How blockchain can disrupt the cannabis market

Blockchain and cannabis: Both represent disruptive trends that are shifting how we do business in Canada.

For legal cannabis cultivators, producers, and retailers, blockchain can pivot an industry vexed by unexpectedly slow growth toward greater profits.

Slow growth of legal cannabis

Since the legalization of recreational cannabis in Canada, in October 2018, the anticipated consumer move from illegal to legal product hasn't occurred as quickly as forecast, frustrating early market entrants.

Early in 2020, the majority of recreational cannabis sales are still through illegal channels—80% by volume and 60% by value.

Potential reasons for the relatively slow shift to the legal market include:

• Early supply shortages online and in store
• Limited number of retail stores
• Restricted product selection
• Higher price for licensed products
• Inertia of pre-legalization consumers
• Consumer wariness of government-regulated product

As the industry matures, these issues are being resolved:

• Licensed producers significantly increased cultivation and processing capacity in 2019, which, combined with the slower-than-forecast shift from illegal to legal cannabis sales, resulted in a swing from undersupply to oversupply.
• Some provinces issued more retail licenses per capita than others did in 2019―Ontario recently announced the abolition of the lottery system and a plan to allow up to 20 store openings a month, starting in April 2020.
• The recent legalization of edibles, vapes, and topicals—what's called Cannabis 2.0—will allow the legal channel to compete across a wider range of products.
• The move to commercialization, combined with the swing to oversupply in 2019, is creating pressure to reduce the price of legal cannabis as competition increases.

Overcoming consumer skepticism

Consumer wariness of government-regulated product persists.

The provinces have not convinced consumers that purchasing product at a higher price point (for the foreseeable future) is a better option than purchasing illegally sold cannabis—despite the consistency, quality, and safety of legally produced product.

Consumers can't be expected to understand that the legal market offers a more consistent, higher-quality product without the necessary data points to make informed buying decisions. There are a number of problems with getting that information:

• Marketing activities by Licensed Producers and Retails are severely restricted, preventing the dissemination of information related to the quality, consistency, and safety of legal cannabis products to wider audiences.
• Health Canada reporting is limited to summary data focused on compliance rates, and the number of inspections, licenses, and recalls.
• Several recalls of legally produced product were made in 2019, and three licensed producers had their licenses suspended, shaking consumer confidence.
• Medical issues related to vaping surfaced in the U.S. and in Canada; potential links to cannabis vapes heightened consumer fear.

Providing provenance information—the full trace history of each lot of product through the entire supply chain—would communicate the consistency, quality, and safety of legal cannabis.

The technology to provide complete information is available—blockchain.

Blockchain: a seed-to-sale solution

The Blockchain Council defines blockchain as a “digital, decentralized technology which maintains a record of all the transactions which happen over a peer-to-peer network. These records are stored in decentralized systems that are interconnected. Each group of transactions on a blockchain is referred to as a block and each block is combined chronologically to form a chain. Each and every piece of information recorded on the blockchain is public and every participant has a copy of the blockchain. A blockchain is distributed as it is not controlled by a single entity.”

Blockchain reduces vulnerability and increases transparency because information is stored digitally and does not have a centralized point or an intermediary who carries out transactions.

Blockchain was first used as an engine to drive the rollout of cryptocurrencies, but blockchain can apply to every industry. The Blockchain Council's top-10 use cases include supply-chain management and food safety—there are several examples of trials in food and beverage and pharmaceutical organizations.

Cannabis organizations have advantages over other producers of consumer products with strong traceability requirements, however. Cannabis organizations' systems are typically more modern, making it easier to integrate a blockchain solution. They are generally young organizations with a growth culture that facilitates change. Their supply chains are less complex.

The introduction of Cannabis 2.0 products that potentially include ingredients from multiple vendors increases the value proposition of blockchain to capture trace history for each lot of product through the entire supply chain.