The Cannabis market is growing like a weed (sorry). So is the Blockchain market. Combining the two is more than a random buzzword generator. The fact that both inhabit a legally grey area (sometimes/some places legal, sometimes /some places not) makes an entrepreneur/investor interested in one naturally inclined to look at the other with an open mind.

This is Part Two (Chapter 10) of The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index/table of contents of The Blockchain Economy book please click here.

This chapter looks at 3 use cases for Blockchain in the Cannabis market:

• Banker’s Reject.

 

• Transparent Supply Chain Replacing Ye Olde Honest Dealer.

 

• Illegal Cross Border Trade

First we offer our Cannabis Investment Thesis 101.

Cannabis Investment Thesis 101

Cannabis (aka Marijuana and lots of street names like pot, weed, ganja, mary jane) is a big market. The legal market in California alone  is estimated at $7 billion. The prospect of this huge market coming out of the shadows has investors salivating.

• Medicinal vs recreational. Many people use Cannabis as medicine for pain, epilepsy, PTSD and recovery from chemotherapy. These customers want the CBD part of Cannabis without the THC part that makes you high. For an explanation of the difference go here.

• Canada. Ranked 10 in global GDP, Canada is a big economy where cannabis is scheduled to be legal (both medicinal and recreational) some time in 2018. 

• Canada’s big southern neighbour (aka America). Cannabis is legal in many states, but at a federal level Cannabis is still classified as a Schedule 1 drug  (alongside Heroin and Methamphetamine). Cannabis will likely remain a Schedule 1 drug until the next elections in 2020 . Trump has openly vowed a crack down, creating a big States rights issue; imagine an FBI SWAT team busting down a legal business in California or Colorado.

• Holland. Way ahead of the curve, legal for decades. Also perhaps not coincidentally, a big early adopter of Bitcoin and Blockchain.

• Switzerland. It is legal for medicinal and semi-legal for recreational (slap on the wrist fines about the same as a speeding fine and cops are not looking to arrest people who show a bit of discretion). Like Canada and Holland, Switzerland wants its citizens and businesses to benefit by being ahead of the legalisation curve. Also like Canada and Holland, Switzerland is a big early adopter of Bitcoin and Blockchain.

• Medical Marijuana will roil the Pharma business. It is hard to patent a plant, so cannabis based drugs are likely to be cheaper. As Cannabis becomes more legal, researchers can legally do research and then the real benefits (and negative effects) can be openly documented and discussed. Many will contrast this with the completely legal and horribly destructive opiod business.

The legal grey areas will clear up over time – the direction of travel is clear. Everybody wants a piece of this pot pie – even governments (which want to tax & regulate). 

Banker’s Reject 

Banks live by regulatory fiat. The right to print money via fractional reserve banking depends on regulatory and ultimately political mandate. Therefore banks are very nervous about doing anything that can bring them legal/regulatory jeopardy – such as accepting cryptocurrencies on deposit or accepting fiat currency from a business that made its profit from cannabis. There have been cases of legal cannabis businesses in America needing to pay their tax to the IRS having to do so with suitcases full of cash because no bank will accept their business.

This is expensive (about 10-15% of sales in security and cash handling expenses). The business needs vaults, guards, security device and lots of staff managing all this physical cash. 

Without a bank account, these businesses cannot get bank loans for growth and customers can’t use credit or debit cards.

Those businesses will be more willing to look at alternatives to the traditional banking system. This is why innovation comes from the edge. At the centre, people say “why change, the system as it is today works just fine”. At the edge, people say “the system as it is today does not work for us, what alternatives are available?” Entrepreneurs offering those alternatives, even if they use something weird like Blockchain find an open mind among those business owners.

There are specialist coins such as Potcoin serving this market, but we also expect that other crypto ventures will address this big emerging market with specialised add on services and niche marketing.

Transparent Supply Chain Replacing Ye Olde Honest Dealer

In the illegal cannabis market, you had to trust your dealer to sell you good stuff. The dealer was also motivated to be honest because he/she knew that the customer had alternatives. That is why Bob Dylan sang that “to live outside the law you must be honest”. If the dealer tells you that the cannabis is seeds from xxx grown in yyy, you either believe the dealer or find another dealer.  If the dealer tells you that the cannabis is x% CBD and y% THC, you either believe the dealer or find another dealer.

How does this work when you move to a legal cannabis market? The answer is the usual one – retail stores, supply chains and brands.

• Retail Stores. Their customers come in two types based on whether they need a lot education before buying. Many who visit these new stores don’t use recreational cannabis and have never bought medicinal cannabis. The sales people have to patiently explain how it all works. The brands that win will be ones that enable those sales people to explain how everything works from “farm to pipe” through transparent supply chain data. Whether those sales people are flesh and blood humans in a physical store or bots in an e-commerce site, the brands that win will be ones that enable those sales people/bot to explain how everything works through the  supply chain from “farm to pipe”.

 

• Transparent supply chains. This is where the mix of IOT and Blockchain that we describe in the chapter on Blocks Of Destruction Hit The Supply Chain Business will be applied to the legal cannabis business.

 

• Brands. Legal Cannabis is a new/emerging market. There are not yet big established brands in this market. In ye olde brands in mature markets, companies spent fortunes so that in that micro second spending decision you trust their brand. Brand = Trust. In the emerging world of brands in a transparent supply chain, the mantra will be “trust but verify” (where as described in the chapter on supply chain and Blockchain, very few do the verify work but the fact that they can do so keeps the brand honest as one tweet that exposes a lie can destroy a brand). As these brands are new and because the retailers want to provide a lot of education, they will be more motivated than ye olde brands to offer transparent supply chain data. By the time that ye old brands move into the market (which they will when legality is totally clear), transparent supply chain data will be the bar that they will have to jump over. 

One new venture targeting this niche is Paragon, through an immutable ledger for industry-related data. There are also numerous cannabis centric social media services such as Smoke.Network and CannaSOS/PerkCoin, which makes sense as privacy and censorship resistance is a mandatory feature in this niche. 

One venture that started in social media but moved into transparent supply chains is MassRoots which aims at the seed-to-sale (“farm to pipe”) tracking, mainly by focussing on relationships with the retailers through their MassRoots Retail point-of-sale system.

Companies such as Nuvus Blockchain and IBM target the transparent supply chain feature.

Illegal Cross Border Trade

Legality varies by country and within America by State. Therefore until it is legal everywhere, there will be illegal cross corder trade. While legality in America is still in a very murky state (legal in some states, illegal in others, illegal at the federal level), that cross border trade will be big – just like it is in Pharma drugs bought by Americans from Canada. This is where specialised privacy coins such as Monero, ZCash and CLOAKcoin are useful (the latter is making a play for the cannabis market). Expect more innovation from services to make Bitcoin privacy more accessible (mixing etc) so that Bitcoin can also be safely used for illegal transactions.

Soon all business will be like this. During the early days of the Dot Com era, businesses would boast that they had a web site, which was often nothing more than a static digital copy of the company brochure. Today, having a website is about as exciting as having a business card. Today businesses boast that they use Blockchain. Tomorrow, using Blockchain will be as exciting as having a website. The question is what are the bridges from today to tomorrow? Innovation usually comes from the edge. The Cannabis market is one example of innovation at the edge motivating early adoption of Blockchain.

Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).