Tag Archives: token

Digital Assets & Cryptocurrency in Cannabis

By Itali Heide
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As the cannabis industry experiences a significant shift toward general acceptance and mainstream adoption, new modes of operation are popping up everywhere. The evolution and expansion of the industry beg for constant innovation, and the integration of NFTs and cryptocurrencies as payment options is at the crossroads between tech and cannabis.

Crypto and NFTs have grown in popularity in recent years. Non-fungible tokens are an interesting asset in the art and collectibles world, while cryptocurrency has made a name for itself by providing a unique kind of financial independence. More and more payment processors are embracing these new payment methods, and the cannabis industry is also slowly welcoming them.

In order to fully understand the cannabis-crypto connection, Swaroop Suri, founder of Melee Dose, a cannabis brand that’s been embracing NFTs and crypto as payment options, shared some insights. Their innovative approach to creating unique cannabis experiences with technology and creative branding makes them a pioneer of this movement.

What’s Happening with Cannabis and NFTs?

NFTs and cryptocurrency are exciting developments in an industry that carries the reputation for having a rocky relationship with the banking industry. The legal gray area surrounding the connection between cannabis businesses and the banking industry has given way to an onslaught of challenges, with many banks shunning cannabis because of its federally illegal status. While traditional banking can limit cannabis companies’ access to basic financial services, the decentralization that’s characteristic of blockchain opens up many doors.

In recent years, different brands have tested the waters by using cryptocurrencies and NFTs to enhance marketing and offer alternate payment options. While it’s still early in the game, trends are starting to appear.

Bitcoin quickly became one of the more popular cryptocurrencies

One of these trends is using NFTs in marketing and branding, creating unique digital assets that can be collected. This gives an air of exclusivity, creates more immersive experiences, and helps forge a brand identity. NFTs are often a great tool to engage with customers and create a sense of community.

Melee Dose recently started integrating NFTs from Bored Ape Yacht Club (BAYC) into product packaging and branding. This has allowed the brand to offer unique experiences, foster community engagement, enhance storytelling and demonstrate adaptability to an ever-changing world.

“This collaboration merges the worlds of fashion, art and technology, providing our customers with exclusive “IRL” products incorporating digital assets and driving brand affinity”, says Swaroop Suri. “By embracing the digital revolution and connecting with the influential BAYC community, we aim to redefine consumer experiences and build lasting relationships with our audience.”

Crypto Payments Aren’t Futuristic Anymore

Payment is another trend to look out for. Cryptocurrencies are becoming more accepted in many big industries, including cannabis. With traditional banks limiting access to banking services, crypto allows cannabis companies to offer decentralized and secure payment options.

Cryptocurrency offers more enhanced privacy than traditional payment methods, which is great for those who want to stay under the radar. Lower transaction fees are another plus, as a decentralized system is more flexible. The speed of crypto payments is also an enticing feature, as payments are usually processed more quickly than traditional payment methods.

Swaroop Suri, Founder of Melee Dose

So, how are brands accepting crypto as payment? Is it safe? Melee Dose started accepting cryptocurrency payments on their e-commerce store by partnering with Coinbase Payments, a leader in the crypto industry with a strong reputation and ease of integration.

Cryptocurrency may seem perilous to those who don’t know much about it, but siding with the right company can help ease those fears. Addressing concerns about crypto volatility, Suri “opted for a feature provided by Coinbase Payments that allows for immediate conversion of cryptocurrency payments into our local currency, ensuring stable revenue despite market fluctuations.”

By working closely with reliable payment partners like Coinbase Payments and implementing necessary features, companies like his are able to successfully overcome crypto roadblocks, providing customers with increased flexibility and convenience.

The Future of Crypto, NFTs & Cannabis

The future of integration between cannabis, crypto and NFTs is exciting and always on the move, meaning there are opportunities constantly arising and challenges ahead we have yet to tackle. As cannabis legalization continues to evolve, we might expect changes in regulatory frameworks that impact how cryptocurrency is used in the industry. While we can’t say what those changes might be, the fact that NFTs and crypto have become mainstream indicates a clear adoption, as the industry finds ways to integrate them. From blockchain integration and creative marketing to payment options and immersive experiences, they are here to stay.

Swaroop Suri and his team might’ve gotten in on the game early, but they know the future is expansive: “It’s possible that NFTs could become a significant part of cannabis marketing strategies in the future,” He says. “The cannabis industry can use NFTs in various ways, such as tracking crops and using intellectual property to promote products through packaging artwork, which is what our team at Melee Dose has accomplished.”

