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Blockchain Controversies Continue To Rock The Cannabis Industry

By Marguerite Arnold
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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.

Greece Gets Growing

By Marguerite Arnold
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The Greek government changed the law on medical cannabis as recently as February of this year. Now it has issued its first cultivation license.

Who Is The First Beneficiary?

The lucky (first but far from last) firm to receive a cultivation license? Intriguingly, a South American-Canadian cultivation company called ICC Cannabis Corp.

The most recent agreement received from the Greek government supersedes and augments its previous hemp cultivation license in the country. The license, however is not final yet but rather a conditional pre-approval for medical cannabis cultivation.Things in Greece are proceeding fast with no internal or external opposition.

The company already has secured a 16 acre grow facility in Northern Greece. ICC also has a distribution network of over 35,000 pharmacies spread across 16 countries which it says will “complement” its current Greek victory.

ICC will pay USD $200,000 in connection with the license issuance, pay a finder’s fee and issue 12 million shares.

Company executives are quick to point out that the success is a result of staff cultivating close relationships with local politicians.

The ICC of course is not the only company now engaged in solidifying their business opportunities in Greece. Hexo, a Canadian LP with about a million feet of grow space at home by end of 2018, in partnership with local Greek QNBS, is also rapidly moving to establish a 350,000 square foot growing facility in country as well. With a similar eye, it should be added on the European medical market.

European Legal Cultivation Is Exploding

Medical cultivation, in other words, is getting underway regionally, with authority. And the bulk of such crops not consumed locally, are already being primed for export to more expensive labour markets across the continent with increasing demand for high quality, low cost, medical grade.

Not only is this procedural development fast and relatively efficient, it sets up a serious competitor within the EU to provide cheap flower, oil and other processed cannabis products to a continent that is now starting to place bulk orders as individual countries struggle with the issue of how much local cultivation to allow and what patient conditions should be covered.

Even more interesting, at least so far, are a lack of punitive punishments being meted out to the country from the EU for considering this economic route to self-sufficiency again. That is not true for Albania, in direct contrast, which is being penalized with its membership to the Union on the line, for the level of black market cannabis grown in the country.

That said, it might also be the progress of Greek cultivation that has caused such a furore – led by France in Brussels within the EU. A country far behind regional leaders on reform it is worth noting. Even on medical.

A Quick History Of Cannabis Reform In Greece

Greek politicians decided fairly early as the cannabis ball got rolling in Europe that the industry was the perfect cash injection to an economy still emerging from troubled times and massive financial defaults. In fact, Greek officials are estimating that legalizing the medical industry here will inject approximately USD$2 billion into the country’s economy.

It could be, of course, much higher. Especially when exports are added to medical tourist consumption.

The amazing thing so far, for all the other issues in just about every other legalizing country within the EU of late? Things in Greece are proceeding fast with no internal or external opposition.

Who Is ICC?

The firm used to be known by the hard to pronounce Kaneh Bosm Bio Technology and Shogun Capital Corp. The firm has an interesting footprint with production in Uruguay but already exporting CBD and other derivatives to the Canadian market, including via a deal with Emblem Cannabis.

The company began trading on the TSX Venture exchange in November 2016. In late September, the company announced that it was also securing a 55-acre grow facility in Denmark, with other Canadian cannabis heavyweights like Canopy, Aurora and Green Dutchman Holdings.

KIND Financial Launches Canadian Payment Solution

By Aaron G. Biros
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KIND Financial, a technology and compliance software solutions provider in the cannabis industry, is launching a new e-commerce and payment processing platform in Canada. According to the press release, they are partnering with a Canadian bank to launch the KIND Seed to Payment platform, which is essentially an e-commerce gateway integrated with their compliance software, KIND’s RegTech platform.

David Dinenberg, founder and CEO of KIND Financial

David Dinenberg, founder and CEO of KIND Financial, says this is an approach to help alleviate the cannabis industry’s banking woes. “We’ve been very focused on a global vision and taking a strategic approach towards solving the cannabis industry’s largest problem – banking,” says Dinenberg. “Not only have we built a broad portfolio of finance and compliance solutions with a high-level of technical sophistication, but we’ve made a strong commitment to security and compliance, which is evident through our partnership with Microsoft.” A little over a year ago, they entered a partnership with Microsoft to utilize their cloud-based solutions for government traceability software.

According to the press release, the software has regulatory and security features built in, such as age and identity verification, which can help companies comply with security and chain of custody regulations. “Our mission is to ensure business and technological growth for all constituencies within the cannabis industry while ensuring full compliance with evolving regulations, and that’s why we’re thrilled to make these services available to our great neighbors in the north,” says Dinenberg. “We understand compliance will be a critical issue for some time to come, but with our solution, all providers and their partners can focus on the job at hand while keeping in line with regulatory mandates.”

KIND Financial has not done much work in Canada previously, but this could be a sign of a greater push for international expansion. “We’re excited to be working in a new country to boost the Canadian cannabis industry in a safe and regulated manner, and we look forward to expanding into other markets overseas,” says Dinenberg. The press release says the new platform is designed to work with different languages and foreign currencies, including the euro and Australian dollar, which could help Canadian producers enter emerging markets.

In addition to their announcement of the KIND Seed to Payment platform, the company also announced they will be rolling out a mobile payment system called KIND Pay, a digital payment option for consumers that will accept Visa and MasterCard. They anticipate that KIND Pay will launch before the end of this year.