Cannabis, Blockchain, and Cryptocurrency

by Jessica BillingsleyMay 22, 2018

Blockchain must be THE hottest buzz term around right now, even eclipsing cryptocurrency to which its technology has been so famously applied.  At least once a week, an acquaintance sends me either a new cannabis cryptocurrency ICO (Initial Coin Offering) notification or a new article on the cutting edge startup that is going to change cannatech forever with its blockchain application. 

I want to demystify blockchain, cryptocurrency, and cannabis technology as these terms are thrown around with little regard to their underlying technology. I’m going to explain just what cryptocurrency is and isn’t, what blockchain is and isn’t, and their real applications to cannabis technology.

What is blockchain?

To start, let’s demystify blockchain.  There are two components that make blockchain what it is.  First, there is an immutable ledger of accounts This is literally a chain of blocks of information stored on servers none of which can ever be overwritten, only new ones added.  Second, this chain is auditable by verified peers.  What are peers?  Remember the days of peer-to-peer music file sharing like napster? Do you remember ever trying to download a song and you couldn’t because no one was “seeding” or making that file available on their computer?  Well, blockchain peers are very similar.  Blockchain only works if there are peers who agree to host the blockchain and each independently verify transactions. 

So how does this work in real life? 

When a new transaction is made that relies on writing to the blockchain, the transaction is written by the peer to which the person transacting is closest, and then that transaction must be verified by at least one other peer.  This verification process varies dramatically by application of the blockchain technology, but is central to the technology being able to call itself blockchain. 

This peer review process is why blockchain has become nearly synonymous with cryptocurrency.  Cryptocurrency uses blockchain and the peer review process to create a crowd sourced rather than FinCEN (Finanacial Crimes and Enforcement Network) review of the currency transactions. Learn more about cryptocurrency.  However, cryptocurrency is merely the most well known application of blockchain. 

Blockchain technology—immutable, peer reviewed information –has applications well beyond those of cryptocurrency alone. Blockchain serves as a bookkeeping platform or ledger that is incorruptible, enforces transparency, and bypasses censorship.

It is particularly applicable to regulated industries which rely upon maintaining a trusted chain of custody throughout the supply chain such as pharmaceuticals and tobacco.  It is no surprise it has been so often recommended for cannabis recently. 

If the peers don’t exist, and only the immutable ledger exists, the technology isn’t blockchain and is merely the familiar good accounting technology principles with which you’re probably already familiar.  Such accounting systems employ an immutable ledger or chain of transactions, and if you want to change a transaction, you must create a new reversing entry rather than being able to delete or edit the original transaction. 

Blockchain in Cannabis

MJ Freeway’s MJ Platform follows good accounting technology principles in this way; however, it isn’t blockchain technology because it isn’t peer reviewed.  Having transactions peer reviewed would require other cannabis technology companies to agree to the cost of hosting each other’s data as well as the time to peer review it.  Also, all of this peer reviewing causes the blockchain technology to not be feasible for a real-time transaction. 

Imagine if every time you wanted to perform an action to your plants or make a sale to customers, you had to wait for the blockchain to be written, shared, and then verified by another company.  It simply takes too long to function as an applicable technology for running a business.  Therefore, in the foreseeable future, it will not replace the software you use to run your business as that requires a real time transactional database.

I do think blockchain has interesting applications for responsible cannabis regulation.  If a governing entity such as a state, province, or federal government were to require blockchain for compliance and define its parameters, it would do a great job of ensuring good, auditable compliance.  This is likely to happen in a jurisdiction with a philosophy similar to Washington State which chooses to make nearly all of its cannabis compliance data publicly available. 

I recommend the governing entity setup the initial hosting and allow verified peers who pass a strict vetting process to access the chain for compliance.  If peers are not vetted and transactions are not each linked to a vetted peer, there is potential for unscrupulous parties to write fake transactions to the blockchain.  MJ Freeway and our commercial software competitors would almost certainly be required to participate as peers, bearing the burden and cost of hosting the blockchain and performing peer audits in order to serve our clients located in the jurisdiction under which the governing body has chosen to require blockchain technology for compliance.  Interestingly, in this scenario, the governing entity would still need software such as MJ Freeway’s Leaf Data Systems business intelligence tool to query the blockchain to report on compliance activities and alert for any bad actors or actions outside of regulatory compliance in that jurisdiction.  Governments tend to embrace new technology and turn with the nimbleness of a container ship.  I predict it will be years before we see this application of blockchain, if at all.  It is likely there will be an even newer, more easily adopted technology available by that time.

What then are the applications of cryptocurrency for cannabis? 

In the US, where cannabis is still illegal federally and most cannabis businesses are still denied normal banking services and credit card processing, the federally decentralized cryptocurrency sounds like a panacea.  Indeed, the ability to process a cryptocurrency transaction is straightforward and is something we at MJ Freeway identified a couple of years ago as needed, and it’s schedule on MJ Platform’s product development roadmap for a future release. 

The challenge with cryptocurrency and purchasing cannabis is that in order to make it worthwhile for a business to implement the ability to accept cryptocurrency, it must have enough of a percentage of its customer base willing and interested in paying via that currency.  Unfortunately, although cryptocurrency has firmly entered the mainstream, we are a very long way from critical mass in terms of customers being willing and interested in paying this way.  While theorizing with some other industry leaders, we discussed putting a bitcoin ATM next to the traditional ATM in a dispensary to encourage cannabis consumers to pay with bitcoin.  Bitcoin ATMs are simply reverse ATMs.  You deposit cash in them which is transferred to a bitcoin account.  However, if a customer has the cash to deposit in the bitcoin ATM, they could just pay cash for their purchase alleviating an extra step.  Until enough customers have their own cryptocurrency accounts, there’s no demand for this functionality and other features will take precedence.  

In summary, I foresee a day in the future where the public will demand transparency of regulated substances through a publicly accessible blockchain and where we will pay with cryptocurrency as easily as with any other mobile app or payment method; however, that day is some years in the future still and requires both governments and consumers to embrace these promising new technologies. 

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