Banks won't do business with the industry because it would be considered money laundering since marijuana is a controlled substance under federal law.
State Senate Bill 75 would have allowed dispensaries and patients to join financial co-ops, which would run just like credit unions.
The bill died in the Senate Finance Committee by a 5-2 vote on Tuesday evening.
Those in the medical pot business say it would have kept them from dealing in cash, which they argue is dangerous.
"[Dispensaries] are already selling medical marijuana now, they are sometimes forced to have cash on hand and that can just make them more of a target for criminals," Brian Vicente, who runs the marijuana advocacy group Sensible Colorado, said.
The banking industry came out in opposition to SB 75, warning that the federal government would certainly step in to shut down any co-op serving the medical marijuana industry.
"So that's the greatest threat this institution would face," Jenifer Waller, with the Colorado Bankers Association, said. "Another challenge would be just having access to the payment system, being able to issue checks and do wire transfers."
Waller says institutions need federal insurance to access payment systems, which means the co-ops created by SB 75 might have effectively been reduced to little more than vaults for holding deposits.
Some in the medical marijuana industry would welcome having a co-op targeted by federal law enforcement as a reason to get the issue into court.
Sen. Pat Steadman (D-Denver) says he hoped that wouldn't happen, but added "with this issue, that court case is lurking around every corner."
Steadman sponsored SB 75 along with Rep. Tom Massey (R-Poncha Springs.)
At a Tuesday hearing, medical marijuana patients said they also feel vulnerable paying in cash, but that many dispensaries won't take anything else because they don't have business bank accounts.
Several lawmakers experessed concern about the feasibility of establishing the co-ops under federal regulations.
(KUSA-TV © 2012 Multimedia Holdings Corporation)