Marijuana |

For all the talk about the law lagging behind innovation, there is one area where technology is racing to catch up with the law: regulated state cannabis markets.

The birth and growth of cannabis compliance technology is, for the most part, a result of the legal and regulatory foundations upon which modern legal cannabis markets were built. And it is an area defined by ever-growing innovation to meet the demands of state regulators and commercial cannabis clients.

Many trace the need for such compliance technology to the 2013 Obama-era “Cole Memo,” which declared that states with legalized recreational and medical marijuana markets would be essentially untouched by federal prosecutors, provided they had a robust regulatory and enforcement structure in place.

States responded by implementing “seed-to-sale” compliance systems, which aim to track cannabis products from cultivation all the way through retail sale to ensure oversight and prevent products from reaching the black market.

Though the memo was rescinded by the U.S. Department of Justice (DOJ) in January 2018, it was far from the only guidance mandating that state governments have cannabis tracking capabilities.

Michael Stalbaum, senior vice president of marketing and operations for seed-to-sale platform KIND Financial, noted that guidance from the Department of Treasury's Financial Crimes Enforcement Network on how cannabis businesses should operate, for instance, “relies heavily on the seed-to-sale” tracking abilities.

More importantly, states that have legal recreational cannabis markets have codified the need for “seed-to-sale” tracking in their own cannabis laws as well.

Bryan Meltzer, partner at Feuerstein Kulick, called seed-to-sale compliance tech “a big part of the cannabis industry” and noted that states will even certify and designate compliance technology as a must-have platform for local marijuana businesses.

Such seed-to-sale compliance technology is similar to that used in the pharmaceutical and medical industry to keep track of prescriptions drugs. Seed-to-sale compliance platform BioTrackTHC, for example, tracks cannabis products through assigning a 16-digit bar code to a marijuana seed before it is planted.

“The bar code is carried with the product all the way through to the final sale to the customer and creates essentially an unbroken lineage chain of that particular product,” said Jeff Gonring, director of marketing and communications at BioTrackTHC. “So it tells you who grew it, where the seed came from, who produced it, who transported it, who processed it, who sold it, and who bought it.”

BioTrackTHC has won contracts in numerous states, including New Mexico, Washington, New York and Illinois, to be the designated compliance technology local recreational or medical cannabis businesses must use in their operations. Though each state has a different criteria of what it's looking for in compliance technology, Gonring explained that generally, most want a platform that can prevent “diversion and inversion, access by unintended minors, and maintain transparency and accountability over the chain of custody for the plants full growth life cycle and transaction history.”

He credits BioTrackTHC winning state contracts due in part to its “closed looped system,” which means “you can't bring a plant or a product into any licensed business unless it has a bar code that could be tracked previously to that.”

Of course, the ability to track commercial products is not unique to just one company. All seed-to-sale platforms have to have a certain standards of tracking functionality. But where platforms differ is on the types of innovation they offer beyond their core functions.

In addition to conventional tracking, for example, KIND Financial uses tagging beacons and video surveillance to allow customers to “tell exactly where their plant is within their operations” and warehouses, Stalbaum said.

What's more, in 2016, KIND Financial became the first seed-to-sale compliance software to team up with Microsoft, which now hosts KIND's platform its the Azure cloud service.

“We were one of the first people to really take it to that level and get the power of Microsoft behind our hosting,” Stalbaum said.

Meanwhile, Biotrack has invested in data reporting capabilities to allow commercial and government clients to get a deeper understanding of cannabis product supply chains. Gonring explained the platform offers everything “from blind audits to detailed forensics reports” in order to provide “accountability for every single user accessing the system's inventory or supply-chain.”

The Ones That Get Away

Despite such innovations, seed-to-sale compliance technology is far from perfect. From time to time, there have been cannabis products that found their way outside regulated state markets and borders.

In November 2017, for example, a man who owned a licensed marijuana processing company in Oregon was arrested in Nebraska—a state without legalized cannabis laws—with 110 pounds of marijuana extract, on suspicion of possession of marijuana with intent to distribute.

For Stalbaum, such incidents underlie the reality that there are “always, unfortunately, ways to manipulate” regulated markets. However, he believes that compliance technology is getting better at putting more security controls in place to make these incidents less common.

Stalbaum also pointed out that these incidents could arise because some states' seed-to-sale tracking requirements are less stringent than others. “Some of the problem is state to state,” he said. “Some states require batch tracking, so you're tracking a batch of products, instead of each product specifically.”

Some, however, see the problem not as a sign of weak regulation but of inadequate technology.

Seed-to-sale startup 420 Blockchain, for example, believes such incidents can be mitigated through the use of blockchain technology, which can create impermeable record-keeping, to better track cannabis products. “Blockchain is irrefutable,” said Michael Kramer, co-founder of 420 Blockchain. “Once it has entered, it cannot be changed.”

Of course, unchangeable records may be a double-edged prospect when accounting for human error. If ever mistakes were made on blockchain entries, for example, it could be difficult, or impossible, to fix them.

Kramer, though, notes that the 420 Blockchain platform, which was released as a public beta in January 2018, will require two-factor authentication before an entry can be input into the system, thereby cutting down the chance that an entry will be made erroneously.

In addition to its tracking platform, 420 Blockchain is also developing a separate smart contract product that will code and automatically execute contracts on the blockchain between various cannabis companies. Initially though, the effort will require a fair amount of hand-holding.

420 Blockchain “will verify all those contracts and walk the customer through” coding the contracts in order to prevent errors, Kramer said.

Whether blockchain technology will become a staple of future marijuana compliance technology remains to be seen. But it's certain that the market for cannabis compliance innovation is just getting started.

Given that market for compliance technology will only grow as new state cannabis markets come online in the near future, “it does feel early in the industry on the innovation side,” Meltzer said.