Cannabis and blockchain Pt I: From outlaws to outliers

Cannabis is poised to revolutionize the pharmaceutical industry, food, alcohol, clothing, and recreation among others. For its part, blockchain has the potential to disrupt all legacy systems from finance to supply chains, and with both industries on the cusp of mainstream adoption and legitimacy their momentum is culminating at the right time.

The age of confluence

By October this year Canada is expected to pass a bill to legalize cannabis for recreational use, the first major economy to do so. It was already one of the first in the world to legalize it for medicinal use in the early 2000s.

In the US, 29 states have legalised cannabis in some form and eight have legalised it in varying degrees for recreational use. California, the most populous state and the world’s 6th biggest economy, kicked off 2018 with the decriminalization of recreational consumption.

Currently, the global cannabis market, predominately medicinal, is estimated to be worth $7.7 billion and tipped to hit $31.4 billion by 2021, with an annual compound growth rate of 60 percent as other countries liberalize their marijuana laws. With such momentum there is an expectation that the rest of the US market will soon open up for legalization.

The cash bag economy

However there is a dichotomy in the US industry: even in states where the plant is legal for medicinal sale, banks refuse to provide services to the dispensary companies and others with money derived from the legitimate marijuana industry — resulting in bags of cash, literally, being carried around.

Several blockchain projects have emerged to offer a solution to this problem. Tokes, built on the Waves blockchain and traded on the Bittrex exchange, is advancing what it believes will be the most comprehensive ecosystem in the cannabis industry.

Its platform will provide three services, method of payment, seed-to-sales blockchain supply management and point of sale software.

The Tokes token (TKS) is traded against Bitcoin or Ether and will be a customer-to-business payment method that removes the need for dispensary owners to deal in fiat currency if they adopt digital currencies for their operations.

Their joint venture with Theracann, a cannabis business consultancy group, has opened them up to the supply chain market. Adopting Theracann’s enterprise resource planning (ERP) system they want to create a single ecosystem that includes cultivation, processing, packaging, quality assurance, and security.

Tokenize this

Although there are several companies with their own similar seed-to-sale tracking ERP, “the singularity of the Tokes ERP is that it will be the world’s first blockchain-based ERP system,” says Michael Wagner, CEO of Tokes.

He believes the game changer of having a data structure on a decentralized public blockchain as opposed to a centralized private server structure is that it will prevent failures like what happened at MJ Freeway.

Last year, the database of one of US’ biggest seed-to-sale software platforms was hacked multiple times, losing all its customer records. In addition its source code was published on torrent site The Pirate Bay and on Reddit. The breaches caused a prolonged disruption to dispensaries, forcing many retailers to suspend sales and others to record transactions by hand.

“We think it’s important to build this information on the blockchain for its transparency, accountability and immutability to prevent another MJ Freeway incidents,” says Wagner.

The hack was a setback to legitimizing an industry which is heavily mandated with regulator compliances. It no doubt sent shivers up other players in the market and one would expect a mass migration from centralized systems to the ‘unhackable’ blockchain after it.

Despite this, Jessica Billingsley, co-founder and president of Colorado-based MJ Freeway, still isn’t convinced by the technology. Blockchain has “applications for cannabis, and it’s a very interesting technology, but it has drawbacks and limitations,” she says.

Cryptocurrency and cannabis stocks hype

With cannabis and blockchain being two of the most trending investment stories over the past couple of years it’s important not to let the hype blur reality.

In a parallel to the rampant ICO market, cannabis-related stocks have been on a tear over the past two years and have fallen in and out of favour recently. Canadian cannabis stocks, flagbearers of the global cannabis industry, have seen the sharpest rise in prices. IPOs have flourished — remarkably seeing 29 cannabis related companies successfully listing on the Canadian Stock Exchange.

“The valuations are astronomical”, says John Prentice, CEO of Ample Organics, Canada’s largest seed-to-sale software platform with 75 percent of the market there. “In any industry, there’s something wrong with a company that’s doing $12-25m in annual revenue being valued in the billions of dollars.”

From January 2016, the Canadian Cannabis LP Index (index of licensed producers) rose 15-fold to its peak in January this year. It is down around 12 percent year-to-date after hitting all-time highs in January. Since its peak on January 9th the index has contracted nearly 40 percent. The Bitcoin Liquidity Index BLX had a similar hockey-stick rally in the past two years, but had a big sell of at the start of the year and is also down around 50 percent from its peak.

Marijuana companies in the US haven’t fared quite as well but are still well above where they were two years ago.

Analogous to the blockchain industry Prentice says there have been many instances of listed Canadian companies jumping on the cannabis marketing bandwagon to boost their share price.

In a stockmarket traditionally dominated by gold and commodity mining companies “about 70 percent of companies on the Canadian Stock Exchange are now either cannabis companies or mining companies that have pivoted to the cannabis industry to drive their valuations even if they don’t ever end up going into cannabis,” he says.

“Now what we’re seeing is a lot of publicly-traded marijuana companies looking for that next hype story and are partnering with blockchain companies to boost their prices.”

Blockchain as a supply-chain network

Since establishing Ample Organics in 2014 Prentice has done his research on blockchain and while he believes “there’s potential there, it’s going to be really tricky to implement” in terms of regulation and consensus among competitors.

Ample uses a system of scanning barcodes with a scanner gun on individual plants but Prentice vouches for its resilience. “We’ve got thousands of pieces of equipment out in the fields and we have not had a single equipment failure since we started.”

“We’ve been approached by blockchain projects to partner with them but none have been able to give a coherent business case as to why it makes sense.”

The crux of his argument is around competitor consensus. “We know that blockchain is only immutable if you don’t control 50-plus percent of the nodes. But if you control the majority of the chain you can effect changes to it, so why would a competing organisation have any faith in a privately controlled blockchain that would be controlled by a competitor?”

MJ Freeway’s Billingsley similarly believes that as blockchain doesn’t replace transaction systems, but simply keeps that unchangeable ledger of transactions, that it isn’t effective without many business participants.

“Blockchain does not work unless there are peers willing to host the chain and that both validate and accept changes on a peer level.” She says this undermines the technology’s main purpose in supply chain management — that the ledger can be updated and validated in real time by each network participant, revealing where a product is at any moment.

Achieving consensus in the supply-chain

This begs the question of how achievable it is to get every participant in an industry to use the same network.

In blockchain there are three different types of distributed ledger networks: public, controlled and private ledgers.

Public ledgers, like Bitcoin, are are permissionless protocols that anyone can join and contribute to the process of transactions. For controlled protocols, the validation process is vetted by a preselected set of nodes, while participation (reading and sending transactions) might be public or restricted to certain participants. In fully private distributed protocols read permissions are kept centralized to one organization.

Wagner of Tokes says his supply-chain network will be a hybrid: “Various data elements will be broadly accessible by consumers (when, where, how, temperature, humidity, etc. was the plant grown and delivered to the dispensary), while other data elements with higher confidentiality requirements will not be accessible by the public, but rather exclusive to those regulatory bodies that require it.”

Technology giant IBM also recently entered this debate when they submitted a paper to the government of the Canadian province of British Columbia,  advocating for the use of blockchain in the cannabis supply chain, touting it to bring “next level transparency.”

IBM has also partnered with Walmart in a project called the Blockchain Food Safety Alliance to improve food tracking and safety in China.

Perhaps we are closer to blockchain-based provenance than we think?