Potchain 1.0: Why the Legal Weed Industry Is Embracing Blockchain

By Features PCmag

Last Tuesday, America made a lot of decisions. We cast votes that will shape what our country looks like over the next handful of years and beyond. Yet, for all the surprises election night brought to many, everything went according to plan on the cannabis legalization front.

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Maine, Massachusetts, Nevada, and the big domino the whole legal weed industry was watching intently—California—joined Alaska, Colorado, Oregon, and Washington in legalizing recreational marijuana on election night. Arkansas, Florida, Montana, and North Dakota passed medical marijuana legislation, bringing the number of legal medical marijuana states to 28 plus the District of Columbia. That's more than half the country in which ganjapreneurs can soon start new businesses that will touch every aspect of the weed economy. This means a burgeoning ecosystem of growers and dispensaries, of course, but all the ancillary services every small to midsize business (SMB) needs as well—from customer relationship management (CRM) software to point-of-sale (POS) systems.

From a technological perspective, the legal weed space also presents another unique opportunity: Legalized cannabis on this scale is a first for the US. This new, fast-growing sector of the economy presents challenges we haven't dealt with before, partly because even in legalized states, there are still a lot of things cannabis-related businesses can't do, particularly when it comes to banking and legal protection.

Technology is helping to fill in a lot of those gaps for cannabis businesses. In particular, a host of startups are beginning to tackle cannabiz issues using blockchain. This emerging sector is employing the distributed, immutable ledger technology in everything from banking, finance, and regulatory compliance to storing cannabis strain DNA via blockchain technology to protect growers' intellectual property (IP). We're about to live in a blockchain-based world and the legal weed industry might be a leading early adopter.

Linking the Seed-to-Sale Potchain

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Seed-to-sale is an umbrella term that's used often in the cannabis industry. In totality, it means software and services that help businesses track and manage inventory—from planting and growing all the way through processing, product shipping, and, ultimately, to transactions at the POS in dispensaries. Seed-to-sale systems help entrepreneurs not only with keeping track of assets and sales but also with managing the complex hurdles of state-by-state legal regulation and compliance.

There are already a couple of big players in the seed-to-sale space. Weed tech startups such as Flowhub are battling pharmaceutical incumbents, including BioTrackTHC and MJ Freeway, for state-by-state government compliance contracts. Other players such as KIND Financial have even begun getting tech giants involved, hosting its Agrisoft seed-to-sale platform on Microsoft Azure. Blockchain startups such as Tokken aim to work in tandem with seed-to-sale platforms, not against them.

According to founder and CEO Lamine Zarrad, Tokken is a "digital bank" startup he says is ideal for the legal cannabis industry because it can help businesses work around regulatory restrictions. Tokken is currently piloting its beta in Colorado and plans to roll out nationwide in Q1 2017. Tokken gives cannabusinesses a bank account and blockchain-based transaction history that's linked to brick-and-mortar banking institutions and seed-to-sale systems, with Tokken as the middleman.

Before founding Tokken, Zarrad spent his career in equity and finance, most recently serving as a government bank examiner, evaluating the financial condition of national banks. When we spoke with him, he was happy to get into detail on why exactly it's so difficult for cannabis-related businesses to obtain bank accounts. According to Zarrad, it comes down to the Bank Secrecy Act (BSA). These federal banking regulations, most recently amended as part of the Patriot Act in 2001, focus on two major risks that still have banks skittish about working with cannabusiness and other high-risk industries, including even stable vice industries, like alcohol: money laundering and careless finances.

"Tokken was born as a way for banks to deal with high-risk accounts. One of the federal government requirements that precludes banks from operating in the cannabis space is the ability to record and ensure complete data integrity," said Zarrad. "The blockchain is not our entire banking infrastructure—we don't use it for value transfer—but we use its indelible ledger as a redundancy mechanism. The blockchain eliminates that risk because we can prove to regulators and law enforcement that every timestamped transaction recorded through our system hasn't been tampered with."

Editor's Note: Tokken, as with most startups in the space, uses the Bitcoin blockchain. It's the most established and accessible blockchain distribution out there. But just to be clear: that doesn't mean transactions have anything to do with its cryptocurrency namesake. Anyone can use the Bitcoin blockchain to store publicly accessible hashed data and transactions without touching Bitcoin itself. Think of the Bitcoin blockchain as open data infrastructure; anyone who knows how to mine a block can use it to store transactional data, which is then distributed and encrypted via the largest blockchain in the world.

