Can Blockchain Boost the Cannabis Industry?

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Lawmakers and companies from the United States and Canada are increasingly considering or already using blockchain to better track and verify cannabis products from seed to sale, for example, or to address problems associated with the industry’s lack of access to banking, via stable cryptocurrencies.

Consider California. As in other states, many legal cannabis businesses in California are unable to open bank accounts because cannabis is still considered illegal by the federal government. Blockchain, proponents of Assembly Bill 953 argue, could ease that issue by allowing licensed cannabis businesses to pay taxes via an anchored form of cryptocurrency. On September 10, Berkeley City Councilmember Ben Bartlett participated in a live demonstration of what transactions at legal cannabis stores could look like if payments by cryptocurrency—as opposed to cash—were available. “By providing a cash-free method of cannabis tax collections, AB 953 can reduce costs and safety risks for cities and businesses,” Bartlett said in a statement. He completed the transaction at Ohana Cannabis, in Emeryville.

Assemblymember Phil Ting, the author of the bill, points out that Californians voted for Prop 64—the 2016 measure that allowed adult use of cannabis in the state—to gain safe access to the plant and also to create jobs and tax revenue. “However, the cost of doing business has been exacerbated by the fact that the legal industry still cannot open bank accounts, and must transport large amounts of cash to operate,” Ting told Cannabis Wire in an email. But using cryptocurrency “will lower the cost of paying taxes and combat black market activity,” he said, by encouraging more businesses to get licensed.

The bill would ultimately allow legal cannabis businesses to use a cryptocurrency known as “stablecoins” to pay taxes. Stablecoins, unlike some other forms of virtual currency, are backed 1:1 by the US dollar. Thus they would avoid the risks associated with sudden value fluctuations of some other cryptocurrencies. At the live demonstration, Councilmember Bartlett used the Universal Dollar to complete the transaction, “an ethereum-based token pegged to the US Dollar” and created by the Universal Protocol Alliance, a coalition of leading Blockchain companies.

Some 70 percent of legal cannabis-related businesses in the United States do not have a bank account, according to the Blockchain Advocacy Coalition, a group of blockchain companies in California that works to persuade policymakers of the benefits of blockchain and to support favorable regulation of the cryptocurrency and blockchain industries.

Last November, Ohio became the first state to allow companies to pay taxes with cryptocurrencies, and remains the only state so far to do so, though legislators in other states, including Illinois and Arizona, have pushed for similar regulations. Ohio Treasurer Robert Sprague announced in a forum in February that so far only two businesses have opted to pay taxes using cryptocurrency, though he did not specify the value of the cryptocurrency-paid taxes or what kind of businesses had participated.

One of the big things about the California bill, said Ally Medina, the Executive Director of Blockchain Advocacy Coalition, “is that it stipulates the use of a stablecoin.” The heart of this bill, Medina told Cannabis Wire, is that it specifies the use of a virtual currency that is backed by a real-world asset, thus addressing some of the wariness that lawmakers had expressed in the past toward cryptocurrency-paid taxes.

Assembly Bill 953 is a “two-year bill,” meaning that due to legislative deadlines, the bill will be eligible for hearing in January 2020, and is expected to move forward at that time.

Meanwhile, in Rhode Island, the state put out a Request For Proposals in June inviting the blockchain industry to “submit proofs of concept that could apply blockchain technology to improve or enhance state government operations.” The suggested areas of application included anti-fraud, contracts, records, notarization, registration and licensing, among others—and medical cannabis. 

“Medical marijuana is one of those areas where we thought this technology could increase visibility into the industry and reduce potential fraud and abuse,” Brenna McCabe, Rhode Island’s Director of Public Affairs told Cannabis Wire. “The Department also has the ability to mount administrative actions related to this area; blockchain technology could potentially assist in creating an authoritative record of chain-of-custody.” 

The state is evaluating more than thirty responses to the overall Request For Proposals, according to McCabe. Updates are expected in coming months.

Trace, a Vermont-based company that uses blockchain technology to track and verify cannabis products, is one of the companies that responded to Rhode Island’s Request For Proposals. The idea of the platform is to provide an “alternative tracking system for hemp and cannabis that will supply tracking, product monitoring, and basically create the regulatory software that gives people good data about their products and where they came from,” Josh Decatur, co-founder of Trace told Cannabis Wire.

“We strove to make an application that is very specific to the cannabis industry,” said Paul Lintilhac, Trace’s other co-founder, noting that the platform was built specifically for the cannabis industry.

With the platform, Decatur and Lintilhac are hoping to hone in on a core problem of an industry that is slowly making its transition, state by state, from the illicit to the legal market: trust and verification within the supply chain. “It provides a secure way where you don’t have to trust the middle man, or even Trace. You can rely on tech to secure data. All the product information, all the chain of custody, is stored and accessible to the public,” Decatur said. 

Trace, which is not yet launched, has a short-term focus primarily on hemp, because it is federally legalized, and medical cannabis in the case of Rhode Island and other states where it is legal, but both Decatur and Lintilhac say they are preparing for the possibility of federal adult use legalization.

Meanwhile in Canada, Shoppers Drug Mart, a major Canadian retail pharmacy chain, announced on August 14 the success of the first phase of its pilot program for blockchain to verify and track medical cannabis products from seed to sale.

Phase two, which is expected to begin late November with TruTrace Technologies Inc. and Deloitte Canada LLP, will be focused on “developing a unified approach to medical cannabis standards” and “onboarding licenced producers and other partners,” according to the announcement. This step is expected to “provide physicians, pharmacists, and patients with greater confidence in the products they prescribe or consume.” Already, two of the highest valued cannabis companies in the world, Tilray and Aphria, have joined.

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