NFTs won’t stop there. “There is a possibility to use NFTs for establishing VIP programs that offer exclusive discounts and access”, Suri says. “The ownership of an NFT could grant special privileges and perks to customers when shopping with an e-commerce company, fostering a deeper connection with the brand and community and leading to customer loyalty in the long run.” NFTs offer diverse possibilities for cannabis brands to improve their marketing techniques and get creative.

When it comes to crypto payments, brands will surely continue to add crypto as an option in addition to merchant processors. Highly-regulated industries like cannabis can find many benefits in crypto, as experienced by Suri: “Accepting cryptocurrency can mitigate some of these issues by providing an alternative payment option that is not subject to the same restrictions as traditional payment methods.”

Final Thoughts

The excitement surrounding crypto and NFTs is understandable, and as the cannabis industry introduces new opportunities for those who are at the intersection of these two global forces, companies everywhere are changing their relationship with technology.

There are other brands hopping onto the this train as well. Household cannabis brands and popular companies like Plain Jain, Highland Pharms, American Green and Pharma Hemp are just some of the many that have begun accepting crypto as payment.

As the industry continues to evolve and grow, staying ahead of the curve and embracing technology with critical thinking and environmental consciousness is key. As a new, dynamic and exciting space with as many opportunities as it is filled with challenges to tackle down the road surrounds us, the one thing we know for sure is that this is just the beginning.

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User-Generated Data Brings Revenue: It’s Time for the Users to Get Some

By Dr. Markus Roggen, Amanda Assen, Dr. Tom Dupree
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You generate the product, you should benefit from it too.

If you are not paying for the service, you are the product. This pithy phrase is often heard in discussions about social media’s use of personal information and user-generated content. The idea can be traced back to a 1973 short film that critiques television’s impact on culture and politics. Although about television, the quote, “you are the end product delivered en masse to the advertiser,” still rings true when talking about major online corporations.

We have all seen it with big corporations. In the first three months of 2021, of Facebook’s $26.2B revenue, a whopping $25.4B was from advertising sales. However, the space for an advertisement to be delivered en masse to the public is not the only thing purchased from Facebook. Access to personal information such as your search history, likes and posts are also purchased by companies to determine which advertisements they should target you with.Access to user-generated data by advertisers has sparked privacy and ownership concerns regarding large internet platforms. The idea of being surveilled all the time is uncomfortable, and many large corporations like Facebook have royalty-free and transferable licenses to your posts.

Similarly, many websites in the cannabis industry gain value from information submitted by consumers. As an example, the website Leafly provides over 1.3 million consumer product reviews that are often used for purchasing decisions. These reviews play a role in attracting more people to websites that operate with a similar system to Leafly, and in turn advertising space to reach those people is sold. According to their About page, more than 4.5 million orders for advertising space are placed with businesses on Leafly each year, generating annually about $460 million in gross merchandise value. So, the users work for free to attract an audience to these websites for the advertisers, and the websites make money from advertisers.

Can we empower users with ownership of their content, data and participation in profits?

Frustrated social media users exclaiming “We are the product!” does nothing to change our reality. It is unlikely we will change how big corporations like Facebook work, but can we ensure users receive some of the benefits in our own cannabis industry? Many of these websites, especially those for medicinal cannabis, are designed to genuinely help users. Can we further increase this feeling of having a transaction with the websites rather than feel like we are being sold to advertisers? The world of NFTs may offer some guidance.

An NFT (or non-fungible token) acts as a digital certificate of authenticity. Unlike cryptocurrencies (like Bitcoin), each NFT is unique, so it cannot be exchanged or multiplied. They are kept on a blockchain system, which is a growing list of computationally secure ledgers. The blockchain allows proof of ownership to be established for the person with the NFT, and prevents others from being able to tamper with or claim ownership of the artwork, game, tweet or cat picture it is assigned to. Although non-exchangeable, NFTs can be traded on a digital marketplace, like how a physical piece of art can be auctioned.

While NFTs and cryptocurrencies are certainly not without controversy and flaws, an NFT-like system that provides users with proof of ownership for their data and grants them control over what is done with it may be the way of the future for websites in the cannabis industry. Just like Facebook, when it comes to sales, online display advertisements are some of the top revenue generators for websites in the cannabis industry that utilize user-generated content. With an NFT-like system, users could be granted a royalty for their content, which would obligate websites to give a portion of their profits to the users when their content is sold to an advertiser. Users may be able to have a portfolio of their generated content, have some control over who can access their content and who their personal data can be sold to.

