The past year has been another strong year in cannabis. Investors continued to pour money into the burgeoning industry — surpassing 2018 investment totals in just 40 weeks — and new markets opened up for recreational and medical cannabis. And following the passage of the 2018 Farm Bill, CBD has proliferated and become one of the hottest health supplements in the country.
But as the year winds down, the industry appears to be poised for a more challenging shift in the new year, as once-heady expectations for some big companies don’t pan out and some states clamp down, rather than loosen up, certain regulatory hurdles.
Here are some financial trends to keep an eye on in cannabis over the next year:
Finding New Capital Investment Will Be Tougher
After an initial investment boom in recent years, cannabis investors are realizing not everything colored green turns to gold. With public cannabis companies not performing as well as hoped and restrictive tax laws still plaguing the industry, investors are growing more cautious when it comes to cannabis. Add in other macroeconomic trends that are pointing to a global economic slowdown, and 2020 is shaping up to be a tough year to find cannabis capital.
That’s not to say funding will completely dry up, but operators and business owners must be aware that investment deals that perhaps closed in a matter of days in previous years, likely will take weeks or months while investors dig deeper into books and perform higher levels of due diligence before inking a deal. This means cannabis businesses must carefully plan and watch their cashflow and pursue fresh capital or investment earlier rather than later.
Expect More M&A and Consolidation
With the green rush reaching a crest of sorts, reality is setting in for some smaller cannabis operators. Expect to see more consolidation with smaller dispensaries and cultivators being bought up and absorbed by the big kids. More limited capital and investment options coupled with continued regulatory and legal uncertainties mean unsustainable operating costs for independent and smaller operators, which means the only way to survive may be to sell to a larger player.
New Markets & Regulations
The new year brings new states opening up to recreational or medical cannabis sales, as well as newer or altered regulations in existing markets. Cannabis firms must keep an eye on these new markets and regulations to best determine whether they plan to expand or not.
How stringent or lenient regulations are written and executed will determine the size and viability of the market. One state may severely limit the number of licenses it issues, while others may not put any limit. For example, Oklahoma issues unlimited licenses to grow hemp at $1,500 a piece. While that sounds promising for smaller hemp producers, it also could potentially lead to an oversaturation in the market. On the flip side, a more restrictive (and costly) licensure structure could lead to a far more limited market where only the industry’s largest players will be able to compete.
Cannabis businesses also should keep an eye out for new regulatory hurdles in existing cannabis markets. For instance, California is raising its excise tax on cannabis beginning Jan. 1. That will result in higher costs for both consumers and cannabis companies. High state and local taxes have been a challenge industrywide because they make legal operators less competitive with the illicit market. Also, a proposed rule in Missouri could ban medical cannabis operators from paying taxes in cash. Such a rule would prove problematic for an industry that has had to rely on cash because of federal banking regulations.
Credit Card Payments
While cannabis businesses may face several new and recurring hurdles in 2020 on the financial front, at least one looming change should make business easier: credit card payment processing. Because of cannabis’ continued banking woes, dispensaries and other plant-touching operations have not been able to accept credit cards. Though federal banking limitations remain in place, in 2020 we will see payment processors introduce new, creative and less expensive ways to navigate current banking limitations that will allow cannabis sellers to take credit cards. Opening up payments in this way will not only make transactions and record keeping easier for customers and businesses alike, it also will attract consumers who don’t use cash.
While some of these trends may prove challenging, in many ways they are signs that the cannabis industry is shifting and maturing as we enter a new decade. Many hurdles remain, but the size and momentum of the industry will only continue to grow in 2020 and beyond.
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 Journallast 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.
Two reports published by short selling stock firm Quintessential Capital Management and forensic investor research firm Hindenburg Research on December 3, charges that Canadian LP Aphria, has bought overinflated assets in Latin America and in Florida from shell companies owned by company insiders. Added to the lingering controversy is the purchase of the German Nuuvera this spring (a company also partly owned by Aphria brass), and the reports went over like a bombshell. Globally.
However, the story has already spread far beyond one company. And the response in the market has rocked the industry for most of December.
The response by the firm? A promise of an immediate line-by-line rebuttal, due out in the second week of December. So far, however, despite news of an additional Aphria purchase in Paraguay, the rebuttal report has not been issued.
Why Is This So Damaging? Or Is It?
Aphria’s stocks promptly took a dive that halved their value although they began to recover after Aphria management appointed an independent third party firm to review the claims.
