First-Principles: Cannabis and Blockchain
Let’s cut the bull. The words ‘cannabis’ and ‘blockchain’ are exciting to put together but many people do it for the hype. I’m interested in a robust argument built from first-principles that reasons why these two should coexist. Without it, a proposal that merges both concepts — seen already by a few blockchain startups that have ICO’d — becomes less attractive as complexity, hype and miseducation muddies the waters.
Lack of Financial Services
The growing number of jurisdictions where cannabis is accessible, either medically or recreationally, offers entreprenuers opportunity to service the economy. But as a sector, the cannabis industry is insufficiently banked. In places like the U.S., the industry faces difficulty due to the tension between state and federal regulations of the plant. This means that state banking infrastructure cannot interoperate with federal banking, meaning access to financial services is limited.
Leaky Seed-to-Sale Tracking
IBM has provided feedback to the government of the province of British Colombia in Canada describing how the blockchain can be used for custody chain tracking. The blockchain ledger is resistant to fraud since cryptography ensures that the ledger cannot be altered.
These are impressive characteristics. Yet, a software-based approach alone is insufficient. As long as the demand for cannabis exceeds its accessible supply, the black market is a potentially lucrative endeavour that seduces individuals with monetary incentives to transact illegally.
With that level of a profit motive, there is no tracking system that can overcome the law of supply and demand. (Belville, 2017)
Security
In computer science, the concept of system security is defined at different granularity levels. You can have a network security policy, with a firewall protecting traffic within a corporate subnet and only allowing traffic from a set of trusted nodes. You can have database security, where the information is protected at the database level with a password. You can have device security, such as the type on the iPhone which encrypts the filesystem unless proper authorization has been granted with your fingerprint or facial recognition.
In the context of regulating cannabis, security can be defined as the difficulty of tampering with the state of the regulated ledger by a hostile actor. This actor can be someone external, like a criminal entity, or someone internal, like a rogue employee. In the case of seed to sale tracking systems that use traditional web infrastructure, the security profile is composed of a multi-layered hierarchical architecture composed of access control restrictions at different granularity levels. But more complexity plays against the intended purpose; each layer requires dedicated auditing, visibility, logging, maintenance and training workflows. Even if strict computer security is achieved, a rogue or compromised employee with the correct permissions could tamper with the ledger and forge or delete records.
“If somebody can get in and read the data, they can also write (code) to it. They can disrupt the entire industry. That opens up corporate blackmail,” said Logan Bowers, co-owner of Seattle pot shop Hashtag. Bowers worked in software for about 20 years before opening his store.
Here is where the blockchain excels. Each transaction must be signed cryptographically be someone (or something in the case of a machine), meaning each record in the database is attributable to at least one account. This transaction has the same security properties as the strong encryption used to create the signature, meaning its really, really hard to forge a transaction. Furthermore, this security is at the finest granularity level: the transaction, or individual record. Since the blockchain is a public utility, its complexity is understood by an increasingly large labour and talent pool, reducing training and coordination costs. Security maintenance occurs publicly as part of the open source project. And you get the auditing, visibility and logging as built-in functions of the system.
Identity & Privacy
How should patient data be stored? How is privacy maintained for the average user? Recreational consumption can carry a negative stigma that can affect your personal and professional relationships.
Blockchain provides a solution to the scattered identity problem that faces the online web today. Rather than spraying your identity across disjointed providers, platforms, health trackers and strain discovery databases, the patient can own their identity data.
The data that is tied to your identity is increasingly monetized. Facebook, Google and Web 2.0 business models are based on gathering the largest amount of data possible and then re-selling it to advertisers. With sensitive medical data, its important to ask the above questions.
Licensing Storage and Verification
How should licenses be issued and verified? Another open question. By tokenizing the license into a digital format on the blockchain that is based on public-private key encryption, these licenses are protected from duplication, forgery and other forms of fraud.
Seductive Black Market Incentives
Economics is a social science that studies human behaviour when dealing with the scarcity of a valuable resource. For the cannabis sector, a lucrative black market is the economic reality when large demand for cannabis is faced with a restricted supply. The general problem of the black market is non-trivial but it can be understood in economic terms.
Usually, economic solutions to this problem are complex and require massive coordination from policy makers, law enforcement and the supply chain. In places like the U.S., the problem emerges due to the inconsistency in regulation between neighbouring states and lack of federal policy. In the province of Ontario, the government has decided to monopolize the distribution of cannabis. This decision implements a game theory strategy against the black market, for better or for worse. Mechanism design can be used to design models of supply chain enforcement that are decentralized and deployable even in the long tail of the supply chain.
Understanding this is critical to our supporting argument. Cannabusiness is projected to be an enormous market, which poses unique problems that must be analyzed with a macro-level lens. From a mechanism design perspective, the Actors in the mechanism include large, well-capitalized black market actors. In addition, the incentives of the market itself are susceptible to corruption, as seen in the Leaky Seed-to-Sale section above.
It is difficult to overcome the laws of supply and demand. Since these problems are economic in nature and involve incentives, blockchain-based solutions might be suited to the tasks of enforcement and regulation in the cannabis industry. This would be like “fighting fire with fire”, and there are proposals for using blockchain to fight ICO fraud, improve information distribution among regulators and even decentralized enforcement mechanisms. These proposals harness the power of blockchain for good, and even weaponize them as part of an incentives arms race.
Conclusion
The web has transformed society. But it is fundamentally broken. Security has been added ad-hoc in a patchwork manner over many years, which is why digital security today relies on ring perimeter security models, like firewalls and access restrictions at the network borders. Identity is scattered across many different providers, meaning that user data is exposed to greater risks of being stolen. The mechanism design that online platforms deploy to monetize user and behavioural data is at risk of re-occuring with the regulated cannabis supply chain. And the mechanism design between the government, black market and supply chain actors is influenced by corruption and is leaky at best.
A blockchain solution has strong encryption built-in at the foundational level. The security model is much more robust, as the ledger is extremely difficult to tamper with. An identity on the blockchain can be deployed in a model where the patient owns their data and selectively decides how it is used. Finally, any mechanism design that is deployed is fundamentally more robust due to the stronger security model, and is already proven at scale from a market size and financial value perspective. After all, the market for money is certainly bigger than the regulated cannabis industry will ever be.
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