The Big Business of Making a Cannabis Surveillance State
How cannabis became one of the mostly highly regulated substances in the US.
Image: Daniel Oberhaus
Walk into any licensed cannabis grow op in Colorado and one of the first things you'll notice are the barcodes.
Every plant has a brightly colored tag—blue for recreational and yellow for medicinal—zip-tied to its stalk or planted in its soil, and each tag bears a bar code and a Radio Frequency ID (RFID) chip. Look up from the plants and you'll notice the security cameras silently monitoring every inch of the floor 24 hours a day, 7 days a week. Employees will likely be wearing badges that allow a computer program to track their movement from room to room. Perhaps you'll run into an inspector from the state's Marijuana Enforcement Division, who show up unannounced to verify the amount of flower produced by the grow op matches with what the state has recorded in their real-time inventory systems.
Welcome to the cannabis surveillance state, a multi-million dollar industry that is responsible for turning America's favorite black market flower into one of the most highly regulated commodities on the market today.
The reasoning behind implementing these cannabis surveillance systems is pretty straight forward. Since cannabis is still illegal on a federal level, the burden is on the states that have legalized weed to prove that legalization has not aided black market activity. If a state knows where all of its cannabis is at any given time, then it can keep the DEA off its back by demonstrating that there is a cannabis "closed-loop," meaning that no pot is crossing state borders.
"I believe we've taken the pharmaceutical and alcohol industry's approach to [cannabis compliance software] because we had law enforcement in mind when we made this product," David Dinenberg, CEO of Kind Financial, told Motherboard. "You can't divert product from our software—anytime you're logged in, whether that's through your thumbprint or a password, we have recordings of it. We don't even delete it. It lasts forever."
Formally speaking, the cannabis surveillance network Dinenberg described is known as seed-to-sale tracking, which as its name implies is responsible for following a cannabis plant from the time its seed is planted in soil until it is purchased at a dispensary. These systems can measure the weight of cannabis products down to the milligram and know any time a cannabis plant is moved from a grow room to a flower room or is distilled into a concentrated product.
Read more: Smoke Cloud: Encrypting the Internet of Weed
In 2011, Colorado became the first state to pass a law mandating cannabis surveillance and two years later this law went into effect with the launch of the Marijuana Enforcement Tracking Reporting and Compliance (METRC). METRC is a government-facing compliance system owned by the software company Franwell that allows the Colorado Marijuana Enforcement Division to track millions of cannabis plants as they move through the production process. Although METRC was created specifically to meet Colorado's compliance needs, it is now used by four state governments (Colorado, Alaska, Maryland, and Oregon) to track medicinal and recreational cannabis.
METRC is unique in the sense that it only offers government-facing tracking programs, unlike the two other major seed-to-sale software companies MJ Freeway and BioTrackTHC, which focus on both private and government sector solutions. MJ Freeway was founded in 2010 for the express purpose of tracking cannabis, whereas BioTrack was founded in 2007 and focused exclusively on tracking pharmaceuticals until 2010 when it pivoted to cannabis. Currently BioTrack leads the seed-to-sale market with five state contracts (Washington, New Mexico, Illinois, New York, and Hawaii).
So far, only nine state contracts have been awarded in total, but there are 19 other states that have yet to purchase a contract from one of the seed-to-sale providers to oversee cannabis regulation in their state. Each of these states will likely have to implement some sort of tracking architecture before they are able to start legally selling pot. This has prompted a number of new companies to enter the market, including Kind Financial, which partnered with Microsoft last June to create a seed-to-sale compliance product for cannabis cultivators and retailers.
"Microsoft is in the government business already," said Dinenberg. "At the end of the day they're servicing their government clients, but they weren't able to service them with a track and trace marijuana product. We were the lucky ones who were brought in."
Microsoft's entrance into the already crowded field of cannabis compliance software speaks to the profitability of cannabis surveillance. METRC's first 5-year contract with Colorado was worth $1.2 million and its 5-year Oregon contract is worth $1.7 million, as well as generating additional millions of dollars in revenue from the plant RFID tags, which cost almost 50 cents each.
BioTrack, by comparison, beat out 22 competitors (including Xerox) for the Washington contract, which was worth $750,000 plus an annual quarter million dollars for maintenance to the system. Yet for business-facing cannabis software companies like BioTrack and MJ Freeway, the real money is to be made in the annual contracts with cannabusinesses, which carry subscription fees ranging from $200 to upwards of $500 for using the software.
Kind Financial is hoping that its partnership with Microsoft overturns the cannabis surveillance industry by amalgamating a variety of different compliance functions under one umbrella. Not only does Kind have access to Microsoft's Azure government cloud and a cannabusiness-friendly point of sale software, but it also develops its own kiosks for cannabis retailers. These kiosks mean that a dispensary can allow customers to pay in cash without ever having to actually touch the money—instead, the money deposited in the kiosk is picked up by a third-party service and deposited into a bank. Due to the legal issues troubling the cannabis industry, banks are wary to work with cannabusinesses, but having a third party mediate the process can ensure lawful compliance on both sides of the equation.
"There is an absolute stigma to this industry," said Dinenberg. "The only way we'll get taken seriously is when we can act more like a traditional business, and the only way that's going to happen is compliance and technology."
Despite the software companies' emphasis on law and order to attract government clients, others feel that these regulation regimes put too much strain on cultivators, particularly caregivers who produce modest amounts of cannabis at home.
Since the cannabis industry is being so heavily monitored, in the government's eyes the only source of potential "leakage" onto the black market must be coming from home grows. Indeed, this was the justification in a landmark 2005 Supreme Court case which allows the federal government to prosecute home grows, even if personal cannabis cultivation is legal in the state. The problem is that not every caregiver is a drug dealer, which means many legitimate caregivers may end up being punished if the ability to grow marijuana at home is revoked or simply not included in future cannabis legalization efforts.
Ultimately, the strangest part of the cannabis surveillance state is that it is far stricter than the monitoring and compliance mechanisms of significantly more dangerous consumer products like tobacco or alcohol. But according to Dinenberg, this regulation regime is unlikely to change anytime soon, even if the feds were to reschedule or legalize cannabis.
"I believe the cannabis industry becomes what it is today or more regulated [if the feds legalize cannabis]," Dinenberg said. "I don't think there is anything wrong with having strict compliance. I don't think a rational opinion for the masses should be one where we just expect marijuana to be bought, sold and grown. This will be a heavily regulated industry for a very long time."
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