Worse, however, the entire industry saw a hit too. This report affected investor confidence across the industry. And although the hit appears to be temporary, the unfolding scenario is a perfect example of why volatility in the market is scaring away not only more conservative female retail investors but larger institutional ones that the industry is now courting assiduously as medical cannabis begins to be integrated into health systems particularly in Europe.
Bottom line? As the big cannabis companies are listing on the larger, foreign exchanges, including the NYSE and Deutsche Börse, the scrutiny is getting more direct and granular.Despite the stratospheric market caps of all the major Canadian LPs in particular, not to mention enormous expenditures for the last several years (on property and other acquisitions), the revenue picture, as other stock analysts and publications such as the normally neutral Motley Fool recently pointed out, at least so far does not justify the same. Bulk sales to a hospital, establishing a cultivation or processing facility or even getting import licenses may set one up to do business however, but it is not an automatic route to ongoing and expanding sales. And that is the key to high valuations that are rock solid and beyond the scope of such allegations.
For the moment, that pressure, particularly in global medical markets, is falling first on patients if not doctors. Not the industry.
That said, this has been a major building year. Recreational cannabis has just become legal in Canada. And in Europe, reform is still in the process of happening.
It is also a charge if not frustration that has been growing, however, against all the public cannabis companies as valuations shoot into the stratosphere. Forensic and investigative firms, particularly in Europe and the United States have been focusing on the industry for close to a year now. As a result even when firms successfully rebut charges of fraud, they are looking at different valuations from analysts at least in the short term.
Bottom line? As the big cannabis companies are listing on the larger, foreign exchanges, including the NYSE and Deutsche Börse, the scrutiny is getting more direct and granular.
Are “Short Seller” Reports Unbiased?
For all of the focus on short seller reports in this industry, however, no matter the accuracy of some of their claims, here is the next issue:
Short sellers make money by betting against not only individual firms but the industry itself. They benefit financially in other words, from volatility in the market and arbitraging even small changes in price. Even if their reports cause the same.
Such reports as a result are also not “unbiased” as industry coverage in the press is supposed to be, no matter how much more time sometimes goes into the reporting and preparation of the same.
And no matter that this industry is now going into its fifth year, there is still lingering scepticism that, in the case of Aphria, has so far not only fallen on the individual firm in question, but then rebounds across the industry, unfairly hurting all firms in this space.
In retrospect, when the cannabis history books are written, 2018 may come to represent as much of a watershed year as 2014. Much has happened this year, culminating in a situation, much like at the end of the first year of modernization, where great victories have been achieved. But a long road to true acceptance and even basic and much broader medical use still beckons. Even if the new center left ruling coalition party in Luxembourg has just announced that recreational cannabis reform is on its agenda for the next five years.
This is a quick and by no means a full review of both fourth quarter activity globally, and how that ties into gains for the year.
Canada Legalizes Rec Sales
Beyond all the other banner headlines, October 17 will go down in history as the day that Canada switched the game.
Will 1017 replace 420? Not likely. But it is significant nonetheless.
What does this mean for the rest of the industry (besides international border checks and lifetime bans for Canadian executives and presumably others traveling into the U.S. to cannabis industry conferences at present)? For starters, a well-capitalized, public industry which is building infrastructure domestically and overseas like it is going out of style.
This is important for several reasons, starting with the fact that the big Canadian LPs are clearly not counting on supplying Europe from Canada for much longer. Why? The big European grows that were set up last year are starting to come online.
So Does California…
And other significant U.S. states (see Massachusetts this month and Michigan) are following suit. However the big issue, as clearly seen at least from Canada and Europe, is there is no federal reform in sight. That opens up a raft of big complications that so far, most U.S. firms have not been able to broach. That said, this situation is starting to change this fall, with two U.S. firms entering both Greece and Denmark, but in general, a big issue. Canadian firms are still trying to figure out how to both utilize the public markets in the U.S. without getting caught in detention when crossing the border.the U.S. is continuing to be a popular place to go public for Canadian firms
Regardless, the U.S. is continuing to be a popular place to go public for Canadian firms, who are also looking for access to global capital markets and institutional capital. Right now, Frankfurt is off limits for many of them. See the Deutsche Börse. That said, with the rules already changing in Luxembourg, one firm has already set its sights for going public in Frankfurt next spring.
The German Situation
Like it or not, the situation in Germany is key to the entire EU and increasingly a global enchilada, and no matter where companies are basing their cultivation sites at this point, there are two big gems in the European cannabis crown. Deutschland is the first one because of the size of the economy, the intact nature of public healthcare and the fact that the German government decided to mandate that sick people could get medical cannabis reimbursed by their public health insurer.
