Can Blockchain Technology Disrupt the Cannabis Black Market?

As of October 17, 2018, both medical and recreational cannabis will be legal across Canada.

When first introduced, the Trudeau government made it clear that the intent of legalization is to stamp out the country’s entrenched black market — one-third of which is supplied by organized crime.

In a recent study, Statistics Canada found that despite the establishment of government-sanctioned medical marijuana in 2001, 90 percent of the country’s cannabis users still procure their pot from illegal sources — whether sketchy corner pot dealers or “gray market” unregulated dispensaries.

The agency estimates that Canada’s illicit cannabis market raked in as much as $6.2 billion in 2015 off purchases totaling 697,500 kilograms of product. In comparison, only 33,482 kilograms of dried flower and cannabis oil were sold through the legal medical market.

One of the major issues in Canada is that illegal drug dealers have effectively taken over the older, grandfathered licenses to grow cannabis under the previous Marijuana for Medical Purposes (MMPR) legislation introduced by the former Conservative government. As highlighted by a recent bust in York, Ontario, many of these licenses have been hijacked and are being used to produce massive quantities of illegal cannabis that is being sold to dispensaries or street dealers.

In that case, police seized $6.5 million in illegally produced cannabis. York Police Chief Eric Jolliffe says police are often “identifying personal and designated production licence holders that are growing excessive amounts of cannabis under Health Canada authorizations. The product is then diverted to the illicit market by organized crime groups to supply illegal dispensaries, export outside of Canada and trafficked in our local communities.”

However, at the current time, there is no practical way for police, governments or consumers to tell the difference between legal and illegal cannabis. As several legal cannabis states in the US have discovered, in order to effectively woo cannabis users from the black market to the legal market there are several hurdles to overcome — including costs, accessibility and quality.

Keeping costs competitive and ensuring enough licensed retailers are within consumer reach are key factors, but so is ensuring access to safe, quality products. Blockchain technology that has the ability to track cannabis products from seed to sale may be one of the sharpest weapons in the fight against black market marijuana.

Eradicating the black market won’t happen overnight  

After Uruguay, Canada is only the second country to legalize recreational-use cannabis at the national level. But the numerous examples of smaller-scale legalization south of the border may offer some insight as to how likely it is that a regulated market can overtake a well-established black market.

In terms of prices, analysts believe legal weed retailers will be able to compete with illicit sources. According to the Financial Post, “in the next few years as regulations loosen and legal supply networks grow.” Since legalizing adult-use cannabis in 2012, prices in the state of Colorado have fallen from over US$12 per gram to under US$7, as per BDS Analytics, and the number of licensed retailers has grown to around 1,000. The state’s government says an estimated 70 percent of cannabis consumers are now purchasing their product on the legal market.

Washington state, which legalized recreational use in 2012 as well, has also seen its black market sales fall to below 30 percent. “It’s like booze after prohibition, some people continued to purchase liquor from bootleggers. But with time, the black market shrank to the point of insignificance,” said Rick Garza, director of the Washington State Liquor and Cannabis Board.

The consensus amongst market analysts and policy experts is that the legal market’s ability to overtake the black market rests on helping cannabis users recognize the value of purchasing regulated, safety-tested products. “After all, ‘reducing the black market’ is simply another way of saying ‘shifting cannabis consumer behavior,’” explains a report by the Cannabis Commerce Association of Canada, “and the legitimate alternative to black market cannabis will have to be sufficiently attractive to offer competition.”

Safe, quality product as alternative to risky unknowns on the black market

While customers will be demanding high-quality products, provincial and federal governments will be requiring that those products meet health and safety regulations. Canada’s cannabis industry will be subject to the same consumer safety and public health requirements that regulate the agricultural and food sectors — including product recalls. As in the pharmaceutical industry, regulations concerning dosing, quality, concentration levels of psychoactive components and packaging will also be enforced.

“These factors will drive businesses to develop systems that are harmonized with common, recognized standards that encompass the value chain, and that are verifiable and enforceable,” according to a recent white paper by SCS Consulting and Value Chain Management International.

