Blockchain Controversies Continue To Rock The Cannabis Industry

By Marguerite Arnold

Blockchained “ecosystem” play Paragon is a warning to others in the cannatech space

Disclaimer: Marguerite Arnold is the founder of MedPayRx, a blockchained ecosystem that does not use utility tokens, and that is currently going to pilot in Europe designed to eliminate such risks.

As reported here in Cannabis Industry Journal last year in a three part series, there are considerable dangers of utilizing blockchain in the cannabis industry (as well as other industry sectors) that directly affect all commercial operators as well as consumers of both the recreational and medical kind. These remain largely unsolved.

These include regulatory and compliance issues in every direction, starting with banking and securities law, but also include privacy and consumer protections. They also fly in the face of regulations imposed by governments to control inflation, set prices for medications and food, and prevent monopolies.

Beyond that, they also pose considerable if so far unexamined liabilities for businesses operating in this space (including uncontrollable volatility in basic business operations) that very much impact the basic cost of doing business.As of the beginning of this year, however, the situation is back in the news. 

The Skinny On Paragon
As of November last year, the company was sanctioned by the SEC in a precedent setting case on the issue of whether “utility tokens” are securities or not. In fact, the SEC found that Paragon illegally marketed and distributed digital securities under the false pretension that they were not securities. Paragon, in turn, reached a settlement with the SEC that it would return any funds received by investors prior to October 15, 2017 and pay a fine to the SEC.

As of the beginning of this year, however, the situation is back in the news. Because of the settlement agreement, it appears that a pump and dump group operating through the exchange YoBit managed to raise the token briefly from about $.10 a token to $10 in an effort to raise the cost of compensation from Paragon. This absurd rally was completely unsustainable, and as a result, fell back to $0.3 per token (albeit tripled the price of the token). But the fact that it happened at all is illustrative of the extreme risk now faced by the industry itself from this kind of tech and financial model.

Why? It means that all users (token holders) of such an ecosystem and for any purpose, would be directly exposed to such risks in the future. And on literally an hour-by-hour basis.

Utility tokens in other words, as defined by all such models (and Paragon is far from the only one), are used not only for investment in such businesses, but then bought downstream, via exchanges, by people who wish to transact in the network itself. And that is the real danger to businesses themselves by adopting such models.

Problem 1 – Utility Tokens Are Securities

The biggest issue at the heart of this conversation is this: Tokens are recognized now as securities, and further still operating in a world where pump and dump on the exchanges is a major liability for all who buy the tokens for any purpose. This means for example, that anyone who must buy a system cybercoin to transact within a blockchained ecosystem (from consumer to business manager overseeing international distribution of their product from the commercial end) would face unprecedented volatility that does not exist by using regulated currencies. Good old dollars and euros for example do not pose this kind of existential risk to businesses themselves.

In the Paragon case directly, for example, owning Paragon crypto means that monthly rent at the incubator would fluctuate in cost based on the unregulated cost of the coin, not a prenegotiated rental agreement in regular currency for space (which is far less volatile). In the current environment, such space just tripled in price.

Beyond that, no consumer in California, for example, would want to have to face the added cost of buying a hyped token (at artificially raised prices) before they can access the newest, coolest strain of bud.

Such systems in other words, are NOT just a fancy form of a digital payment solution (like Paypal). What they do dramatically increases the risk of price volatility in all business operations (also called “cost of goods sold” or COG), andto the end user while also directly exposing all to such risk at every point of production, processing and sales.

Why?Latency issues are also a major issue.

Because the cost of conducting normal, basic business operations would be directly exposed to speculating investors. Even local businesses, in other words, would be completely vulnerable to not just the fluctuations domestically or even internationally caused by doing business in multiple jurisdictions and traditional currency risk, but have direct and unprecedented exposure to a much less regulated and far more volatile price environment globally. And further one that affects literally the entire manufacturing and distribution process.

Problem 2 – Network Congestion

Latency issues are also a major issue. This is a bit more technical and complicated, but is one of the bigger reasons why most blockchain technology and solutions are still incapable of dealing with commercial industry requirements. Much less keep regulated industries in any space, in compliance.

Here is one way to think of the problem. If you have many users on a blockchain network all at once, speed of transaction goes way down and associated costs go way up.

The tokenized asset in other words, has to compete not only with people buying the token as an investment, but those using them to buy goods and services on the commercial side AND the industry processing taking place behind the scenes to fulfil and track product. This has been easy to see with Bitcoin in particular, but is not limited to the same.

Further, prioritization on a network itself (and the costs involved to overcome them, also paid in tokens) then unfairly creates a monopoly environment because of the added costs involved to speed up otherwise normally processed and critical operations. The biggest boys on the block(chain) win. Always. That is antithetical to anti-trust law.