Ironies abound, however. In the last quarter, it is clear from the actions of the Deutsche Börse that Frankfurt is not a popular place to go public (Aurora went public on the NYSE instead in late October).
The cultivation bid was supposed to come due, but it is now likely that even the December deadline might get pushed back again, interminably at least until April when the most recent lawsuit against the entire process is due to be argued.
In the meantime, there is a lot of activity in the German market even if it does not make the news. Distribution licenses are being granted all over the country (skip Berlin as there are already too many pending). And established distributors themselves, particularly specialty distributors, are increasingly finding themselves the target of foreign buyout inquiries.
There are also increasing rumours that the German government may change its import rules to allow firms outside of Canada and Holland to import into the country.
The German market, in other words, continues to cook, but most of it is under the surface a year and a half after legalization, to figure things out.
Next to October 17, the other date of note this fall of course was November 1. The Limeys may not have figured out Brexit (yet). But cannabis for medical use somehow made it through the national political fray this summer. Hospitalized children are compelling.
Now the question is how do other patients obtain the same? The NHS is in dire straits. Patients must still find a way to import the drug (and pay for it). And with newly imposed ex-im complications coming Britain’s way soon, there is a big question as to where and how exactly, patients are supposed to import (and from where). All looming and unanswered questions at the moment.
But hey, British doctors can now write prescriptions for cannabis.
Greece and Malta
Greece and Malta are both making waves across Europe right now. Why?
The licensing process that has continued into the fall is clearly opening up inexpensive cultivation in interesting places. Greece is growing. Malta, an island nation that is strategically placed to rival Greece for Mediterranean exports across Europe is still formalizing the licensing process, but don’t expect that to last for long.
Look for some smart so and so to figure out how to beat Brexit and import from Malta through Ireland. It’s coming. And odds are, it’s going to be Malta, if not the Isle of Mann that is going to clinch this intriguing if not historical cultivation and trade route.
Just as October came to a close, the Polish government announced the beginning of medical imports. Aurora, which went public the same week in New York, also announced its first shipment to the country – to a hospital complex.
Let the ex-im and distribution games begin!
It is widely expected that the Polish market will follow in German footsteps. Including putting its cannabis cultivation bid online whenever the Polish government decides to cultivate medical supplies domestically. The country just finalized its online tender bid system in general.
Does anyone know the expression for “pending cannabis bid lawsuit in Warsaw” in Polish?
While it gets little press outside the country, the Danish four year experiment is reaching the end of its first year. While this market was first pioneered by Canopy/Spectrum, it was rapidly followed by both Canadian LPs and others entering the market. Latest entrant this quarter? A tantalizingly American-British conglomerate called Indiva Ltd. as of November 21.
Italy is also starting to establish a presence in interesting ways as multiple firms begin to establish cultivation there.
There are also increasing rumours and reports that Israel might finally be able to start exporting next year. That will also disrupt the current ecosystem.
And most of all, beyond a country-by-country advance, the World Health Organization meeting in early November and in the early part of December is likely to keep the pressure on at a global level for rescheduling and descheduling the cannabis plant.
This in turn, is likely to set the stage as well as the timeline for rec use in Luxembourg. Look for developments soon.
A busy time indeed. Not to mention a quarter to end a very intriguing year, and certainly destined to sow returns for years to come, globally.
It has been a busy couple of weeks for Aurora executives, no matter what else is going on. And all signs indicate that Aurora is not only keeping its pressure on major competitors Tilray and Canopy in particular, but playing a highly sophisticated political and global game right now.
Where the company in other words is not “winning,” Aurora is clearly establishing an effective global footprint that is ensuring that it is at least keeping pace with the speed of market development and even breaking new ground more than once recently.
The Aurora Tour Of The Global Stage In Late October
Forget what is going on in Canada for a moment, if that is possible. Global investors, certainly, in the aftermath of the post legalization glow, certainly seem to be. So are the big LPs like Aurora. They are looking elsewhere, to medical markets and to Europe, for more clarity on where the market will go.
Aurora certainly has been, even if unwittingly, caught in the middle of that conversation, in part because of where and how the company has been positioning itself lately.
Last time around, the company announced it was in the top ten finalists. This time, it is also expected to do well.That said, what Aurora is doing, like everyone else in this space right now, is playing a global game of hopscotch in terms of both raising equity and then where that capital gets spent. Aurora’s recent victories, certainly this year, indicate that it will continue to be a formidable presence in the room.
