As the global cannabis industry continues to expand in ways previously unimaginable, there is a growing demand for transparency throughout the cultivation and distribution processes – complete seed to sale observability. A handful of startups around the world are tapping into this need by offering blockchain-based solutions for cannabis businesses.

For the last few years, blockchain has been touted as a new and innovative technology that could shake up a number of industries such as music and streaming, education, financial institutions and payments, healthcare, cryptocurrency, and cybersecurity. Although blockchain is still on the fringe of becoming the next big thing, it’s comparable to how the internet slowly creeped into our lives and eventually underwent a rapid evolution that reshaped modern society.

The cannabis market seems to be taking root the same way, very slowly at first but now it is a global phenomenon that cannot be stopped, regardless of its legal status. Unlike other industries, however, those working in cannabis face many unique challenges regarding regulatory changes, payment systems, and supply chains. Blockchain has been embraced as an innovative technology that can help revolutionize the way cannabis companies conduct operations and handle business.

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Challenges faced by the cannabis industry

Although 36 states already allow the use of medical and/or recreational cannabis, it remains federally illegal, which means industry stakeholders still face some unusual hurdles that people in other fields never even have to consider – supply chain issues, accepting payments, banking and business financing, tax structures, and constant regulatory changes are only a few of the many.

Let’s start with supply chain issues, which are different in the cannabis industry than others because legal cannabis businesses are stuck competing with the still-thriving illegal market. Take California, for instance, the largest cannabis market in the world which still has black/grey sales that often outpace the legal ones. With business owners bogged down by ridiculous regulations and sky-high licensing costs, it’s no surprise that unpermitted dispensaries and illegal grow-ops are still popping up all over the country.

Payment systems, banking options, and business loans have also been a thorn in the heal of cannabis business owners for years. Only recently did legislation that would allow banks to work with cannabis companies start making its way through the house and senate (yet to pass the latter), so until now, they’ve been dealing almost exclusively in cash payments and savings. Lenders have long been denying loans to cannabis companies and the few willing to provide them do so with astronomical interest rates, categorizing it as a “high risk” loan situation.

High taxes, difficulty with record keeping, cyber attacks, as well as a lack of insurance and federal protections have also been a plague on the cannabis industry for years. Tracking cannabis from seed to sale, which is required in all states that have legalized cannabis to some degree, can prove challenging when all parties in the production and distribution process aren’t fully committed to sharing information.  

What is blockchain technology?

Blockchain is a system of recording and exchanging information through a digital ledger of transactions. All inputted information is duplicated and distributed across the entire network of computer systems on the blockchain. Every time new transaction is made, or every time a new step is reached in the production/distribution process, a record of that is added to each blockchain of every participant’s ledger.

Blockchain uses a decentralized database known as Distributed Ledger Technology (DLT), and it’s managed and updated by multiple participants. For example, if this technology is used to track the life of a cannabis plant, each person involved in its production cycle would be adding information to the blockchain at every step – cultivators, labs, extractors, distributors, and so on. Transactions are recorded with an immutable cryptographic signature called a hash, and everyone using the chain has access to these updates.

This means that it would be immediately noticeable if any block in the chain is tampered with. If someone wanted to hack the blockchain, they would have to change every single block in the chain, across all recorded versions of the chain. The blockchains that are more heavily employed are constantly growing and being distributed to more and more users, making them even more difficult to corrupt as they expand.  

People are also drawn to the dispersed natured of how blockchains are managed. Most standard databases, such as an SQL database, have an individual or group of individuals in charge. This can certainly lead to conflict of interests where said individuals may hack the ledgers and make changes that could give them monetary bonuses. With blockchains, no single person is in charge and it’s operated by the people who use it. The transparency, and the fact that blockchains are so resistant to modifications, make it a valid disruptor for many different industries, including cannabis.

How can blockchain benefit the cannabis industry?

Once again, a leading concern in the growing cannabis industry is how legitimate companies will be able to get the upper hand on all the illegal operations. Black market businesses will often make counterfeit packaging that looks almost exactly like some of the most recognized brands, then undercut the legal distributors by selling products (often inferior) at a lower price than what is feasible for anyone working above board.

