3 Ways Blockchain Could Help Solve the Cannabis Business's Biggest Roadblocks
Does starting a legal marijuana company make good business sense? A growing number of voices argue yes. The cannabis industry raked in almost $9 billion in sales in 2017, and that figure is estimated to rise to $21 billion by 2021.
Investors are paying attention to this booming field, and in March 2018, Canadian company Cronos Group made history by becoming the first “plant-touching” cannabis company to be listed on a U.S. stock exchange. Nine states and the District of Columbia have legalized recreational marijuana, while 21 more allow medicinal use. A recent analysis found that cannabis shops make more revenue per square foot than Whole Foods.
But despite apparent demand, the cannabis industry is far from easy money. Cannabis is still illegal under federal law. The Department of Justice (DOJ) brought some relief to legal pot businesses in 2013 with the Cole Memo, which deprioritized bringing federal enforcement actions against businesses behaving in compliance with state laws -- but that memo was revoked in early 2018.
Industry experts don’t necessarily think the rescission of the Cole Memo is the beginning of the end for cannabis businesses. Law firm Venable LLP predicts that the DOJ will go after egregious violators of state laws rather than state-compliant companies. But in addition to raising the stakes for state law compliance, the memo’s disappearance exacerbates an already-pressing problem for the marijuana industry: access to financial services.
Under the Bank Secrecy Act, knowingly providing financial services to a business that violates federal law is illegal. A 2014 document from the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided some federal guidance for banks hoping to serve cannabis businesses. However, fear of running afoul to the federal government in addition to the high costs associated with FinCEN compliance incentivizes most banks and payment companies not to do business with marijuana companies.
For that reason, many cannabis companies are mostly or entirely cash-based -- and cash-based business models bring a ton of problems with them. Cash is easier to misplace or miscount, and business owners and managers carrying thousands of dollars in cash are prominent targets for robbery, and this puts employees, customers, and nearby community members at risk, as well.
Can cryptocurrency solve the cannabis industry’s woes? A growing number of cannabis-oriented crypto companies say yes. Here are some of the issues blockchain could potentially remedy in the legal marijuana world.
1. The Cash Problem
One of cryptocurrency’s greatest promises to the legal marijuana industry is an alternative to cash and banks. PotCoin, a well-known marijuana-based cryptocurrency (and the company endorsed by Dennis Rodman during the U.S. and North Korea summit), is designed to make payments exclusively in the marijuana industry. Customers can make transfers from their crypto wallets to their dispensary’s crypto wallets directly, and either party can exchange the coin for fiat currency at any time. Unlike cash, PotCoins can’t be misplaced or stolen out of a safe.
2. The Bank Loan Problem
A small number of banks and credit unions provide banking services to rigorously vetted cannabis companies. But even these companies virtually never offer business loans because the federal government could seize any assets put up as collateral.
While most crypto-cannabis companies are focusing on providing immediate payment solutions rather than traditional business loans, there is a precedent for crypto-based business loans.
3. The Inventory and Recordkeeping Problem
Running a legal cannabis business that doesn’t run afoul of the law in these uncertain times requires crossing your T’s and dotting your I’s--and that principle extends to inventory. It’s illegal to transfer marijuana grown in one state legally into another state where it’s illegal, and it’s also illegal to sell it to recreational users in medical-only states. Legal cannabis companies need to be able to prove that their products are going where they’re supposed to be going.
Some states, such as Oregon and Colorado, mandate the use of RFID tags to keep track of all cannabis products from cradle-to-grave (shelf). But the system has proven burdensome for regulators and businesses alike. A recent story on legal cannabis data gathering in the Seattle Times reported that insufficient manpower to process massive data inputs and reliability issues with self-reported data is hurting the state’s efforts to monitor legal sales.
A better data gathering analysis and monitoring system wouldn’t just help overworked government staffers; it would also reduce the administrative burdens of businesses trying to comply. Better supply chain data can help companies perform inventory and customer data analytics, and minimize stock shrinkage. FinCEN has proven a burdensome regulatory guide in part because it required banks to handle so much data related to their cannabis customers, however, cannabis businesses who can provide comprehensive financial and inventory data showing their compliance with state law are more likely to avoid federal attention and convince a bank that they’re worth taking a chance on.
Supply chain management is one of the most-cited initial applications for blockchain technology. Blockchain’s immutable transaction ledger provides a secure, transparent medium for recording steps in complex supply chains, even when they involve multiple parties. Smart contracts can automatize some steps in the chain and also integrate with IoT devices. For companies looking to prove compliance with state laws, a blockchain ledger could provide a cost-effective and tamper-proof method for showing that their inventory is being distributed appropriately. As the supply chain industry continues to develop in blockchain, we may see cannabis-oriented blockchain tools that could supplement or even replace the current RFID tag system.
The cannabis industry is still a tricky space to navigate--but it’s also a profitable one. As public opinion and government policy continue to evolve, it’s possible that cannabis startups will no longer need to use the blockchain. However, blockchain itself is a revolutionary technology, and startups that take advantage of it now will be in a better position to come out on top.