For now, however, it is clear that retail investors are suddenly cautious and institutional investors are clearly still very leery. So where does that leave Aurora?
Road Trip To Germany
Consider these interesting series of events. Canadian recreational reform “goes live” on October 17. Instead of sticking around Canada, however, CEO Cam Battley spoke at a recent investor road show for the Canadian public cannabis companies over the weekend of October 21-22 in Frankfurt, Germany. Three well placed, but anonymous industry sources confirmed to Cannabis Industry Journal that a meeting between all the major cannabis companies in Frankfurt over the weekend (including not only Aurora, but Wayland Corporation, Canopy, Aphria, Green Organic Dutchman and Hexo) was either planned or attempted with federal Minister of Health, Jens Spahn sometime during this period of time.
Even more interestingly, this conference had clearly been planned to coincide with the original due date of the new German cultivation bid, in which Aurora is also well positioned. Last time around, the company announced it was in the top ten finalists. This time, it is also expected to do well.
Whenever the bid finally is decided, that is.
As of October 23, the day of the IPO in New York and the day after the conference in Frankfurt concluded, news circulated that the bid had been delayed a second time, with rumours of further lawsuits swirling.
IPO In New York
That day, Tuesday October 23, Aurora announced its IPO on the NYSE, not in Frankfurt after announcing this possibility the month before. This is significant, namely because all of the cannabis companies listed here are essentially in what is known, colloquially, auf Deutsch, as being “in the dog house.” Namely, financial regulators are looking closely at listed companies’ profiles on the exchange. If a listed company is too associated with the recreational industry, trades will be barred from clearing by Clearstream, the daughter company of the Deutsche Börse and located in Luxembourg. Earlier in the summer, all of the major LPs were briefly on the restricted list.
The next day after Canadian recreational reform became reality in fact, on October 18, the Deutsche Börse made the latest in a series of comments regarding its intentions about their future decisions on the clearing of cannabis stocks. Namely, that at their discretion, they can prevent the clearing of stock purchases of a cannabis company at any time. In other words, essentially delisting the stock.
Aurora, with its ties to mainstream, “adult use” in North America, is absolutely affected by the same, certainly in the short term. Including of course, all those rumours about Coke’s interest in the company (still unconfirmed by both Aurora and Coke).
Looking Toward Poland
Yet here is where Aurora stays interesting. Just two days after its debut on the NYSE, the company announced that Aurora would be the first external company to be allowed to import medical cannabis to Poland (to a Warsaw hospital and pain clinic). The same day, incidentally, as the Polish government announced that medical cannabis could indeed begin to be imported.
This came after a stunning move earlier in the year when the company bagged the first medical cultivation license in Italy.
Clearly, Aurora is keeping good, if not powerful, company. And that will position it well in the long run. Even if, for now, its IPO on the NYSE got off to a less than powerful start.
Why Does Aurora Stand Out?
Like all the major cannabis companies on the global stage right now, Aurora understands what it takes to get into the room (wherever and whatever that room might be) in politically and regulatorily astute ways, much like Tilray. Both companies are also very similar in how they are continuing to execute market entry and public market strategy. Tilray, it should be remembered, went public over the summer, in North America too, right around the announcement of the final recreational date in Canada.
And while Aurora is clearly playing a still retail-oriented stock market strategy, it has proved over the last 18 months that it is shaping up to be a savvy, political player on the cusp of legislative change in multiple European states so far. They are courting the much bigger game now of institutional investment globally.
Disclaimer: Marguerite Arnold has just raised the first funds for her blockchain-based company, MedPayRx in Germany (and via traditional investment funding, not an ICO). She will also be speaking about the impact of blockchain on the cannabis industry in Berlin in April at the International Cannabis Business Conference.
Part I of this series was an overview discussion of blockchain, cryptocurrencies and cannabis and Part II dove into some of the pitfalls of ICOs in the cannabis space. This is the third and final piece of this series.
Beyond raising money or tying a tradable altcoin to cannaproduct, there are many places where blockchain technology can (and will) be used to great effect in the cannabis industry.
In fact, ICOs and cryptocurrency are only part of the blockchain discussion for the cannabis industry. In general, the technology will disrupt the vertical just like it is upending other businesses right now. However, for the moment at least, it will prove most useful in the most complicated and challenging technical and regulatory areas – supply chain product tracking being the lowest hanging fruit (which is still fairly high off the ground for a number of reasons). If evaluating blockchain tech is too onerous (which it usually is for the average investor or even senior cannabis exec), there are other options. Look for innovative mobile DApps (distributed apps that use blockchain for a specific purpose) and smart business cases.
