credit card and reimburses the strawman using cash the retailer received from an illegal (black market) sale of marijuana. The retailer then sells the crypto-currency back to the swipe machine provider, which transfers the funds to the retailer’s designated bank account. At this point, the funds from the black market sale of marijuana have been effectively laundered.

Marijuana retailers could also use crypto-currency to sell marijuana that does not comply with state regulations and divert the funds from these sales to an unaffiliated bank account. Finally, if a marijuana retailer uses crypto-currency to divert funds from legal marijuana sales to an unrelated bank account, the business could under-report its gross income and thereby avoid paying income and excise taxes.

What are the Consequences?

Crypto-currency’s penchant for unlawful transactions threatens Washington’s legal marijuana industry. Under the guidelines outlined in Deputy Attorney General James M. Cole’s 2014 memorandum titled Guidance Regarding Marijuana Enforcement (the Cole Memorandum), the federal government will not use its limited resources to prosecute marijuana businesses that abide by their state’s regulations and do not implicate the memoranda’s eight enforcement priorities. These enforcement priorities include “preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels” and “preventing state-authorized marijuana activity from being used as a cover or pretext for…illegal activity.”

As illustrated above, use of crypto-currency could implicate the enforcement priorities from the Cole Memorandum by facilitating money laundering, tax evasion and the unlawful diversion of marijuana sale revenues. Consequently, crypto-currency’s use could lead to widespread federal prosecution of marijuana businesses and eviscerate Washington’s marijuana industry altogether.

What Can Banks Do?

To protect themselves, banks must vigilantly monitor their marijuana clients for crypto-currency use. Monitoring clients can be a timely and expensive task for banks. To alleviate these costs, banks can work with third party compliance companies like PayQwick, which ensure licensed marijuana businesses remain compliant and do not use crypto-currency.

No matter how banks monitor their clients, they should not accept funds that were ever held as crypto-currency and should further ensure that none of their marijuana clients use crypto-currency. Moreover, if a bank discovers that one of its clients has been using crypto-currency, the bank should take appropriate action.

Re-Published from CBW Winter Newsletter

By Kenneth J. Berke, PayQwick, LLC’s Co-Founder and CEO, and Sahar Ayinehsazian, PayQwick, LLC’s Manager of Regulatory and Governmental Affairs.

PayQwick is a federally registered money services business, licensed as a money transmitter in both Washington and Oregon. PayQwick provides BSA/AML and state law compliance, cash management and electronic payment services. For more information, contact Kenneth J. Berke at, (818) 224-7776 ext. 710 or Sahar Ayinehsazian at, (818) 224-7776 ext. 722.


2016 HAS BEEN A MONUMENTAL YEAR FOR MARIJUANA, as voters and regulators throughout the U.S., including those in Arkansas, North Dakota, Florida, California, Nevada, Maine, and Massachusetts, have legalized medical or adult recreational marijuana use. Through comprehensive regulations, marijuana-tolerant states have allowed cannabis businesses to emerge from shadowy corners into licensed and well-lit storefronts. These businesses have shaped a robust industry, which, although profitable, lacks access to banking. To address these needs, PayQwick LLC, a federally registered money services business and licensed money transmitter in Washington and Oregon, has been facilitating cashless transactions and business bank accounts for licensed marijuana businesses. In turn, PayQwick has gained insight into how these businesses can operate efficiently and avoid the traps that threaten the unwary.

Getting and keeping a state license to operate a cannabis business is an expensive and time-consuming process requiring meticulous compliance with federal and state laws. Of particular importance are the eight enforcement priorities listed in Deputy Attorney General James M. Cole’s 2014 memorandum titled “Guidance Regarding Marijuana Enforcement” and each state’s marijuana regulations. Compliance failures could result in penalties ranging from fines to licensure loss and criminal prosecution. In states like Washington, which uses a lottery system to grant a finite number of licenses, licensure loss can mean permanent exclusion from the marijuana industry. Compliance also is the key to getting and keeping a business bank account. Although larger national banks do not yet serve marijuana businesses, smaller community banks have begun to accommodate the marijuana industry. Developing lasting and successful banking relationships requires marijuana businesses to remain honest, transparent and compliant, and to keep themselves abreast of all changes to local marijuana regulations. Further, marijuana businesses should not use crypto-currency in any form. Crypto-currencies, like Bitcoin, facilitate money laundering and tax evasion, which can lead to criminal penalties for marijuana businesses and their banks. Remaining compliant can also mean the difference between life and death. Marijuana businesses are frighteningly familiar with the risks of a cash-dependent industry. To mitigate these risks, most premise-centered marijuana regulations require secure doors, locks, and state-of-the-art surveillance systems. Although compliance can be costly, marijuana businesses that have survived potentially deadly break-ins can attest to its importance. Recently, because of its compliant surveillance system, one Washington State retailer spotted a robbery in-progress and alerted the police before anyone was hurt.

