How technology will unleash the legal cannabis industry's growth potential

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Even as federal and state regulators struggle over state cannabis legalization, there are key areas in which they align.

Each cares about safety, compliance, and depriving criminal cartels of revenue. And, more than ever, tech firms have the potential to bridge the gap between legalizing states and prohibitionist federal policy.

Lost in much of the renewed current debate about prohibition has been the substantial regulatory regimes that 29 states and the District of Columbia have established to ensure cannabis is grown and sold safely and securely.

As founder and leader of a software company that helps dispensaries to, among other things, automatically comply with local regulations in their operations, I know there is no "wild west" in the legal marijuana business. Growers, distributors, and retailers must comply with complex regulations that require accounting for every milligram - literally from seed to sale. While the rules differ from state to state across the country, every state has taken its oversight role seriously.

This has had two major effects.

First, we uniformly find reliable, efficient markets developing as the cannabis business matures. This is no small feat given the federal prohibition. For one thing, cannabis supply in any given state must come from in-state growing operations because growers cannot transport cannabis across state lines. For another, marijuana is an all-cash business. Credit card companies and federally chartered banks do not do business with cannabis companies for the same reason.

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Second, through just our own business, which operates in 12 states, we have seen billions of dollars in revenue tracked, accounted for, and effectively taken from organized crime and put into state coffers. Drug cartels have surely lost entire markets in states that have legalized marijuana. Whatever you think of legalizing cannabis, there is no arguing that taking billions from criminals is a good thing.

This has not happened magically. State legislators and regulators have worked hard to craft both laws and the oversight. And at the center of that oversight are tech companies that have been providing to both states and businesses the crucial software they need to track and manage cannabis products.

Going forward, tech will play an even bigger role, according to a new study Green Bits commissioned by national cannabis experts Lewis Koski and John Hudak. They argue that the cannabis regulatory environment is still in its infancy and has been the product of rapid implementation and experimentation. But as the sector takes hold, matures and spreads to even more states, tech will be central to its progress, helping it to scale and keep compliant.

Notwithstanding state sector successes to date, continued federal prohibition means both that states will continue to be on their own regulating these industries (affecting everything from product quality to environmental stewardship) and that large players such as major payment processing companies, which are highly experienced in reliably and accountably moving large dollar volumes and helping regulated industries, will continue to stay away from the market.

Thus, there is both the need and the incentives for smaller, more nimble tech firms to innovate. This, in turn, means three things. First, notwithstanding the conservative nature of regulators, states must embrace and incentivize tech firms to enter and remain in the market. The larger the cannabis market grows, the more difficult it will be to strike the right balance of imposing sufficient oversight without unduly burdening businesses with compliance costs. Tech firms have reliably offered the marijuana industry products that reduce their compliance costs.

Second, states must collaborate and share information with tech firms so that they can best develop and offer their products. Thus far, we have seen tech firms not just reducing compliance costs but increasing compliance rates. We have also seen start-ups begin to introduce products and processes that spur states to raise the robustness of standards for their own tech solutions.

Third, we need tech firms to be somewhat dauntless. While large companies fear federal regulators, smaller firms helping make products safer, more reliable, and more trackable and helping businesses manage cash more securely and responsibly, do not. Remarkably, federal prohibition triggered a democratic boom in the states that sparked a rare combination of regulatory and free-market ingenuity.

The backbone of this progress has been tech companies. In an era of growing distrust of tech firms, it is ironic that, at least in the cannabis sector, such companies have the potential to offer peace of mind to federal authorities in rethinking their approach.

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