Problem 4 – Undermining Basic Government Regulations On Cost Of Purchase

Here is the biggest conundrum, particularly facing the international cannabis industry now in the process of exporting across international borders. Governments (particularly in Europe) routinely set prices on medicine (in particular), for large contractual purchases and to insure the continued survival of public healthcare (which in Europe and the UK covers most people). See the German cultivation bid for cannabis as a prime example. The government is forcing the industry to submit prices via competitive bid that are expected to come in somewhere between 1-1.5 euro per gram. This in turn will affect not only domestically grown but imported cannabis – and from all points on the globe as the industry opens up.

That process is impossible in an environment where the cost of production itself would be (in a price volatile blockchained delivery system) inherently unpredictable and unstable because the price of production and distribution is itself a speculated upon commodity that can vary, literally, at the speed of a pump and dumped token, sold on any unregulated exchange, anywhere in the world. And as a result, is also illegal.


  1. Rex D Stock

    While many things stated in this article ring true (latency, cost, etc.), it’s like saying because the Ford Pinto would blow up if someone hit you from behind that all cars from Ford (or all cars in general) are death traps. Bad logic. The recognition that an ICO or the pimping of securities would justify the long-arm of the SEC, and that STO’s are the way to go, has nothing at all to do with the viability of blockchain in the cannabis or any other industry. This is simply an article designed to muddy the waters even more… Please stop.

  2. Marguerite Arnold

    I appreciate your comments, and thanks for continuing to read Cannabis Industry Journal. However, please do not dismiss the issues I am discussing and highlighting (as a blockchain systems engineer myself) by using false analogies. I did not lump all blockchains under the same rubric, and in fact the Ford/IBM/LG/Huayou project you seem to be referring to in the Congo to prevent child labor abuse is certainly an admirable use case – no matter how fraught with controversy cobalt extraction and export of the same from the country is beyond that (starting with environmental impact).

    However, and this is why this is important, that Congo project uses Hyperledger, which is also a non-speculated on blockchain created by IBM. What my article focuses on is the token economics behind the vast majority of the blockchain tech involved in cryptocurrency (including ETH and Bitcoin and all tokens based on the same downstream – i.e. “utility tokens”). This is what dooms all of them that do use this model to similar issues especially in commercial ecosystem environments. In fact, I disclose up front that I am in fact developing a blockchain based (but non token fuelled) system designed to work in a more traditionally regulated environment. Including a much more energy efficient one. Regulations, when they work, are intended to protect people and businesses from abuse, and in the Paragon case, I believe the SEC acted correctly. Further, blockchain so far is widely misunderstood technology because of the initial focus on crypto and utility tokens. That is the issue I believe has muddied the waters and slowed down wider acceptance of the underlying tech.

    Beyond that, here are the big issues in summary:

    A. Whether you agree with the SEC or not, the case above in fact, was used by the agency to set case law (fairly or unfairly) and define what “utility tokens ” are beyond the underlying blockchain and token system they are based on. I happen to agree with the decision of the SEC in this matter (namely that they are securities whether used in an ICO or bought on an exchange) and subject to securities law and regulation. By definition, it is also clear to me as an economist, that tokens are also not “money” and further poor “money substitutes,” and therefore should probably not be used in any environment where people or businesses must depend on the same for critical services delivery (i.e. rent, food or medication plus business operations beyond that). Further, this is now the law in the United States. The fact that speculators then used this excuse and settlement in this case to pump and dump the ETH based “utility tokens” of Paragon specifically is illustrative of why this space is still so uncertain and prone to abuse. That is true for specialty “utility tokens” as well as underlying tokens (such as ETH). The reality is that any exchange-traded token or cryptocurrency can be exploited in this way (see Bitcoin as prime example A). That is also why central banks were created and remain so critical for the management of “traditional currency.”

    B. In Europe, more specifically Germany, the regulators do not like them and are refusing to accept ICO funds (raised from anywhere) because they feel they cannot regulate them. Don’t shoot the messenger.

    C. Whether you like it or not, good old regulated currency creates a safer environment for not only businesses plus consumers because they are less susceptible to speculation, manipulation and price volatility throughout an ecosystem environment such as supply chain tracking (which can also occur in regulated currencies but it is harder to create runs on a country or regional currency than a simple token). However, that is the danger of any token based environment where you are buying the token to do business in the ecosystem. That is also the fundamental logic behind central banks regulating “regular” currency in the first place.

    D. Such issues have nothing to do with the incredible (and so far underused) utility of blockchain as a technology beyond tokens or ICOs. I think I made that crystal clear but want to do so again. That is also why I am taking the time and raising the money to use blockchain in a highly regulated space in Europe.

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