Will Blockchain Disrupt Banks, Black Markets and Business as Usual?

Stanford University

Even though recreational marijuana use is now legal in California, the likelihood that its immense black market will go away anytime soon is slim. Late last year, the state’s Department of Food and Agriculture estimated that all but 2.5 million pounds of the 13.5 million pounds of cannabis produced in 2016 left California — a huge amount undoubtedly exported to places where pot is still illegal.

California’s system for tracking the inventory and movement of products — a combination of radio-frequency identification tags and software used by other states where marijuana is legal — can only monitor so much. Although helpful for auditing and compliance purposes, the solutions “are not expected to eliminate illegal inversion or diversion of cannabis throughout California’s commercial cannabis supply chain,” according to the department’s website.

Canada, which is set to legalize recreational marijuana use later this year, is hoping to roll out a more robust system for holding everyone accountable to the law — and one of the options being discussed is the rapidly evolving technology known as blockchain. Sometimes described as a decentralized online database that records all activity on the platform and prevents anyone from editing or erasing information, blockchain seems like an ideal solution for the oversight of cannabis commerce in Canada.

That’s what the team at Greenstream Networks hopes. The 10-person tech company based in Montreal is developing a regulatory-compliance platform that leverages blockchain and will enable real-time oversight of the entire cannabis supply chain — capturing the complete history of transactions in perpetuity on the platform for anyone with permission to see.

“The entire seed-to-consumption cycle is what we’re calling it now,” says Greenstream Co-Founder and Chief Technology Officer Joel Yaffe. “The Canadian green-scape is everything from pharmaceuticals, licensed producers, research and testing. There are clinics. There are professional services, retail, and then the whole technology side of things. It’s literally a brand-new industry.”

Blockchain basics

Blockchain can be hard to comprehend if you aren’t a computer programmer, and its importance to entrepreneurship perhaps less obvious. But a blockchain’s ability to serve as a platform for conducting transactions between users, recording all associated data, and preventing any changes from being made are key reasons why it is increasingly touted as a technology that will upend many of the processes we rely on today.

In late 2017, IBM published an industry analysis on how blockchain can provide an indisputable chain-of-custody audit for cannabis in British Columbia, summing up the technology’s advantages with these three points:

  • It is distributed: no central system brokers transactions. Instead each party in the business network is provided its own ledger copy showing all transactions. So truth is shared by design.
  • It is immutable: Cryptography ensures that transactions (blocks) once entered into the ledger (chained) can never be altered, so transactions are secure.
  • It is transparent: All shared ledgers across the business network hold all transactions of all parties within the network, ensuring consensus.

This leads to one of the loftiest promises uttered by blockchain evangelists: that it will engender trust and establish one source of truth via time-stamped entries viewable by anyone on the platform. Another is that the blockchain’s decentralized nature eliminates the need for a singular clearinghouse — the kind that hackers target when looking to steal large amounts of sensitive data.

That’s why cryptocurrencies like Bitcoin, which operate on their own blockchains, are frightening banks and other financial institutions that have traditionally served as trusted third parties. More broadly, blockchain is being applied to everything from the management of medical records to digital rights in music.

Maybe the venture capitalists are all wrong, but I think the biggest thing that we should really be paying attention to is where are the strongest engineers and entrepreneurs deciding to spend their time.

In the realm of social causes, a new study out of the Stanford Graduate School of Business found that over 80 percent of nearly 200 organizations, initiatives and projects that are seeking to use blockchain to benefit the public “were making material progress toward solving a genuine problem.” According to the study’s authors, 14 percent fell into the “hype” category.

Perhaps an even clearer sign that blockchain is ready for prime time? Amazon Web Services is offering templates that will allow businesses to leverage the technology immediately for use cases like financial transactions, identity tracking and health-data sharing.

Importance to entrepreneurs

Startup investors and programmers alike have been flocking to the space in droves. Record-breaking fundraising activity by blockchain and cryptography startups — many in the form of initial coin offerings (ICOs) over the last few years — has allowed these fledgling firms to hire talent at breakneck speed.

Industry reports show that these companies raised more than $5 billion since the beginning of 2018 through ICOs, where startups crowdfund for capital by offering digital currency or the “tokens” needed to acquire it. Worldwide spending on blockchain solutions is forecast to grow to $9.7 billion in 2021, other reports state.

“Maybe the venture capitalists are all wrong, but I think the biggest thing that we should really be paying attention to is where are the strongest engineers and entrepreneurs deciding to spend their time,” says entrepreneurship researcher Chuck Eesley, a faculty member at the Stanford Technology Ventures Program. “Technical talent is moving into this area, both in Silicon Valley and around the world.”

