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Blockchain Startups Are Hoping to Fix the Cannabis Industry’s Banking Problem

2 October 2016 CHEX Leave a comment Press

There’s nothing like federal law to make even the most legitimate business operators in the cannabis industry feel like a bunch of drug dealers.

While the nearly $7 billion weed industry is growing, the conflict between federal marijuana prohibition and state laws authorizing medical and recreational pot use makes it almost impossible for many cannabis businesses to have bank accounts or accept credit cards. Federally regulated banks usually refuse to work with clients who make their money from a Schedule I drug that is still in the same category as heroin.

Now, a number of startups are using blockchain technology to to facilitate business transactions in the cannabis industry. With digital currency, they’re hoping to target the nearly 75 percent of all cannabis businesses that operate only in cash and without bank accounts—despite a statement from the Justice and Treasury Departments that should have allowed banks to serve state-compliant marijuana businesses.

“At the end of the day it’s impossible to reconcile these transactions because they’re predominantly cash and because the ledgers were put together by the individuals who worked in the cannabis industry, so they could have been manipulated,” Lamine Zarrad told Motherboard.

Zarrad is the founder of Tokken, a Colorado-based company that provides an online banking experience for cannabis companies using an indelible blockchain ledger ensuring data integrity and proprietary compliance.

To use Tokken, users (i.e. dispensary customers) download the app and link their bank accounts or credit cards to them. Then they pay using a mobile wallet, like Venmo, at partnering dispensaries. The transaction is recorded on Tokken’s blockchain ledger, while the retailer is issued a corresponding number of “Tokkens”, a kind of branded digital currency that works only within the company’s system. Pot retailers can then use the Tokkens to pay suppliers or pot growers who also use Tokken, or to transfer them out and convert them to US dollars.

Zarrad described the blockchain as a series of algorithms that compete to record data and facilitate transactions to meet compliance guidelines. They ensure in real time that users are who they say they are, while every transaction is monitored by the droves of individuals using the service. “It’s the most cryptographically and mathematically secure and established system to date,” Zarrad said.

Meanwhile, because the blockchain stores transaction history with a third party, regulators and law enforcement can investigate a dispensary and use Tokken’s system to query all their activities, he said. “At the end of the day, they rely on us to make sure those transactions are not tampered with take a look at the site here. When you have blockchain security, it takes away the uncertainty factor,” Zarrad said.

While this digital method is of course less private than dealing by hand in cash, the blockchain’s mathematical algorithm encrypts the data.

Cannabis Hemp Exchange (CHEX) is another startup using blockchain technology to validate transactions between wholesalers and retailers (i 1zj2e8v.e., pot growers and dispensaries). Through the company’s blockchain, data is decentralized and stored across multiple servers.

“The blockchain is ‘trustless’ and provides transparency and audit ability into wholesale cannabis transactions,” Eugene Lopin, cofounder of CHEX, told Motherboard. Data becomes ‘trustless’ when you no longer need to trust a company to have data integrity.

Regulators can look into the blockchain to see a transaction instead of requesting an audit with a company’s central server, which requires special access. While CHEX doesn’t offer a currency replacement, it offers a kosher system to store data and information—something that will be increasingly necessary as more states implement medical and adult use marijuana regulations. These regulations may require seed to sale tracking and other checks on inventory and sales that can be difficult to keep track up when dealing with hundreds of plants, grow cycles, and different batches of manufactured cannabis product.

“When we have a lot of data and regulators want to see what’s going on, it will be transparent for them,” Lopin said. “You’re putting out a message that your company has integrity.”

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