Websites that are more focused on cannabis for medicinal use often pride themselves on being more patient-focused and professional – no pothead puns or crass logos. An NFT-like system might be especially beneficial for these companies, as it would further increase the emphasis of trust and respect for users. In this case, an NFT-like system could be used to assign ownership of reviews to individual website users. Since these reviews attract new people to these websites, when access to a user’s data is sold to advertisement companies, then a portion of that revenue is given to the people who created the reviews. The estimated amount of revenue that reviewers help to bring into the company can be calculated and distributed accordingly. While this may seem like it would cause a significant loss of revenue for the websites, the increased trust that would come with this system would likely promote more users, generating an overall increase in revenue and credibility. Users could become more engaged and spend more time writing reviews, increasing web traffic considerably. Advertisers would be more attracted to the larger audience and the prestige of having their advertisement on a well-respected site.

An NFT-like system could hold large internet corporations accountable.

The new normal is corporations on the internet making money from the content created by users. In return, users receive none of the monetary benefits and have their personal information shared with hundreds of businesses. An NFT-like system, although theoretical, may be able to empower users to hold large corporations accountable for what is done with user-generated data. It is unlikely we can change big companies like Facebook, but if adopted early, this may be plausible in our cannabis industry. This in turn may not only give more ownership to the website users, but could also benefit the websites, and the advertisers. Overall, the product should be the website and the services it provides. An NFT-like system might help promote this and could make users who generate value for the website partners in business.

Blockchain Controversies Continue To Rock The Cannabis Industry

By Marguerite Arnold
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Disclaimer: Marguerite Arnold is the founder of MedPayRx, a blockchained ecosystem that does not use utility tokens, and that is currently going to pilot in Europe designed to eliminate such risks.


As reported here in Cannabis Industry Journal last year in a three part series, there are considerable dangers of utilizing blockchain in the cannabis industry (as well as other industry sectors) that directly affect all commercial operators as well as consumers of both the recreational and medical kind. These remain largely unsolved.

These include regulatory and compliance issues in every direction, starting with banking and securities law, but also include privacy and consumer protections. They also fly in the face of regulations imposed by governments to control inflation, set prices for medications and food, and prevent monopolies.

Beyond that, they also pose considerable if so far unexamined liabilities for businesses operating in this space (including uncontrollable volatility in basic business operations) that very much impact the basic cost of doing business.As of the beginning of this year, however, the situation is back in the news. 

The Skinny On Paragon
As of November last year, the company was sanctioned by the SEC in a precedent setting case on the issue of whether “utility tokens” are securities or not. In fact, the SEC found that Paragon illegally marketed and distributed digital securities under the false pretension that they were not securities. Paragon, in turn, reached a settlement with the SEC that it would return any funds received by investors prior to October 15, 2017 and pay a fine to the SEC.

As of the beginning of this year, however, the situation is back in the news. Because of the settlement agreement, it appears that a pump and dump group operating through the exchange YoBit managed to raise the token briefly from about $.10 a token to $10 in an effort to raise the cost of compensation from Paragon. This absurd rally was completely unsustainable, and as a result, fell back to $0.3 per token (albeit tripled the price of the token). But the fact that it happened at all is illustrative of the extreme risk now faced by the industry itself from this kind of tech and financial model.

Why? It means that all users (token holders) of such an ecosystem and for any purpose, would be directly exposed to such risks in the future. And on literally an hour-by-hour basis.

Utility tokens in other words, as defined by all such models (and Paragon is far from the only one), are used not only for investment in such businesses, but then bought downstream, via exchanges, by people who wish to transact in the network itself. And that is the real danger to businesses themselves by adopting such models.

Problem 1 – Utility Tokens Are Securities

The biggest issue at the heart of this conversation is this: Tokens are recognized now as securities, and further still operating in a world where pump and dump on the exchanges is a major liability for all who buy the tokens for any purpose. This means for example, that anyone who must buy a system cybercoin to transact within a blockchained ecosystem (from consumer to business manager overseeing international distribution of their product from the commercial end) would face unprecedented volatility that does not exist by using regulated currencies. Good old dollars and euros for example do not pose this kind of existential risk to businesses themselves.

In the Paragon case directly, for example, owning Paragon crypto means that monthly rent at the incubator would fluctuate in cost based on the unregulated cost of the coin, not a prenegotiated rental agreement in regular currency for space (which is far less volatile). In the current environment, such space just tripled in price.

Beyond that, no consumer in California, for example, would want to have to face the added cost of buying a hyped token (at artificially raised prices) before they can access the newest, coolest strain of bud.

Such systems in other words, are NOT just a fancy form of a digital payment solution (like Paypal). What they do dramatically increases the risk of price volatility in all business operations (also called “cost of goods sold” or COG), andto the end user while also directly exposing all to such risk at every point of production, processing and sales.

Why?Latency issues are also a major issue.

Because the cost of conducting normal, basic business operations would be directly exposed to speculating investors. Even local businesses, in other words, would be completely vulnerable to not just the fluctuations domestically or even internationally caused by doing business in multiple jurisdictions and traditional currency risk, but have direct and unprecedented exposure to a much less regulated and far more volatile price environment globally. And further one that affects literally the entire manufacturing and distribution process.