The fascinating reality is that where there are service models that can be adapted to regulatory guidelines, blockchain promises, in fact, to remove the red tape and paperwork holding the industry back internationally. The impact on research and testing will also be huge.The rules are certainly changing with regards to public companies and cannabis.
The technology, or even the regulations, in other words, is not necessarily all to blame for the many issues budding blockchain entrepreneurs currently face. This space-age techie stuff, no matter how mind-blowing, is still “just” a tool. As the late Peter Drucker famously said, the raison d’etre of every successful business is one that solves a critical need for their customer. Find one for the industry that happens to use the technology, and you might just retire early. But there is a lot of road between that reality and now. And there probably will not be an ICO on that path. Not in most jurisdictions, and certainly not without complications in every one of them.
With an internationally stock-listed Canadian cannabis business now developing, the rules are certainly changing with regards to public companies and cannabis. For all the press that Cronos recently received for getting listed on the NASDAQ, AbCann got (relatively quietly) listed in Frankfurt last summer. Canopy and Aurora have also just become two of the hottest stocks in Sweden.
That said, these are public companies with regular stock issuances. What that means for ICO issuances related to the cannabis industry in Canada specifically is anyone’s guess at the moment. In Germany presently, this is mine-strewn territory. But even here, that will be driven as much if not more by banking law than canna-reform, just like everywhere else.
Not to mention this of course: Given the choice of investing in a public cannabis company already in business with its stock conveniently listed and purchasable via a regular exchange, what would most people choose? It’s just a whole lot easier than taking a flier on a cannabis-themed ICO offering for a concept that may be a great idea, but will never materialize. Or find a bank. Even in Europe or Canada.
The End Game Is Rosy Even If The Path Is Unclear
Despite all the caveats, the impact on the cannabis industry of this technology will be large – far beyond finance in other words – and in ways that are not necessarily all understood even now. The potential impacts on research, compliance and even further reform, however, are already clear. And for the most part, potentially very positive.
For that reason, there is no such thing as a blanket “yes” or “no” at any part of this discussion. Regulatory environments regarding both cannabis and blockchain are changing everywhere. Go slow and with caution is the watchword of the day. Look for interesting beta projects and track them.This is a rapidly changing territory in every direction.
Mentioning cannabis and blockchain if not cryptocurrency in the same breath is also legit, now. As little as 2 years ago, the idea or any combination of the two terms in fact, for whatever reason, was widely dismissed as just another iteration of Silk Road.
When combining this technology and cannabis, in other words, expect either amazing results or fantastic explosions that create a lot of heat and noise but go nowhere. There is more room, in other words, for a cannabis.io to become the industry’s NextGen Pets.com than Google or Facebook. That said, there are experiments going on now, in several countries where the banking and insurance questions are being addressed early (Germany, Canada, Australia and Israel all being such locales) where such issues have begun to be addressed up front.
In summary? Stay tuned and watch this space. This is a rapidly changing territory in every direction.
Disclaimer: Marguerite Arnold has just raised the first funds for her blockchain-based company, MedPayRx in Germany (and via traditional investment funding, not an ICO). She will also be speaking about the impact of blockchain on the cannabis industry in Berlin in April at the International Cannabis Business Conference.
You have probably heard of cryptocurrencies, tokens and smart contracts. You might have also heard, even if you did not understand the significance, that IBM recently suggested that the Canadian government use their form of blockchain, called Hyperledger, to track the recreational cannabusiness. Or that a large LP called Aurora is also looking at this space (as are other licensed producers large and small). Or maybe you have seen an item in the mainstream news about an ICO for a cannabis company that is now also going terribly wrong.
What on earth is going on?
These are all related issues, even if highly confusing and disjointed. Blockchain technology and cryptocurrency are hot right now and getting hotter – both in the mainstream world and in the cannabis industry globally. But for all its fans, the drumbeat for caution is also growing louder the more mainstream this technology (and the legitimate cannabis industry) becomes.
The many problems the entire cannabis vertical has with banking has make this current development almost inevitableOn the technology and finance side, that is why so many big names right now are urging caution. Nouriel Roubini, professor at NYU’s Stern School of Business, is just the latest to do so – and for reasons that everything to do with history. Including recent history ten years ago, when the world stood on the brink of a financial disaster thanks to unchained derivatives. The biggest worry in fact, right now, is about the financial implications of widespread adoption of the technology, beyond the tech itself and how it may (and may not) be legitimately used. Which itself is a huge question.
