Interactions between multiple myeloma (MM) cells and the BM microenvironment play a critical role in bortezomib (BTZ) resistance. However, the mechanisms involved in these interactions are not completely understood. We previously showed that expression of CYP26 in BM stromal cells maintains a retinoic acid–low (RA-low) microenvironment that prevents the differentiation of normal and malignant hematopoietic cells. Since a low secretory B cell phenotype is associated with BTZ resistance in MM and retinoid signaling promotes plasma cell differentiation and Ig production, we investigated whether stromal expression of the cytochrome P450 monooxygenase CYP26 modulates BTZ sensitivity in the BM niche. CYP26-mediated inactivation of RA within the BM microenvironment prevented plasma cell differentiation and promoted a B cell–like, BTZ-resistant phenotype in human MM cells that were cocultured on BM stroma. Moreover, paracrine Hedgehog secretion by MM cells upregulated stromal CYP26 and further reinforced a protective microenvironment. These results suggest that crosstalk between Hedgehog and retinoid signaling modulates BTZ sensitivity in the BM niche. Targeting these pathological interactions holds promise for eliminating minimal residual disease in MM.