Tokken's system is made up of a consumer mobile application, a POS integration product, and a banking portal and online plugin for businesses. Tokken does provide mobile payments (tokkenPay) and POS services (tokkenSell) including Android and iOS apps for consumers, but Zarrad said blockchain-based compliance is the transparency tool that makes it all work and gives banks and cannabis-related enterprises (CREs) peace of mind.

Tokken is currently working with dispensaries in Colorado. Zarrad said the solution will be live in many Puerto Rico dispensaries by the end of the year, with California and the Pacific Northwest to follow early next year. In each state, he said Tokken is coordinating with state regulators to provide auditing and law enforcement access to match transaction records against blockchain hashes for compliance.

"Consumers download the app, go to a participating retailer and make a purchase, and then the dispensary accumulates transactions in an online banking portal and can transfer money to pay bills or suppliers, etc, through a PayPal-style portal. The money never actually leaves the banks," said Zarrad. "The bank has a dispensary account that's been insured and protected from risk of money laundering, and everything is being recorded on the blockchain."

Tokken is also working to integrate with other blockchain platforms and seed-to-sale systems. Zarrad couldn't give specifics, but mentioned partnerships with a large POS system in Colorado, as well as marketing platforms and delivery systems in California. One partnership he could talk about is with another startup called the Cannabis Hemp Exchange (CHEX), a platform for wholesale and retail cannabis transactions also using the Bitcoin blockchain.

"There are a lot of use cases for blockchain in the cannabis industry, but first and foremost is data transparency via a trustless system," said Eugene Lopin, CEO of CHEX. "CHEX is wholesale cannabis marketplace software that includes a portal for commodities, and on the roadmap is a marketplace for finished products as well. Once we have wholesale market transactions in compliance with regional regulation, we want that data to be auditable."

CHEX is new—the startup was incorporated in 2015—and is currently working with business-to-business (B2B) cannabis distributor Pacific Wholesale Network as a beta client. CHEX is positioning itself as an all-in-one platform for cannabusinesses including features for everything from inventory and sales to office management, marketing, and social media. For now, the young startup is working on a digital storefront product for wholesale suppliers, cultivators, and manufacturers. Lopin and Zarrad confirmed the companies are in talks for a possible partnership in California.

"Blockchain is really interesting for the cannabis industry," said Lopin. "Let's say a transaction was made on our exchange that triggers a process where a wholesale distributor automatically packages a product and loads it onto a truck. When the dispensary receives that delivery, it has to be authenticated. You can do that using a mobile app or something like biometrics, but let's say the transaction uses a [blockchain-based] smart contract that says the container can't be opened until it's authenticated. Beyond just cannabis, that kind of asset verification could potentially be disruptive down the road for something like international commodity trading."

The Dank Side of Cryptocurrency

While Bitcoin itself is of course an option when it comes to using cryptocurrency for cannabis-related transactions, legal cannabis also has a collection of its own pot-specific cryptocurrencies vying for relevance and staying power. In the current Cryptocurrency Market Capitalization, the most valuable one is PotCoin at more than $2 million.

PotCoin is an open-source software platform and peer-to-peer (P2P) cryptocurrency built on blockchain that does a couple different things. Consumers can buy and store PotCoin in digital wallets, online and brick-and-mortar businesses can set up PotCoin transactions at the point-of-sale, and investors can buy and trade PotCoin in cryptocurrency exchanges. Launched in early 2014, the PotCoin is also a limited resource; according to PotCoin's investor portal, the currency is fixed at a supply of 420 million coins.

According to the project's 4-20 Update from this past April, PotCoin is launching a number of initiatives to evolve the technology and build out its ecosystem. The platform now includes a PotCoin Seed Bank for growers to redeem coins directly for cannabis seeds as well as a PotCoin Rewards Program for merchants and businesses. There are a number of merchants across the US and Europe that currently accept PotCoin.

PotCoin is the cannabis-specific cryptocurrency with the most market viability but other options, including Cannabis Coin, DopeCoin, and XCI Coin, also hold some trading value. The goal of these kinds of industry-specific digital currencies is to facilitate secure transactions outside of traditional banking, but the biggest problems with that are two-fold. Merchants already accepting cryptocurrency can already use Bitcoin, but more importantly, newer seed-to-sale solutions such as Flowhub and blockchain-based platforms such as Tokken are more effective mainstream solutions to the banking problem.

PotCoin is a valuable cryptocurrency with an active community, and it's not going anywhere anytime soon. But in the long run, as we march closer to nationwide legalization, hashed blockchain transactions will likely play a far greater role in the science and business of legal cannabis than cryptocurrency.