Problem 2 – Network Congestion

Latency issues are also a major issue. This is a bit more technical and complicated, but is one of the bigger reasons why most blockchain technology and solutions are still incapable of dealing with commercial industry requirements. Much less keep regulated industries in any space, in compliance.

Here is one way to think of the problem. If you have many users on a blockchain network all at once, speed of transaction goes way down and associated costs go way up.

The tokenized asset in other words, has to compete not only with people buying the token as an investment, but those using them to buy goods and services on the commercial side AND the industry processing taking place behind the scenes to fulfil and track product. This has been easy to see with Bitcoin in particular, but is not limited to the same.

Further, prioritization on a network itself (and the costs involved to overcome them, also paid in tokens) then unfairly creates a monopoly environment because of the added costs involved to speed up otherwise normally processed and critical operations. The biggest boys on the block(chain) win. Always. That is antithetical to anti-trust law.

Problem 4 – Undermining Basic Government Regulations On Cost Of Purchase

Here is the biggest conundrum, particularly facing the international cannabis industry now in the process of exporting across international borders. Governments (particularly in Europe) routinely set prices on medicine (in particular), for large contractual purchases and to insure the continued survival of public healthcare (which in Europe and the UK covers most people). See the German cultivation bid for cannabis as a prime example. The government is forcing the industry to submit prices via competitive bid that are expected to come in somewhere between 1-1.5 euro per gram. This in turn will affect not only domestically grown but imported cannabis – and from all points on the globe as the industry opens up.

That process is impossible in an environment where the cost of production itself would be (in a price volatile blockchained delivery system) inherently unpredictable and unstable because the price of production and distribution is itself a speculated upon commodity that can vary, literally, at the speed of a pump and dumped token, sold on any unregulated exchange, anywhere in the world. And as a result, is also illegal.

Marguerite Arnold
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Paradox or Paragon? A Non-Techie Look at Blockchain, Cryptocurrency & Cannabis: Part II

By Marguerite Arnold
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Marguerite Arnold

Disclaimer: Marguerite Arnold has just raised the first funds for her blockchain-based company, MedPayRx in Germany (and via traditional investment funding, not an ICO). She will also be speaking about the impact of blockchain on the cannabis industry in Berlin in April at the International Cannabis Business Conference.


To read the first part of this series, click here. The Paragon class action lawsuit is likely to shake up two industries – the cannabis world, which has been following this situation at least in the industry press since the company began to raise money – and the ICO space in general. Why? Just the combination of the two topics is a guaranteed conversation starter. In addition, given the focus on whether tokens are securities or not (or whether so-called “utility tokens” are as well, depending on how they are used and sold) far beyond cannabis, this case may well begin to set precedent on the entire subject. Even more worrying for Paragon in particular right now, beyond the federal government, coordinated efforts are underway by both law firms and consumer groups to recruit aggrieved investors as suit plaintiffs. Beyond the United States and far from the Paragon case specifically, banks in Europe have begun to set guidelines on cryptocurrency and ICOs too. It is not routinely hostile everywhere (see Switzerland if not many Asian countries). But the map is now being defined.

The dilemma that Paragon is now facing is also something that has been coming for some time both for the company and others like them – and from both the cannabis investment and crypto coin directions. Digitally astute cannapreneurs take note: Do you really want your dream business used to define precedent as a defendant in a class action? Or targeted by the new SEC cyber unit whose job is to regulate ICOs (and probably “crowd sales” too?). That regulatory glare is coming everywhere. And soon. Globally.In the world of cannabis, in particular, it is also very important to be careful.

If issuing tokens, particularly if you sell them to raise money – no matter what that money will be used for – realize what you are doing. Even if you state to the world that these are not “investment” vehicles” but “utility” tokens. If you sell them, they are by definition, even if not federally litigated and defined yet in the United States, a contract for future worth, services or other benefit. An IOU in other words. As such they are also derivative securities, which is why the regulatory agencies, barely 10 years out of the last global financial meltdown, are now starting to see parallels. So much so, in fact, that SEC Chair Jay Clayton warned in January that any attorneys who are involved in ICOs might be in breach of professional obligations. Other jurisdictions are following suit.

In the world of cannabis, in particular, it is also very important to be careful. Selling (soon to be federally if not internationally regulated) tokens or securities in general for that matter for certain services or products that can be illegal in some jurisdictions is also a space that cannapreneurs are going to find challenging. See the banking problems of the entire U.S. cannabis industry. Same issue.