So why all the fuss?
This is revolutionary technology which is also being introduced into the market at a time when decentralized processing for automation is on the horizon. But also because blockchain can be used to create tokens or digital coins that act like financial instruments. And once created, such tokens can be issued much like money or even stock, to raise additional funds – for both start-ups and ongoing enterprises. The best thing though? This technology was invented to create a decentralized form of value exchange and trust-less, anonymized auditing and verification. No traditional financial institutions or even governments needed, wanted or should apply (at least in theory).
The many problems the entire cannabis vertical has with banking has make this current development almost inevitable. Not to mention accessing investment cash (although this is certainly changing outside the United States). Compliance issues in every direction are another wrinkle this tech will help solve. Starting with tracking product but also rapidly expanding to uses including protecting users’ privacy and facilitating access to high-quality, inspected product for qualified users and buyers. Not to mention other areas that are literally space-age but coming fast. Look for cool stuff coming soon involving both AI (artificial intelligence) and IoT (internet of things).
It is a fascinating, complex space. However, one aspect of this world, in particular, Initial Coin Offerings – or ICOs are getting attention right now. Why? They can be an incredibly efficient way to raise money for companies – both ones currently in business and start-ups with little more than a whitepaper or business plan and perhaps a working prototype. More and more of the successful ICOs are, however, for an existing company or are even attached to an asset, including a license, a prototype or a fund of money (or other combinations). They also rely on blockchain and alternative currency or tokens (sometimes also referred to as smart contracts) to work.
From a technology perspective, you can “mint” new coins relatively easily these days, sourced from a variety of different kinds of blockchain. Or even combinations thereof. You also can issue tokens or altcoins without an ICO.
In a world where there is vastly expanding cannabis opportunity, and many of these hopeful entrepreneurs are both digitally astute but without access to traditional capital, what could be better?
From a financial and investor perspective, ICOs are a hybrid form of an IPO meets social media. “Coins,” “tokens” and “smart contracts” –or cyber currency collectively– are digital forms of cash, contracts, membership cards, discounts or even authorizations for identity. There are many ways tokens can be used, in other words. This by way of saying there are also important differences too. Not all tokens are the same. Not all are used as “money.” Some are but have assets assigned to them (like real estate). Others, particularly smart contract tokens, are strictly functional (pay funds when product is delivered and verified). The one caveat here is that the exchange of any token or altcoin will also cost money. Why? It is the electricity cost of computer processing the request for transfer. Plus access and service fees. There is no such thing as a “free” token. How tokens are priced, sold, bought, maintain value and for what purposes, is a debate if not process function that will not be solved anytime soon. Starting with the fact that some blockchains are more energy efficient (and sourced from green energy) than others.
To add to all of this confusion, not all ICOs function the same way. Some do give investors ownership in the company or specific portfolios that even include real-world assets. Others offer to use pooled funds to buy assets (like real estate or an expensive license). Many rely on the “coin” issued as a kind of discount scheme, reward mechanism and in many cases, direct discounted payment for future goods and services, of both the digital and real world kind. Many offer banking services directly, including in the very near future, the ability to exchange cyber cash for the fiat variety at even remote ATMs. Sound futuristic? It is coming and soon.
Most ICOs in the market now, however, rely on the following supposition: Issue a token with a unique name. Put up an ICO website. Encourage investors from anyplace on the planet with an internet connection, to use either crypto or fiat currency to buy tokens in the issuing startup as an investment that will give the new company funds to operate and build out services or the application (whatever that is). Also, plan to use the tokens for an exchange of some kind in the future (either for other coins or a good or service). Watch the value of the coin increase (for whatever reason) while informing investors (or contributors) that this is not really a security but a “utility” token that is expected but not guaranteed to become more valuable. Retire early with the prospect of having brokers of expensive real estate in places like London and Dubai come calling.The public tide of opinion, even if regulations are slow to move, is on the side of reform if not outright advocacy.
That will not be the case for the vast majority of ICOs, however, no matter what returns, goods or services they offer. Even if they also have vibrant communities already using their services (whatever those are). It will not be the case for most of the cryptocurrencies upon which such ICOs are based (most at the moment are based on Ethereum, NEO, Hyperledger or combinations of the three). There will be more of those too. And not every blockchain will make it (cryptocurrencies and tokens are based on an origin protocol or blockchain much like computer operating systems are either PC or Mac or mobile phones are Android or Apple). Some speak to one another well. Most do not “exchange” easily – even between themselves – let alone back into good old cash. And while nobody wants to be the Betamax of blockchain, there will, inevitably, be quite a few of them. When that happens, any economic value of the coins and even contractual relationships created with them disappear as well. Add in extreme price volatility in the current market pricing of these tokens, and you begin to get a sense of the risk profile involved in all of this.