While traveling last summer, Eesley listened to a group of engineers at a startup accelerator in Paris pitch their business plan to consult on blockchain projects for large banks. Not long after, Eesley was in Thailand, where he learned that one of the nation’s largest banks, Kasikornbank (K-Bank), has dedicated a group to experimenting with cryptocurrencies and blockchain technologies.

Then, about a month later, Eesley met with government representatives from Papua New Guinea who discussed their plans to build a science park that would spur blockchain projects aimed at bringing cryptocurrency to the unbanked country.

Is a Google-like application for blockchain going to come up? Perhaps. We’re at the very early stages, so I don’t know.

The blockchain buzz is big in Canada, too. Yaffe and the other engineers at Greenstream have been involved in the technology for years, as industry advisers and founders of previous companies, according to Rob Dawson, CEO of BLOK Technologies in Vancouver, a public company that invests in and develops emerging blockchain businesses, including Greenstream.

“We’ve been able to attract talent from large financial-services companies who want to be in a startup environment and want to be on the leading edge of developing new blockchain applications,” Dawson says.

A sampling of open positions at a blockchain startup include jobs for engineers with expertise in distributed-system design and implementation, in applied cryptography, and in peer-to-peer protocol development. In some cases, these startups want engineers who have either started and successfully sold their own ventures, or who have worked on a founding team and led product development.

Stanford University has offered a course on cryptocurrencies and blockchain technology for the past two years. Taught by prominent computer scientist Dan Boneh, the class attracted about 100 students its first year and about the same the next year. The course teaches how blockchains operate, what they’re good for and how to use them.

At the end of the quarter, students should be able to build decentralized applications (dApps) and write client-side software such as “wallets” — some of the main components that make blockchains useful — or even build their own blockchain to serve an unmet need in the market. Several of Boneh’s students have gone on to launch blockchain companies after graduation.

“There’s tremendous interest now, and I expect the next time we teach it, there will be even more interest,” says Boneh, director of the Applied Crypto Group in Stanford’s computer science department. Cryptocurrencies and blockchains are one area of focus in his lab, which also conducts cutting-edge research on privacy, computer and web security, and various aspects of cryptography. He and his Ph.D. students share all their findings and resources on crypto.stanford.edu.

Though he is deeply immersed in the fast-moving field, Boneh also maintains a broader perspective on whether blockchain is as revolutionary as some say. When the Internet was invented in the 1970s, he says, people thought it was just going to be a way for engineers to send email back and forth. Nobody knew where the Internet was headed, until decades later, when “killer apps” like the web, Facebook and Google made it clear that our world was forever changed.

“Is a Google-like application for blockchain going to come up? Perhaps. We’re at the very early stages, so I don’t know,” Boneh says. “But the blockchain is a major innovation. It builds on a new idea that has been greatly expanded and lets us do things we could not do before.”

Adoption and disruption

An important technical distinction when discussing blockchains is whether they are public or private. When they are public, anyone in the world can join and see the state of the blockchain. Private blockchains are primarily used by businesses to conduct transactions. The one Greenstream is building has both public and private attributes.

The firm currently has no clients, though it is in the process of signing up a small number of producers who are licensed under Canada’s medicinal marijuana laws. There are just over 100 licensed producers across Canada’s 13 provinces and territories, and once recreational pot is legalized, that number is expected to grow as the supply chain inevitably becomes more complex — further underscoring the need for comprehensive compliance monitoring.

That’s why Greenstream’s other customer segment is the government itself.

In Canada, Greenstream would make money by charging a small processing fees for any financial transaction on the platform, but lower than banks and credit cards typically charge. A recent report by Deloitte estimates that the sale of recreational marijuana in Canada will start at $5 billion per year and could reach up to $8.7 billion annually.

Another revenue source for Greenstream would be around the monetization of data. With access to details on every transaction, the company could produce market-insight reports valuable to participants throughout the industry.

But in the end, this isn’t about a startup looking to take down an entire industry with the disruptive potential of a new technology. Rather, Greenstream sees blockchain as an ideal way to reduce the black market and ensure the integrity of the supply chain through truth and transparency — and to do so, not by making incumbents in Canada’s existing cannabis supply chain obsolete, but by working alongside them.

“It’s better to make relationships than break relationships. We’re not running out to create hardware scanners for barcodes. There are people who do that already, and they do it very well,” Yaffe says. “But one person with one password can disrupt an entire system. So that’s what we’re looking to fix.”