This is also going to get even more complicated very soon. Particularly in a world of shifting regs and when it comes to “brand creation.” Right now, for example, a crowdfund or ICO (the terms can be used interchangeably, token issue or not) for a “global cannabis lifestyle brand” promoted and sold online is highly problematic just about everywhere. Why? You cannot transport cannabis across state lines in the U.S. Americans and Israelis also still cannot export anywhere. You also cannot sell what is considered “medical” marijuana to a European regulator if it is not GMP certified. It is, according to local definition, most certainly not “medical”. You may also not distribute cannabis online in countries like Germany. And of course, cannabis itself is still federally illegal in many places, including the United States. Issuing a token or security with the intent of engaging in such practices is ill advised at this juncture. No matter what it is labelled.

Those are also situations where investors could legitimately also sue the ICO or crowd sale holder for breach of securities laws or outright fraud.

Beyond the world of banking law, users face other quagmires, depending on your situation and how you use and issue tokens. Or you certainly will in the emerging future. If you use tokens in situations where members “vote” you may also run into other problems. Like civil liberties issues. Poll taxes (where you force people to pay before access to voting or weigh the impact of their votes on financial contributions) is illegal in many jurisdictions and even more specifically certain use cases that may not always be initially obvious. How that plays out in blockchained ecosystems is a discussion of the future, but it is coming. Along with other labour and regulatory issues surrounding the use of “smart contracts.” Which are also known as “utility tokens.” See, it gets confusing. And fast.

In the cannabis space, liabilities sprout more quickly than even the fastest growing strain.As a result, the first major issue that any cannabis business considering a token generation event (or TGE) will face, no matter whether it is state or federally legit in said jurisdiction, has nothing to do with cannabis but rather rather cryptocurrencies and ICOs – and for right now federal if not international financial law – but look for that to also change as the space develops.

For the present, in most places, token issues where monetary value is assigned or implied are considered securities or even defined outright as currency. Or they will be soon. This means that if you are issuing a new coin for any purpose that you intend to sell for any purpose, including an ICO, especially one that will supposedly be used to pay for goods or services, or even to “assetize” the token to give it a market value (the value of the asset it is assigned), you are now in the federal end of the swimming pool. And federal if not international law is not for novices or sissies much less non-lawyers when it comes to crypto coin. There are great white sharks everywhere in this often-strange digital ocean. That is even before you get to cannabis.

In the cannabis space, liabilities sprout more quickly than even the fastest growing strain.

This is also easy to illustrate – even beyond the concept of an ICO. Say you are a cannabis producer in Colorado – where much of the legal cannabis industry we know today was born. You are in business, have a license and even own your grow space and the acres of real estate that it sits on. But you also want to access additional capital (including that of the international kind) and are, as an aside, overwhelmed by the demands of your cash business. You meet an energetic young blockchain geek who says she can sign you up to her service that will create your white paper, website and even hook you up to one of the several “insta-mint” crypto coin services now available for several thousand dollars (don’t forget lawyer’s fees), plus hiring a good PR firm to manage the ICO process.

Groovy.

You issue your own coins and literally mint them for the sole purpose of assigning each coin to every dried gram of your product that you produce to test the market before potentially holding an ICO. You then “sell” this bud (at wholesale prices) to a dispensary with a wallet that will accept your coin via a smart contract that only releases the funds when the right amount and quality of product is delivered to the dispensary. As a clever marketing technique, you also agree with the recreational dispensary you are working with (who happens to be in Aspen) that you both will also now offer jointly issued coins, at a higher retail price, to any tourist with a medical card or any age-appropriate recreational user who has the ID to prove it, to “pre-buy” their cannabis on the way to après ski and have it delivered, no questions asked, at the hot tub. You advertise the service with a cannabis-friendly ski package operator and travel agent, and voila – customer base is assured. If you have any celebrity friends who are willing to promote it, even better. And why not, while you are at it, do some LinkedIn outreach.

No cash needed either. ID verification happens with coin purchase.

Easy, right? So many headaches solved with one coin to rule them all. Banking issues evaporate along with a lot of work for accountants at both ends of the conversation. And the price of the coin you issue cannot be illegally pumped and dumped because the “price” is set by the state or federal market and/or supply and demand and/or another kind of asset (like a piece of real estate designed to be a startup incubator space for which people also pay entrance fees in your tokens, to enter and use). Then you can offer these “coins” for sale, at those market prices, set by the dried bud you are growing, to anyone, anywhere, to invest in too. Right?

No ICO, even. No problem. After all, you say they aren’t securities but “utility tokens.”

Wrong.