This is especially problematic when people are using cannabis medicinally. Each strain has dozens of different cannabinoid and terpene combinations, as well as many other varying minor compounds. Because they can contain so many different active ingredients, different strains are used to treat different certain conditions. For example, some people might prefer kush strains for pain, and others might prefer blue dream to stay alert. But if someone is getting mislabeled items, they’re essentially wasting money on products that could be completely ineffective, or may even have detrimental effects on the condition they’re aiming to treat.  

“In the cannabis industry, there is a lot of heavy regulation, and a lot of misleading news that causes extra complications for the industry,” said Nadav Segal, one of the founders of Israeli startup company Transparent-C. “I meet with investors who fund companies with a 5-10 year outlook, and when they hear about cannabis, they say that it is too risky for them. We provide a solution that makes the industry more secure, by authenticating data about the cannabis supply process and making it transparent using blockchain technology. We hope that by bringing more transparency to the industry, it can gain more acceptance.”

States and countries that have some sort of legal cannabis program are required to keep detailed records of regulatory procedures to guarantee that products are properly cultivated, processed, and tested for safety and efficiency. However, according to Segal, “tracking each plant’s entire journey via blockchain, where every piece of data can be verified individually, adds a much greater level of trust to the entire process. The process of identifying a cannabis plant typically relies on many varying external and subjective parameters such as plant height, leaf color, stem diameter and measured active ingredients, which can make identification extremely unreliable and lead to faulty identifications.”

He continued to add, “our technology gives any buyer a complete picture of where each plant has come from, and easily helps suppliers avoid unnecessary compliance expenses and save money,” Segal said. “We are looking to make the cultivation process completely transparent for regulatory compliance offices, customs officers, doctors, and patients so they can check any link in the supply chain from seed to end product.”

For example, blockchain technology can record when a product changes on the supply chain (ie, cultivation to harvest, trimming to packaging to distribution, etc.), allowing both businesses and consumers to keep track of their products, from seed suppliers to distribution points across the globe. This can help protect businesses from theft, fraud, and other security issues, as well as offer consumers peace of mind knowing the entire life cycle of their product, and that it comes from a trusted source.

What are the risks associated with public blockchains?

Because blockchain technology is new and decentralized, it can be difficult to integrate it into many work projects. Also add to that the lack of standardization because there are so many different frameworks and types of blockchain systems. This is a major problem for investors, who are still learning about the industry themselves, and may have little protection if their investment tanks; as well as numerous companies who are trying to adapt to the new technology.

One more issue people are having – as they do with any new technology before all the kinks are full worked out – is trust. Yes, it’s true that blockchain doesn’t have a person in charge of each project and that it’s a user oriented system; but someone has to manage and develop the software right? Software developers/managers are able to make significant decisions, which means they can alter the type of cryptography and algorithms used by the blockchain. Again, should there be a conflict of interest, the concern arises that biased algorithms could be implemented, posing a risk to the entire concept of blockchain security.

Another obvious problem with blockchain technology (actually more of a double-edged sword) is that the user is entirely responsible for handling their accounts. This might not sound so bad for the ultra-organized among us, but an example of how quickly this can become a thorny situation is in the case of cryptocurrency keys. Many cryptocurrency accounts require a key code (a very long, unchangeable, and nearly impossible-to-memorize sequence of numbers and letters) to access the digital wallet and other information in the blockchain. If the code is lost, the user will lose access to all their funds and data. There is no restore a retrieval option either, so you’d be totally screwed. This has actually happened to me with a cryptocurrency gift I received from an old job. Thankfully, that currency wasn’t one of the major ones and the value quickly plummeted, so I didn’t lose anything. But imagine losing access to a bitcoin account, or some important business-related data. This raises a lot of questions about of how to mitigate user-oriented blockchain risks.

Final thoughts on cannabis industry blockchain technology

Blockchain technology, although new and yet to be fully understood, is here to stay. Most major industries are already looking for ways to implement the blockchain in their respective fields. Blockchain can boost confidence in products that are on the market and the cannabis industry as a whole by offering transparency throughout the life cycle of the plant, and during the production process of various products. With blockchain technology, cannabis industry stakeholders and consumers can verify plant/product origins, compliance, transactional information, supply chain order, and so much more by utilizing these innovative, user-based systems.