The real hurdle, not to mention expense, comes when transferring back from the world of crypto to the one of fiat (regular money). Being a Bitcoin billionaire (there are about 1,000 individuals who own about 40% of the entire global Bitcoin issuance) is no fun if you have no place to spend it.
A Rapidly Changing Marketplace
In the past 18 months, cryptocurrency and ICOs have gotten increasing attention because of the increasing value of all kinds of cyber currency (far beyond Bitcoin). The total market cap for all forms of cryptocurrency itself zoomed past $700 billion at the turn of the year. That is impossible to ignore. You might have heard of some of these currencies too. There is ETH, Litecoin, Bitcoin Cash, Dash, even Dogecoin (created originally as a joke on an internet dog meme). Right now, in fact, at some of the most expansive exchanges, there are literally hundreds of these coins which are constantly bought and sold if not exchanged and used.
And then there are the sums ICOs are bringing in some cases, flagrantly flaunting regulatory agencies and doing end runs on the global banking system that cannot keep up with them. The top ICO of 2017, a company called Block.one and registered in the Cayman Islands, so far holds the record at $700 million and counting. Filecoin, the second largest ICO last year, raised $262 million in one month from August to September. And then, of course, there is the cannabis industry-specific case of Paragon – now headed for class-action lawsuit litigation over their $70 million pre-and ICO sale intentions.
It would be logical to assume, given the eye-watering sums potentially involved not to mention the large role a smart digital media footprint has to do with an ICO’s success, beyond its service or technology offerings, that this would be a perfect place for cannapreneurs to turn for funding. The global market is opening for cannabis reform at the same time the crypto craze meets Fintech Upheaval is occurring – in fact, these two things are happening almost simultaneously.
Thanks to regulatory realities and an ongoing stigma, there is still no institutional investment in the industry in the United States (that is rapidly changing other places). These are two new industries and dreams are large.
In the legit cannabis space, so are the expenses.
The price of opening a dispensary in most U.S. states tops a million dollars right now. In Europe, the price of entry is even more expensive. A GMP compliant grow facility in Western Europe, plus the money for lawyer’s fees and negotiations for the license itself will set you back anywhere from $20 million and up, depending on the location. Even staying afloat in the industry once the doors are opened is a challenge. And loans, even for outstanding invoices, are still tough to come by in an industry where banking services of the simple business account kind are a challenge. Particularly in the United States.
The public tide of opinion, even if regulations are slow to move, is on the side of reform if not outright advocacy. Why shouldn’t a reform-group-rooted ICO aspire to own or provide ongoing business financing to a community-minded canna farm in California, Canada, Germany, Israel or Australia? Or even Greece?
However, right now, with some noted exceptions, the cannabis business remains at minimum, a dangerous place to consider issuing altcoins that act like financial instruments or raise money with them. Why and how?
Right now the map of Europe, from a cannabis cultivation perspective at least, is shaping up to be very much like a game of Risk. Throw the dice, move your armies (or more accurately line up your financing), and apply for federal import and cultivation licenses.
In the process, all sorts of interesting strategic plays are popping up. And as a result, here is a new and actually pretty cool “alternative” reality that is easy to verify in several different ways. Medical cannabis is being cultivated in multiple countries across Europe as of 2018, however unbelievable this was even four years ago. Even though it is still cleary just early days. And those cultivators are already international, operating across federal jurisdictions in Europe and across both the Atlantic and Pacific oceans.
With all the excitement and attention paid to the American hemisphere and the European moves of big Canadian LPs (and they are pretty amazing), there are still other moves afoot that are absolutely of note. Specifically, Australian firms and MGC Pharma in particular, have been moving steadily to establish both distribution and cultivation presence on the ground in Europe.
The latest news? MGC’s production facility in Slovenia was officially inspected by authorities and issued an interim license for its production plant in January, before presumably being given a green light of approval permanently. The company is also moving forward with the production of CannEpil, the company’s first pharmaceutical-grade medical cannabis product for the treatment of refractory epilepsy.
Refractory epilepsy affects about 30% of all those who suffer from the condition. Refractory is one of those words however, that hides its real meaning. Translation for those without an MD? This is “drug resistant” epilepsy. Resistant to all drugs before, of course, except cannabinoids.