By definition, such activity is illegal in the United States if it has anything to do with the plant for the same reasons the U.S. industry remains a mostly cash-only business. There are several U.S. start-ups trying to construct “legal” payment gateways for the industry right now in the lower 48 plus 2 (see CanPay in Hawaii) and some creative efforts in Europe. However, all of those depend on the willingness of a banking institution on the other end to allow that to happen. See Uruguay if you still remain optimistic about any American efforts right now. Not to mention the newly awoken willingness of the federal DOJ to prosecute for money laundering in a post-Cole-memo world. And that includes you too, California.

But this is an issue that is not just limited to the United States.

In other places, like Canada, Australia, Israel and the Eurozone, legitimate cannabis businesses have bank accounts. And banks are absolutely involved in both the blockchain and crypto space – see Ripple. As a simplified payment gateway, the technology is imminently useful, if still forming. But banking authorities are so concerned about ICOs that they are moving, quietly, to implement policies against them even as they are still accepting cyber currency (in limited ways and via strictly controlled channels).

Given such concerns and divided loyalties, it is unlikely that authorities in Canada will sit this one out, even though (and perhaps because), to date, the most intriguing ideas about cryptocurrency and cannabis have tended to waft from this part of the world lately given what is about to happen this summer.

Most dangerous of all to the budding crypto cannapreneur is Germany – home of legal, public health insurance covering medical cannabis. Banking regulators in Frankfurt, in particular, have taken a dim view of even just regular old crowdfunding. Add a token into the mix and the Germans are even less amused. The persistent rumor in the Fintech community in Frankfurt this March is that German banking authorities are refusing to accept any funds raised during an ICO anywhere. Verboten for any purpose. Why? Even if they know who you are, and all of your investors meet their KYC requirements, they do not know the source of the cyber currency coming from those investors. No dice. And KYC in this instance does not refer to a new brand of cannabis-flavored lubricant. It is a term that means, in the most comprehensive understanding of how it must be used, not only “know your customer” but being able to verify all points of data on a chain. Including the coin issuer, purchase conditions, currency used to purchase the same and “chain of title” downstream. If you are confused by this already, you should not be engaged in an ICO right now.Not all of these models or even the ICOs that use them are scams.

Add cannabis to this recipe, and every bank in Germany, even the one at the moment who is still more or less openly participating in ICOs, if not the rest of the European financial community, will probably walk. Even if you reach your “hard cap” (the maximum amount you hope to raise) that might be in the tens if not hundreds of millions of euros. In that case, it will probably be even harder to find a bank to accept your business. Worse, you may never raise the amount you hope for. At that point, you cannot go back to traditional venture capitalists – or anyone else – for more money. You are done. You must start over from scratch. If there was an asset of any kind involved (including a license to do business) legally, everyone who holds a coin owns a piece of it. See securities law. This is precisely why you can never raise money again against that asset or with the corporate entity that owns it. Or at least not without a lot of legal fees or begging your peeved investors for more money. Legally, at that point, they could require you to sell all assets associated with the corporate entity holding the ICO. And they probably would. For investors that is the best-case scenario. ICOs for concepts with no assets or strategic partnerships in place at the time of the “token sale,” create many lose-all scenarios for investors.

There are many pitfalls to this world – and not just from the cannabis side.Issuing a “token” that someone has to pay for that acts like cash (even if to buy goods and services in the future from other members of the ecosystem and social community that crypto coins create) that also is vulnerable to market pricing, is another quagmire. In fact, it might be, beyond any techno or financial queasiness about blockchain, the biggest reason that this industry should look, and with considerable caution, at all tokenized and ICO models that also premise their worth on the idea that such coins will inevitably increase in worth over time. There is also anti-cartel, monopoly and market discrimination to consider.

Not all of these models or even the ICOs that use them are scams. There are and will be valuable alt currencies and tokens in the future (even without a cash value assigned). All of the top start-ups in the current ICO space, in fact, are finding unique ways to create a real alternative currency with values attached that are indisputable. And not all of them will succeed.

However, that is not true of the cannabis business at this juncture. The plant, much like cryptocurrency and beyond that, blockchain itself, has not reached mainstream status yet – starting with market economics and regulation that is already international. A pot-based coin, no matter where it is issued and by whom (including a federal government), would run into multiple issues with valuation just because the price of cannabis itself right now is so volatile, not to mention unevenly priced thanks to jurisdictional restrictions and barriers. For that reason, there is no way to issue a “cannabis coin” with global relevance, much less global value.

And that, of course, is beyond the issue of subsequently selling those coins on exchanges that have been repeatedly hacked, fail to give customers access to their accounts, or are, in the case of China, banned outright (which also deemed ICOs illegal last September).

There are many pitfalls to this world – and not just from the cannabis side. Part III of this series will look at some of the biggest opportunities when cannabis integrates with the DLT (distributed ledger technology).

