The cannabis industry can stand to benefit from the features of blockchain technology. This may have some people scratching their heads “How is smoking weed going on a blockchain?” It is not about the activity itself but the business of cannabis supply and transactions. When it comes to verifying the supply chain, the blockchain can provide a service to cannabis dealers that they are getting their supply from legal and authorized sources. This can help reduce discrepancies like fraud while increasing the efficiency of delivery and production.

The legalization of marijuana for medicinal or recreational use in states like California, Colorado and Nevada have led to the rise in retail outlets that sell cannabis derived products. It is no longer just dispensaries that can distribute marijuana legally, but licensed outlets as well. To obtain licenses there are basic legal requirements that must be met and these records could benefit from a DLT (Distributed Ledger Technology). That is not exactly a blockchain, unless it is a system that also issues a digital coin or token. This will allow transactions to be audited from a DLT that incentivizes nodes or computers that participate in consensus to verify transactions and validate blocks in the blockchain.

The idea is unconventional but there are already some businesses in the cannabis industry that are looking into the blockchain. The main benefit the blockchain can provide besides verifying licenses is verifying the supply chain. Things can be obscure when dealing with the supply of marijuana. In the US, most of the supply of marijuana comes from illegal sources that are smuggled into the country. This involves activity which evades law enforcement and keeps a black market thriving. Often times the supply chain is affected by fraud, theft and even unauthorized sources. It can also be tampered with by corrupt businesses to make more money, which is essentially cheating. The solution to stopping this is not up to the blockchain, but it can help verify where the sources are coming from in order to confirm their authenticity.

Marijuana is not just about recreational use. It also has medical benefits which is another market segment that the cannabis industry can tap into. If the supply comes from verified sources, like legal cannabis farms, it helps the industry. At the same time it can help government regulators monitor and audit the supply knowing that there is an immutable and transparent record of its origin and sale from legal businesses. Growers, distributors, retailers and marketers of cannabis products are verified at every step of the “seed-to-shelf” process by a blockchain solution.

The process begins with the growers. These are the businesses that grow the marijuana plants. The growers must meet certain requirements for compliance and are listed in a DLT for retailers who make the purchases at bulk before distribution using what are called smart contracts. The smart contract is a programmable code that states the conditions and logic of the transactions which can execute autonomously. The retailers themselves are held accountable for the sale, and there will be a record of their transaction. The retailers can then sell the cannabis which marketers can promote. We have seen products like brownies, cookies and even beer derived from cannabis. This also creates an industry for paraphernalia, publications and lifestyle products that are centered around cannabis. Those who do the marketing will know who to promote based on verified sources confirmed on the blockchain. This would remove ambiguity as to the legality of the business.

Involving cryptocurrency is essential in a blockchain, but for the cannabis industry while it may be a solution for the producers, perhaps not for the customers. The issue here is that identity is not hidden but pseudonymous in nature since transactions can still be traced back to someone. Some private citizens who use marijuana may not feel comfortable about this. A cannabis coin that is used as a token for purchasing marijuana (medical or recreational) sets up more auditability for regulators to find who and for what reason marijuana is being used. This token is fungible in nature just like fiat cash so it doesn’t have to be tied to any particular identity. It can also be spent in direct peer-to-peer transactions that can be used to exchange items and services other than marijuana products. The transaction will still be recorded on a digital ledger as a digital proof.

With greater visibility due to transparency and higher efficiency due to traceability, businesses in the cannabis industry can benefit from the blockchain. At the moment there are various projects that are exploring this implementation. Startup TruTrace has partnered with Deloitte, the professional services giant. They are working on building a tracking system using a blockchain for “seed-to-sale” of cannabis. Other ways blockchains can help the cannabis industry besides tracking the supply chain includes documenting public information regarding authentic marijuana strains (types of cannabis), verify the amounts of cannabis in edible products sold in grocery or specialty stores with certified labels and also certification of cannabis products as approved by the FDA. Worst case without certified products are fake or dangerous products that could affect the health of customers. There are more issues that one can use blockchains to explore, but a verification system is one way to expand and legitimize the industry.