The Science of Strain DNA

Arguably the most outside-the-box use for blockchain in the cannabis industry has nothing to do with banking. Boston-based Medicinal Genomics uses a service called StrainSEEK to map and sequence the DNA of different cannabis strains, then register that information and store it on the Bitcoin blockchain.

Medicinal Genomics, which is owned by Courtagen Life Sciences, tests cannabis strains for a number of different factors, from DNA purification to microbial and sex testing (yes, apparently weed strains do have genders). But, as far as blockchain goes, Medicinal Genomics currently works with partner labs in eight states to analyze strains, hash the DNA sequence on the Bitcoin blockchain, and then ultimately register and list that strain on Kannapedia, its public-facing cannabis strain database.

Kevin McKernan, co-founder and Chief Scientific Officer at Medicinal Genomics, explained how the company uses this kind of blockstrain sequencing in different ways. Every strain hits you differently, and a blockchain-based DNA fingerprint gives consumers and particularly medical patients a way to verify the strain they're about to ingest and its typical therapeutic effects. Blockchain strain mapping can ensure greater consistency for growers in an industry beset by issues such as strain duplication and counterfeiting.

"Strain mapping can tell growers what all their neighbors are in the field; the genetic distance between their strain and everything else on the market," said McKernan. "That can also be very handy for consumers looking for a strain in another state. It's almost a dewey decimal system for dealing with the error rates and counterfeiting in the industry.

"We sequence the information, compare it against our database, and perform a blockchain transaction for customers to give them that Bitcoin block with an irrefutable timestamp. We have more than 1,000 strains currently in the database currently, and around 420 in the [Kannapedia] public tree."

Along with DNA mapping and Bitcoin hashing, Medicinal Genomics also creates a QR code for every sequenced strain on Kannapedia that can be downloaded and put on a product. McKernan said the company is also redesigning its mobile app as a Kannapedia-facing tool for dispensaries. This is where McKernan sees an opportunity to partner with popular cannabis encyclopedias such as Leafly and Weedmaps. He said Medicinal Genomics has had casual conversations with the companies regarding how to best integrate strain DNA data into their platforms.

"The holy grail in all of this is to combine the years of data Leafly has on user experience with what we on the DNA sequencing and strain testing side do to promote medicine grown in the ground, personalized to the patient," said McKernan.

"We want to connect side effects like paranoia, for example, to specific genotypes and phenotypes in different variants," added McKernan. "As we sequence more and more strains we're beginning to identify common variants that differentiate them. We can use this to focus on the genes that matter to growers, but also to make sure the parents of patients like epileptic children taking [cannabidiol] CBD oils know that if this strain of AC/DC is a slightly different color, it could give their child a fever."

The other side of mapping strain DNA to the blockchain is about protecting intellectual property (IP). This is an industry where obtaining a plant patent is still a convoluted and often prohibitively expensive process. Blockchain-based strain DNA data, or a "blockstrain," can serve as irrefutable, timestamped proof that a grower does in fact own that IP. Mike Catalano, Senior Director of Marketing for Medicinal Genomics, explained why blockchain is such a valuable technology in this regard.

"Similar to the issues on the banking side with cannabis, we're looking to bridge the gap with the available IP protection for entrepreneurs," said Catalano. "You can't just go register your strain with the US Patent and Trademark Office (USPTO). The patent office is coming around, but we're trying to provide a way for companies to protect what they have with a technology that could stand up under review."

This kind of forward-thinking use case gets into why blockchain is such an attractive technology for the legal cannabis industry. In areas such as banking and legal copyright, the government hasn't caught up with the space yet.

Blockchain is an immutable ledger with the ability to store and protect everything from money to IP data while the rest of the world catches up. Years from now, if marijuana is legalized federally, large pharmaceutical corporations may move into mass cannabis production. A blockchain hash is the irrefutable digital proof an entrepreneur can pull out to prove they own the IP of that strain, complete with DNA evidence and the time the transaction was logged.

"Let's say the industry begins to open up and a Monsanto or a Pioneer Pharmaceuticals comes along and says we're going to patent this popular strain," said Catalano. "Blockchain is a way to prove a prior use of that strain and get an exemption. Blockchain is a way for growers to improve the overall quality and consistency of the strains and information out there, and it's also about protecting them in the future. Blockchain is something that will continue to be used even when more traditional IP protections open up down the road."

This article originally appeared on PCMag.com.