Marguerite Arnold
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Paradox or Paragon? A Non-Techie Look at Blockchain, Cryptocurrency & Cannabis: Part I

By Marguerite Arnold
2 Comments
Marguerite Arnold

Disclaimer: Marguerite Arnold has just raised the first funds for her blockchain-based company, MedPayRx in Germany (and via traditional investment funding, not an ICO). She will also be speaking about the impact of blockchain on the cannabis industry in Berlin in April at the International Cannabis Business Conference.


You have probably heard of cryptocurrencies, tokens and smart contracts. You might have also heard, even if you did not understand the significance, that IBM recently suggested that the Canadian government use their form of blockchain, called Hyperledger, to track the recreational cannabusiness. Or that a large LP called Aurora is also looking at this space (as are other licensed producers large and small). Or maybe you have seen an item in the mainstream news about an ICO for a cannabis company that is now also going terribly wrong.

What on earth is going on?

These are all related issues, even if highly confusing and disjointed. Blockchain technology and cryptocurrency are hot right now and getting hotter – both in the mainstream world and in the cannabis industry globally. But for all its fans, the drumbeat for caution is also growing louder the more mainstream this technology (and the legitimate cannabis industry) becomes.

The many problems the entire cannabis vertical has with banking has make this current development almost inevitableOn the technology and finance side, that is why so many big names right now are urging caution. Nouriel Roubini, professor at NYU’s Stern School of Business, is just the latest to do so – and for reasons that everything to do with history. Including recent history ten years ago, when the world stood on the brink of a financial disaster thanks to unchained derivatives. The biggest worry in fact, right now, is about the financial implications of widespread adoption of the technology, beyond the tech itself and how it may (and may not) be legitimately used. Which itself is a huge question.

So why all the fuss?

This is revolutionary technology which is also being introduced into the market at a time when decentralized processing for automation is on the horizon. But also because blockchain can be used to create tokens or digital coins that act like financial instruments. And once created, such tokens can be issued much like money or even stock, to raise additional funds – for both start-ups and ongoing enterprises. The best thing though? This technology was invented to create a decentralized form of value exchange and trust-less, anonymized auditing and verification. No traditional financial institutions or even governments needed, wanted or should apply (at least in theory).

The many problems the entire cannabis vertical has with banking has make this current development almost inevitable. Not to mention accessing investment cash (although this is certainly changing outside the United States). Compliance issues in every direction are another wrinkle this tech will help solve. Starting with tracking product but also rapidly expanding to uses including protecting users’ privacy and facilitating access to high-quality, inspected product for qualified users and buyers. Not to mention other areas that are literally space-age but coming fast. Look for cool stuff coming soon involving both AI (artificial intelligence) and IoT (internet of things).

It is a fascinating, complex space. However, one aspect of this world, in particular, Initial Coin Offerings – or ICOs are getting attention right now. Why? They can be an incredibly efficient way to raise money for companies – both ones currently in business and start-ups with little more than a whitepaper or business plan and perhaps a working prototype. More and more of the successful ICOs are, however, for an existing company or are even attached to an asset, including a license, a prototype or a fund of money (or other combinations). They also rely on blockchain and alternative currency or tokens (sometimes also referred to as smart contracts) to work.

From a technology perspective, you can “mint” new coins relatively easily these days, sourced from a variety of different kinds of blockchain. Or even combinations thereof. You also can issue tokens or altcoins without an ICO.

In a world where there is vastly expanding cannabis opportunity, and many of these hopeful entrepreneurs are both digitally astute but without access to traditional capital, what could be better?

bitcoin
Bitcoin quickly became one of the more popular cryptocurrencies

From a financial and investor perspective, ICOs are a hybrid form of an IPO meets social media. “Coins,” “tokens” and “smart contracts” –or cyber currency collectively– are digital forms of cash, contracts, membership cards, discounts or even authorizations for identity. There are many ways tokens can be used, in other words. This by way of saying there are also important differences too. Not all tokens are the same. Not all are used as “money.” Some are but have assets assigned to them (like real estate). Others, particularly smart contract tokens, are strictly functional (pay funds when product is delivered and verified). The one caveat here is that the exchange of any token or altcoin will also cost money. Why? It is the electricity cost of computer processing the request for transfer. Plus access and service fees. There is no such thing as a “free” token. How tokens are priced, sold, bought, maintain value and for what purposes, is a debate if not process function that will not be solved anytime soon. Starting with the fact that some blockchains are more energy efficient (and sourced from green energy) than others.

To add to all of this confusion, not all ICOs function the same way. Some do give investors ownership in the company or specific portfolios that even include real-world assets. Others offer to use pooled funds to buy assets (like real estate or an expensive license). Many rely on the “coin” issued as a kind of discount scheme, reward mechanism and in many cases, direct discounted payment for future goods and services, of both the digital and real world kind. Many offer banking services directly, including in the very near future, the ability to exchange cyber cash for the fiat variety at even remote ATMs. Sound futuristic? It is coming and soon.

