Is blockchain the answer to building a strong, resilient cannabis industry?
By Anne-Frances Hutchinson
Blockchain and the cannabis industry have the makings of a beautiful friendship. Even as the industry labors toward legitimacy as defined by our current government systems, its underlying culture promotes personal autonomy, rejects hierarchical control, and chafes against centralized authority. Blockchain’s genius and promise resides in distributed control, decentralized governance, and transparency. That’s about as far from a partnership made on Wall Street as it gets, but there is a connection based on trust—or the lack of it—that can make their union work.
In supply chains, blockchain technology can increase visibility, support resilience, improve processes, and provide secure and reliable tracking and trading data. Centralized data systems certainly do these things and do them well, but they rely on single or multiple sources of authority to ensure that information passed up and down the chain is accurate and correct.
When working to establish fair systems of cannabis commerce, those sources of authority are likely to put their own best interests in front of the interests of consumers. The reason is simple: to the winner go the spoils. For an industry projected to be worth $37 billion by 2024, that’s a sweet payday. Centralized control of the industry will force players to put their trust in the hands of those who stand to profit most, and when faced with issues of purity, potency, and provenance, that trust should be inviolable.
We’ve learned from countless other industries how easily trust is betrayed, and we can all call to mind any number of successful enterprises that have leveraged shadowy standards of accountability concealed beneath a presumption of openness. These issues are at the cannabis forefront precisely because of its history as a banned substance and its current designation as a controlled, federally prohibited drug. Blockchain technology has the potential to restore that trust.
Speaking to industry pub Cannabis Dispensary, attorney Braden Perry of Kennyhertz Perry in Kansas City described blockchain’s efficacy as a “digital ledger” for the cannabis industry this way:
“From a seed-to-sale perspective, especially in today’s regulatory environment in the legal marijuana industry, the recordkeeping and reporting is very complex. This automated ledger ensures (information) cannot be altered from either an intentional standpoint, such as a forgery or other type of wrongdoing, or an unintentional standpoint, such as an error.”
With over 650 licensed retail stores, 300 licensed delivery operations, over 100,000 direct employees, and an estimated 6.4 million consumers, California leads the global cannabis marketplace, and is at the forefront of advocating the adoption of blockchain technology. This year, a consortium of educators, activists, and business and technology leaders known at the Blockchain Working Group (BWG), introduced Blockchain in California: A Roadmap. The document sets the stage for how blockchain technology can be used effectively over a variety of industries, including cannabis.
“(B)lockchain fintech may be useful for settling cannabis transactions, improving public and consumer safety, generating economic value, and promoting alternative, decentralized local financing for small and social equity businesses, and promote statewide economic development and post-COVID recovery. Digital currencies, digital asset banking, and next-generation fintech solutions may be useful to address cannabis industry pain points, increase tax revenues, and improve public safety,” they wrote.
While marijuana is legal at the state level, federal illegality is preventing most financial institutions from participating in the industry. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has guidelines for bank activities related to cannabis which keeps them in compliance with the Bank Secrecy Act.
The guidance requires constant due diligence around all aspects of cannabis commerce, including rigorous and costly oversight of ownership, transactions, production details, and supply chain movements. Most banks and financial institutions are unwilling to take on that added overhead to support cannabis businesses, creating a landscape where only the most well funded players stand a chance at getting the banking support they need to grow, create new jobs, and contribute tax revenue to the economy. Small and undercapitalized businesses don’t stand a chance.
Additionally, federal law requires banks to provide FDIC insurance on cash deposits, but financial institutions that bank cannabis businesses risk being penalized for doing so. The BWG posits that a Special Purpose Depository Institution backed by a stable cryptocurrency wouldn’t require FDIC insurance on digital assets, including those of cannabis businesses.
In 2019, the Ohana Dispensary in Emeryville, Calif., used a dollar-backed stablecoin—a form of cryptocurrency pegged to a reserve asset—to make the state’s first compliant digital asset purchase of cannabis. According to the BWG, “The purchaser identification, receipt, and tax payments, were instantly stored, and transmitted to the relevant agencies at the moment of transaction.”
Earlier this year, a bill was introduced to the California state legislature that would require its Department of Tax and Fee Administration to issue a report on how the state, cities, and counties could receive any cannabis tax amounts due by payment using stablecoins. It’s the first step of many yet to come as stablecoin and other forms of cryptocurrency become part of routine transactions by American consumers.
Blockchain technology can make transactions between retailers and their customers and B2B transactions cheaper, faster, and more secure, as well as making sure that the data gathered in those transactions is reliable.
Blockchain is also a valuable asset to quality assurance. The cannabis supply chain requires third-party verification of quality control on finished cannabis products. As BWG found, “This element of the cannabis supply chain, with its validation of a permissible product embedded in an immutable, transmitted document meant for sharing publicly, is remarkably akin to processes and roles within a blockchain ecosystem.”
Blockchain can make the cannabis industry stronger, safer, and more efficient for growers, business operators and consumers. The biggest obstacle is federal legalization, which despite the growing acceptance of cannabis throughout the country is far from guaranteed. We’ll just have to wait and see—and trust—that the day the industry is so desperately waiting for will actually come.