Cannabis, Cryptocurrency, and Blockchain
The cryptocurrency and cannabis markets have significant similarities. Both markets are relatively new in the United States. Both crypto and cannabis have been unregulated for years. However, both are now in the process of becoming regulated and integrated with the mainstream economy. In both cases, what one decade ago would seem like a niche investment now is a mainstream option that is considered even by large multinational firms. The specific characteristics of cryptocurrency also can allow crypto to be applied to the cannabis industry in new and resourceful ways in the future.
Blockchain technology is a central mechanism on which cryptocurrencies are based. Blockchain can be applied to a cryptocurrency specifically designed to enable cannabis industry transactions. Such a cryptocurrency could track the production chain of cannabis products from seed to product. However, several cryptocurrencies have attempted to act as a currency of exchange for the cannabis market. So far, all have failed at this goal. Nonetheless, there is a significant potential for future integration of blockchain and cryptocurrency into legal cannabis markets in the US.
Cryptocurrency and Blockchain: the Basics
Blockchain technology has only recently started to impact financial markets across the globe. However, scientists first developed blockchain technology around 30 years ago (Conway, 2021). At the time of its discovery by Stuart Haber and W. Scott Stornetta, the full potential for blockchain for creating a new type of currency was yet to be understood. The basic idea behind blockchain is simple. Blockchain is a system to record and distribute information without the potential for it to be edited by anyone who accesses it.
More specifically, a node in a blockchain system contains a record of all the data stored on the blockchain since its start. If one node is different from others, it will correct itself by using the data held in the majority of other nodes. This process makes it impossible to tamper with data stored in a blockchain, as any tampering will be immediately adjusted when the tampered node is checked against other nodes.
Blockchain Revolutionizes Financial Markets
Firms and consumers can use blockchain to keep a ledger of any data. However, in January 2009, the launch of Bitcoin demonstrated the use of blockchain for keeping a ledger of transactions (Conway, 2021). This use for blockchain has become highly influential and has already impacted financial markets on a global scale. Called a cryptocurrency, a blockchain system of ledgers allows for a decentralized form of exchange that is verifiable for all users without a central institution such as a bank.
Cryptocurrencies have taken center stage as the most effective use of blockchain. However, firms have implemented blockchain for other services in creative ways which could potentially apply to the cannabis industry. For example, large multinational corporations such as Pfizer, AIG, Siemens, and IBM have used blockchain to track the production chain (Conway, 2021). Blockchain is instrumental in cases where small contamination can impact a significant portion of output down the production chain. It is also useful where each step on the production chain has a severe impact on the final product. These conditions apply to cannabis, which has led to a high level of enthusiasm for integrating blockchain systems into the cannabis industry.
Cryptocurrencies are still seen as volatile and risky
Source: Advantus Media
Crypto and Cannabis: Reasons for Optimism
The cryptocurrency and cannabis markets have many characteristics that seem to make them natural partners. The cannabis market continues to be illegal under federal law in the US, despite a practice of non-enforcement of federal law in states that have legalized recreational use. This legal grey area for cannabis companies operating in states with legal cannabis can lead to significant issues when dealing with the financial system (Safdiye, 2021). Most of the financial system is centralized on the national level. Therefore, many cannabis companies are cut off from the mainstream financial system, as nationally operational banks are reluctant to give cannabis firms access to banking services. Cryptocurrency has the potential to allow cannabis firms to securely transfer funds.
Cryptocurrency can be helpful to for cannabis firms to transfer and receive funds. Additionally, firms can implement crypto and blockchain in ways that add value to the cannabis market. According to Lorenzo Nourafchan, Northstar Financial Consulting Group CEO, “blockchain could add efficiencies to seed-to-sale tracking that offers more insights and clarity than current options (Ward, 2021).” Just as blockchain has been employed to track food products’ production chain, the technology could be very useful for monitoring cannabis production. For example, previous articles in this space have discussed the importance of the growing process on the end product of cannabis oil for vaping. Blockchain technology could serve as an easily accessible ledger for consumers to trace the entire production chain that leads to the oil that ends up in their vape pen.
Cannabis Cryptocurrencies: Many Barriers to Success Remain
Despite the potential for synergy between cannabis, cryptocurrency, and blockchain, serious obstacles remain. These obstacles have prevented the success of several crypto projects which have specifically attempted to act as a form of exchange within the cannabis market. The PotCoin (POT) is an example of a cannabis-based cryptocurrency that began with a vast amount of hype before falling flat and failing to substantially impact the US cannabis market (Krishna, 2021). The excitement around this currency peaked when the NBA legend Dennis Rodman wore a PotCoin shirt to a well-publicized meeting with North Korean leader Kim Jong Un in 2017 (Safdiye, 2021). However, while the currency nearly doubled in price in one day because of this publicity, it has not come close to meeting its goal of facilitating financial transactions across the entire cannabis industry.
There is little evidence that cryptocurrencies represent a viable solution for the cannabis industry at this time. Currencies such as PotCoin, CannabisCoin, and DopeCoin have failed to impact the industry, and stablecoins such as Bitcoin and Ethereum remain too volatile to be used as a primary currency for B2B or B2C transactions. According to Franco Amati, co-founder of NGO Bitcoin Argentina and Signatura, stablecoins such as bitcoin may gain usefulness for cannabis companies as they become integrated into mainstream international trade operations, yet “for the rest of what we call ‘crypto,’ although tech will continue to progress, in the near future it won’t stop being a niche tool (Safdiye, 2021).” Although the combination of cannabis and crypto is ripe with possibilities, there is agreement among industry experts that there are currently no safe and efficient uses for cryptocurrency by cannabis firms on a large scale.
Conclusion: More Changes to Come
Significant barriers have prevented crypto from deeply impacting the cannabis industry. Nonetheless, cannabis and cryptocurrency are two developing markets experiencing rapid innovation. Cryptocurrency is not at this time a method for firms in the cannabis space to completely shift their financial operations and record-keeping. However, cannabis firms should continue to be on the lookout for ways to employ cryptocurrency and blockchain within their business. From a method to avoid banking issues under federal cannabis prohibition to a unique method of documenting the seed-to-product chain of the cannabis industry, cryptocurrency and blockchain will continue to be intriguing options for investors.