Most ICOs in the market now, however, rely on the following supposition: Issue a token with a unique name. Put up an ICO website. Encourage investors from anyplace on the planet with an internet connection, to use either crypto or fiat currency to buy tokens in the issuing startup as an investment that will give the new company funds to operate and build out services or the application (whatever that is). Also, plan to use the tokens for an exchange of some kind in the future (either for other coins or a good or service). Watch the value of the coin increase (for whatever reason) while informing investors (or contributors) that this is not really a security but a “utility” token that is expected but not guaranteed to become more valuable. Retire early with the prospect of having brokers of expensive real estate in places like London and Dubai come calling.The public tide of opinion, even if regulations are slow to move, is on the side of reform if not outright advocacy.

That will not be the case for the vast majority of ICOs, however, no matter what returns, goods or services they offer. Even if they also have vibrant communities already using their services (whatever those are). It will not be the case for most of the cryptocurrencies upon which such ICOs are based (most at the moment are based on Ethereum, NEO, Hyperledger or combinations of the three). There will be more of those too. And not every blockchain will make it (cryptocurrencies and tokens are based on an origin protocol or blockchain much like computer operating systems are either PC or Mac or mobile phones are Android or Apple). Some speak to one another well. Most do not “exchange” easily – even between themselves – let alone back into good old cash. And while nobody wants to be the Betamax of blockchain, there will, inevitably, be quite a few of them. When that happens, any economic value of the coins and even contractual relationships created with them disappear as well. Add in extreme price volatility in the current market pricing of these tokens, and you begin to get a sense of the risk profile involved in all of this.

The real hurdle, not to mention expense, comes when transferring back from the world of crypto to the one of fiat (regular money). Being a Bitcoin billionaire (there are about 1,000 individuals who own about 40% of the entire global Bitcoin issuance) is no fun if you have no place to spend it.

A Rapidly Changing Marketplace

In the past 18 months, cryptocurrency and ICOs have gotten increasing attention because of the increasing value of all kinds of cyber currency (far beyond Bitcoin). The total market cap for all forms of cryptocurrency itself zoomed past $700 billion at the turn of the year. That is impossible to ignore. You might have heard of some of these currencies too. There is ETH, Litecoin, Bitcoin Cash, Dash, even Dogecoin (created originally as a joke on an internet dog meme). Right now, in fact, at some of the most expansive exchanges, there are literally hundreds of these coins which are constantly bought and sold if not exchanged and used.

paragon advertisement
This has red flags written all over it.

And then there are the sums ICOs are bringing in some cases, flagrantly flaunting regulatory agencies and doing end runs on the global banking system that cannot keep up with them. The top ICO of 2017, a company called Block.one and registered in the Cayman Islands, so far holds the record at $700 million and counting. Filecoin, the second largest ICO last year, raised $262 million in one month from August to September. And then, of course, there is the cannabis industry-specific case of Paragon – now headed for class-action lawsuit litigation over their $70 million pre-and ICO sale intentions.

It would be logical to assume, given the eye-watering sums potentially involved not to mention the large role a smart digital media footprint has to do with an ICO’s success, beyond its service or technology offerings, that this would be a perfect place for cannapreneurs to turn for funding. The global market is opening for cannabis reform at the same time the crypto craze meets Fintech Upheaval is occurring – in fact, these two things are happening almost simultaneously.

Thanks to regulatory realities and an ongoing stigma, there is still no institutional investment in the industry in the United States (that is rapidly changing other places). These are two new industries and dreams are large.

In the legit cannabis space, so are the expenses.

The price of opening a dispensary in most U.S. states tops a million dollars right now. In Europe, the price of entry is even more expensive. A GMP compliant grow facility in Western Europe, plus the money for lawyer’s fees and negotiations for the license itself will set you back anywhere from $20 million and up, depending on the location. Even staying afloat in the industry once the doors are opened is a challenge. And loans, even for outstanding invoices, are still tough to come by in an industry where banking services of the simple business account kind are a challenge. Particularly in the United States.

The public tide of opinion, even if regulations are slow to move, is on the side of reform if not outright advocacy. Why shouldn’t a reform-group-rooted ICO aspire to own or provide ongoing business financing to a community-minded canna farm in California, Canada, Germany, Israel or Australia? Or even Greece?

However, right now, with some noted exceptions, the cannabis business remains at minimum, a dangerous place to consider issuing altcoins that act like financial instruments or raise money with them. Why and how?

Part II of this series will look at the significant liabilities of using cryptocurrency and ICOs in the cannabis industry.