Building A More Compliant Cannabis Industry With The Blockchain

Despite Chris Rock’s old adage that people “don’t sell drugs, drugs sell themselves,” being in the legal — or at least legal-ish — business of cannabis retail is surprisingly difficult and friction-filled work.

The problem is not in moving the supply. The cannabis industry brought in a little over $6 billion in revenue in 2016 — a figure that some estimate will grow to as much $50 billion by the year 2026. As a point of comparison, U.S. consumers spent a roughly equivalent amount ($55 billion) on smartphones last year.

The problem crops up with the “legal-ish” description of the weed industry. Though marijuana has been decriminalized for medical or recreational purposes in 29 states (and the District of Columbia) and 64 percent of the polled voting population supports marijuana’s legalization, pot remains very much illegal on the federal level as a Schedule 1 narcotic.

During the Obama administration, the federal government had a formal “see no evil” policy when it came to the conflict between state and federal law; however, the current administration’s sitting Attorney General Jeff Sessions has made it very clear that he considers cannabis to be a dangerous, illegal drug that should not be available for commercial sale.

While that conflict exists, financial institutions with federal charters or deposit insurance to consider have cut a wide path around the weed industry — as processing funds from the sale of an illegal Schedule 1 narcotic puts them in direct violation of federal anti-racketeering laws.

A very wide path.

Florida, which recently legalized medical marijuana, saw its issuing of state ID cards slowed dramatically because Bank of America rather adamantly refused to touch online payments for medical marijuana cards.

Bank of America is the processor for the Florida Department of Health, but it “explicitly refused to handle money coming from patient and caregiver card applications,” said Christian Bax, head of the state’s Office of Medical Marijuana Use.

It’s not because they don’t want to process more payments — Bank of America loves processing payments — but these payments are pot adjacent, and, according to their spokeswoman, it’s a no-fly zone as far as industry rules are concerned: “[Standards] impose restrictions that we believe prohibit Bank of America Merchant Services from providing payment processing services related to the sale of illegal substances.”

Cannabis’ legally gray status as a multi-billion dollar a year industry is fast on its way to becoming a tens of billions of dollars a year industry that is run entirely on cash. Payments for goods between suppliers, wholesalers and retail distributors are in cash; payments to employees are in cash; tax payments are in cash; even paying the power company and water bill are contingent on cash.

It’s an inefficient system, Wil Ralston, president of SinglePoint, noted — one that makes for awkward situations for investors in the industry who are uncomfortable with the amount of business that needs to be carried out with “briefcases full of 100s.”

Ralston argued it’s a situation blockchain technology is uniquely well-suited to solve.

“Where we come at it from, is there are not a whole lot of solutions available to the cannabis industry. There is a stigma, and people just don’t want to touch it, so the typical types of solutions for inventory management and payments just aren’t there. It just so happens that the technology for blockchain is really a great fit … And as we see major firms like IBM and Overstock embracing this technology, it really seemed like the right time to apply this to an industry that is struggling,” Ralston said.

And struggling in a variety of ways — because while the cannabis industry’s troubles with payments are fairly well known, they are part of a virtual buffet of headaches companies in the cannabis business have to endure when managing their heavily regulated supply chain.

“What we are looking to do [by] utilizing blockchain technology is build out a functionality that enables … seed-to-sale tracking and utilizes the payments opportunities that come along with the blockchain to help support the industry,” Ralston explained.

The larger seed-to-sale solutions operating on “certain cloud-based systems” have, unfortunately, turned out to be less than reliable and stable.

“There have been some large-scale crashes that have effected the industry pretty dramatically,” Ralston said. “Those negative effects have had some real and very measurable effects. And so, when we talk to the community, we are seeing a lot of demand of a different solution that provides more function.”

Moreover, he noted, when his firm says they want to make seed-to-sale tracking easily available, they literally mean just that. From the moment the seed sprouts, SinglePoint can show who owned, controlled and cultivated it, what wholesaler they sold it to, what retailer it went to and exactly when it went to the consumer.

“The goal of implementing our payment technology and what we hope to see is that we can also keep a full record of the payments so that the business can keep track of it and easily pay their taxes,” Ralston explained.

Building this exchange is an exercise in threading the needle, since their broad goal is to be a solution for cannabis businesses in an jurisdiction where the substance is fully or partially legal. Given that both cannabis and bitcoin (and other blockchain-enabled technologies) have at times a complex relationship with regulators, that means care in construction is a priority.

“The exchange we are working on building will be up and launched by Jan. 15, but that will be a standard exchange for digital currency. As far as seed-to-sale, I am actually driving on Friday to take a look at a system we are partnering on with a firm to build out the technology. We are still setting a timeline for that project … and we may have some updates on our seed-to-sale timeline next week,” Ralston said.

He promised to keep us posted.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.