If safe, quality products are a key component to eradicating Canada’s cannabis black market, then the success of both the Canadian government’s policies and the companies operating within in the regulatory framework rests on the ability to effectively track and monitor all points on the value chain, from seed to sale.

How blockchain can help

Blockchain technology — which uses an unalterable shared ledger to record transactions across a decentralized network of computers — is quickly becoming a go-to solution for myriad challenges across a wide range of industries, from energy system management to the healthcare sector. However, the technology’s most critical application may be in creating traceable and transparent supply chains, allowing companies and regulatory agencies to track and locate a product in real time across the entire the value chain.

For example, in the case of cannabis that is illegally produced by a crooked MMPR producer, the blockchain data would be able to identify which cannabis is legally produced, and which is not, using a combination of logistics tracking and genetic data.

IBM (NYSE:IBM), which has partnered with global giants Walmart (NYSE:WMT) and Maersk to use blockchain to improve the traceability of its products, released a report last year for the government of BC, stating that blockchain “is an ideal mechanism in which BC can transparently capture the history of cannabis through the entire supply chain, ultimately ensuring consumer safety while exerting regulatory control — from seed to sale.”

In this way, blockchain-based supply chain management technology may be the answer to not only maintaining quality control, but effectively eliminating the cannabis black market as well.

“The application of consistent consumer safety standards and value chain traceability protocols provides businesses, partners, regulators and consumers with relevant, reliable and readily accessible information about cannabis products – information that can be trusted,” wrote the authors of the SCS Consulting and Value Chain Management International white paper. Hence, traceability is a cornerstone to building the consumer trust and brand credibility legal cannabis will need to compete with black market sales.

Players emerging in the space where cannabis and blockchain converge

While both the blockchain and legal cannabis markets are still young, there are a few companies emerging on the scene with tech products aimed at addressing the challenges of seed-to-sale supply chain management.

Software company TruTrace Technologies Inc. (TSXV:TTT, OTCPINK: BKKSF), formerly known as BLOCKStrain Technology offers a blockchain-based platform for tracking, licensing and archiving genetics of cannabis plants that allows for enhanced security and transparency throughout the supply chain. The automated platform can be integrated into all modern or legacy tracking systems across the cannabis supply chain, including regulatory frameworks at the provincial level and Health Canada-approved cannabis-testing facilities.

The platform, true to its blockchain nature, acts as a central source of information and allows all stakeholders throughout the supply chain to communicate and collaborate in tracking products from “gene to sale.” BLOCKStrain has partnered with WeedMD (TSXV:WMD), a licensed producer in Ontario, to integrate its blockchain-based platform with WeedMD’s significant genetics library.

More importantly, when it comes to the black market, BLOCKStrain is also partnered with Spire Secure Logistics, a security company headed by former narcotics police investigators. Together, the two companies are bidding on government contracts to provide a gene-to-sale track and trace solution to combat the black market.

BLOK Technologies’ (CSE:BLK,FWB:2AD) wholly owned blockchain-enabled supply chain management platform Greenstream is designed to engage licensed producers, dispensaries, consumers and regulators in upholding the integrity of the legal cannabis supply chain. Built using the IBM Hyperledger fabric, beta testing of the platform with Canadian licensed cannabis producers is underway for 2018.

Takeaway

Canada’s emerging cannabis market is expected to be enormous — surpassing C$22.6 billion in annual revenue in the next few years, with a large majority of that profit coming from ancillary cannabis-related businesses. But for the legal cannabis market to be successful, both business and government leaders must find ways to reduce the black market’s share in those revenues.

A traceable and transparent supply chain is key to that endeavor; not only to making sure black market product doesn’t make it into legitimate distribution channels, but also to ensuring that legal cannabis products are of the highest quality. Blockchain-based supply chain management platforms offer the most reliable and transparent means for tracking cannabis products from gene selection to point of sale.

This article was written according to INN editorial standards to educate investors.