And that is a welcome relief for patients domestically and throughout Europe. It is also a note to investors looking for savvy Euro plays right now.For all manufacturers now considering entering this market, this is a complicated environment to begin negotiating
This is a major win for MGC. Not to mention a vibrant medical market. No matter where specialty drugs are now going to be sourced from.
A Treatment-Driven “Branded” Pharma Market
What more traditional American pharmaceutical companies have known for a long time (certainly since the 1950’s) is now a fact also facing all cannabis brands coming to the European market and Germany in particular. The regulatory environment is hostile to the extreme for Auslanders in particular. Specifically, the development of “branded” or “name brand” drugs runs economically and philosophically counter to the concept of public health insurance itself even as their market accessibility is required by the same. This is even more the case for foreign firms with such ideas.
Here is the problem. Name brands are expensive. They are also usually outlier drugs for specific, relatively rare conditions. This is also the place where new drugs enter the market, no matter what they are.
In an environment where the government negotiates bulk contracts for common drugs and these can be bought at every apotheke (pharmacy) for 10 euros and a doctors rezept (prescription), the chronically ill and those with drug resistant conditions are left out of the discussion. They face steep and usually inaccessible bills up front for all meds not in bulk purchase categories. And that as of last year in Germany specifically, includes cannabis. That is the case even though technically the government is now buying cannabis in bulk and making purchase commitments to foreign companies for the same. Insurance companies, however, are still forcing patients to pay the entire out of pocket cost up front and wait to reimbursed.
“Generic” Brands For Off label Chronic Conditions
However medical cannabis is clearly not just another drug. Cannabis falls on both sides of every fence in this discussion.
The first problem is that the providers (importers and soon to be domestic cultivators) are private companies. All of them are foreign helmed at this point, with a well-developed bench of branded products. That makes all cannabis drugs, oil and flower, by definition, fall into the “expensive” branded category immediately. The German, Italian, and Danish governments appear to be now negotiating bulk buys during a licensing season that is well on the way to domestic cultivation too. That alone will affect domestic prices and new products. But again, this is now several years behind other countries – notably MGC in Slovenia, Tilray in Portugal, all things now afoot in Denmark and clearly, Greece.
Next, cannabis’s status as a still imported, speciality, semi-trial status in the EU means it is in the most restricted categories of drugs to begin with (no matter the name or strength of the cannabinoid in particular). And because it can be bought as bud, in an “unprocessed” form as well as processed oils or other medicine, this is throwing yet another spanner into the mix.
Look for distribution deals all over Europe as a result, starting with PolandThen there is this wrinkle. Cannabis (even CBD) is currently considered a narcotic within the EU and even more specifically the largest continental drug market – Germany. The German regulatory system in particular, also imposes its own peculiarities. But basically what this means in sum is that the legal cannabis community including distributors and pharmas at this point, have to educate doctors in an environment where cannabis itself is a new “brand.” Who manufactures what, for the purposes of German law, at least, is irrelevant. It is what that drug is specifically for that matters.
For all manufacturers now considering entering this market, this is a complicated environment to begin negotiating. This is sure not how things are back home.
What this also means is that low cost, speciality cannabis products will continue to be imported across Europe for the German and other developing, regulated sovereign markets here as doctors learn about cannabis from condition treatments. And that is what makes the news about MGC even more interesting.
Look for distribution deals all over Europe as a result, starting with Poland. And, despite the many well-connected and qualified hopefuls from Canada, a little competition in the German market too.
MS is the only “on-label” drug at present for cannabis treatment in Germany. As a result, particularly when it comes to paediatric treatment for drug resistant epilepsy, this is the kind of strategic presence that will create a competitive source for highly condition-branded medication for a very specific audience of patients. It is also what the German market, for one, if not the EU is shaping up to be at least in the near term.
As this interesting abstract from 2006 clearly shows, this kind of epilepsy is also high on the German radar from a public policy and healthcare-cost containment perspective. The costs of treatment per patient were between 2,600 and 4,200 euros for three months a decade ago, and not only have those risen, but so have the absolute number of people in similar kinds of situations.
Further, with indirect costs far higher than direct costs including early retirement and permanent semi disability, MGC’s market move into an adjacent (and cheaper) production market might be just what the German doctors if not policymakers now looking at such issues, will order.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
We use tracking pixels that set your arrival time at our website, this is used as part of our anti-spam and security measures. Disabling this tracking pixel would disable some of our security measures, and is therefore considered necessary for the safe operation of the website. This tracking pixel is cleared from your system when you delete files in your history.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.