Modern marijuana consumers want a convenient way to pay for cannabis, since cash is an expensive hassle for most. Re-loadable cards and smartphone apps are amongst the most convenient consumer payment methods, because they allow consumers to concentrate on what to buy instead of how to pay for it. Further, consumers can set a marijuana budget with re-loadable cards and smartphone apps, which is especially important for chronically ill and cannabis-reliant patients. Consequently, dispensaries and retailers that allow consumers to pay with re-loadable cards and smartphone apps successfully cultivate a loyal and growing customer base. To provide consumer-centered cash alternatives, various companies advertise methods that allow consumers to pay dispensaries and retailers with debit/credit cards. Though these methods seem like sound solutions, dispensary and retail owners must carefully consider the legality and potential ramifications of their use. Business owners should be especially cautious of machines that allow consumers to use their debit/credit cards to pay for cannabis with crypto-currency, because crypto-currency triggers red flags for banks and regulators. Further, because marijuana is a Schedule I substance, it does not have a merchant category code. Therefore, dispensaries and retailers must never conduct debit/credit cards sales by miscoding transactions to reflect sales of a different good or service.

Working efficiently with ancillary businesses, including landlords, attorneys and accountants, is a crucial part of a marijuana business’s success. A key to efficient businesses-to-business relationships is eliminating cash and using quicker and more secure payment methods. Online payment platforms are among the fastest and most secure means for marijuana businesses to send and receive payments. These platforms transform the payment process from gathering and delivering bundles of cash to simply clicking a button. Online bill pay is another cash-free payment method that allows marijuana businesses to instruct a third party to mail a check for them. Bill pay is especially helpful for marijuana businesses that lack a business bank account.

Obtaining a license and operating a marijuana business is a complicated endeavor. Retaining the right advisers, including attorneys and CPAs, can mean the difference between success and failure. While attorneys can help cannabis businesses keep up with cannabis specific regulations, business owners must educate themselves about all issues affecting their business, like whether to structure a business as an LLC, a partnership, or a corporation. Consequently, cannabis business owners should not wait until a problem arises to seek legal advice or limit the advice they seek for cannabis-specific issues. Further, when seeking counsel, marijuana businesses should thoroughly research advisers before retaining them. As states throughout the nation open their minds and economies to marijuana, those in the industry have the chance to profit immensely. To ensure lasting success, cannabis businesses must remain compliant, operate efficiently by simplifying transactions among themselves and their consumers, and seek advice from qualified and experienced advisers.

KENNETH J. BERKE is the Co-Founder of PayQwick LLC.
SAHAR AYINEHSAZIAN is manager of regulatory and governmental affairs for PayQwick LLC.
Reprinted: MGRetailer December |2016


While typically a boring topic, insurance for marijuana businesses is yet another example of the hundreds of new and ancillary companies that have sprung up with the efforts to legalize marijuana across the country.  These businesses present a unique set of exposures because of the nature of the product.  Insurance companies within the industry are vying for position.  Spoilage, contamination and its perishability complicate matters for the insurance industry.

Many policies carry coverage that is similar to those of a vast majority of other businesses like product liability, general liability, workers’ compensation and premises liability.  However, when your premises are a farm or a grow and your product is a plant or a clone, it muddies the typical insurable coverage.

General liability coverage does not necessarily include product liability coverage when independent testing by an independent lab for the marijuana is necessary.  Coverage for your stock or for business personal property may or may not include live plants, clones, buds or flowers.  You may want to look in to cyber insurance as any disruption will equal huge losses.  This increased risk may carry and increased premium but may be well worth it.

It’s also a little tricky as insurances policies have to be in sync with each individual state’s requirements and regulations.  Just like with any other product or business, we all need insurance.  Buyer beware.