Cannabis tracking systems are badly broken. And it’s costing us a fortune.

A laundry list of problems with state cannabis tracking systems and the astronomical costs associated with them.

The complex software systems being used for cannabis tracking are clunky, buggy, difficult to work with, inordinately time-consuming, lacking proper training and support, and oftentimes unsecured and vulnerable to attack.

All of this is costing all of us a veritable fortune.

The cannabis industry, as young as it is, has blossomed into one of the fastest-growing industries in modern times. It’s also one of the most complicated from a regulatory standpoint. As a result, the Green Rush is experiencing sharp growing pains.

Cannabis consumers not only have to put up with illogically high taxes in many states, but they also bear the financial burdens caused by unreasonable and poorly conceived regulations as well as a number of serious technical glitches plaguing cannabis tracking systems.

Ironically, breakdowns in these complex software systems — ultimately designed to prevent legal marijuana from making its way onto the illicit markets — sometimes force recreational users and medical patients alike to turn back to their local “dealer” to purchase cannabis.

Because illicit products are not tested for purity and potency, this situation endangers the wellbeing of recreational consumers and medical patients alike. Witness the recent rash of tragic deaths associated with black market vape cartridges.

Moreover, systems designed to track cannabis products from seed to sale are vulnerable to malfunction, user error, malware, data breaches, and criminal exploitation.

Combined with regulatory friction these problems are costing cannabis operations millions of dollars in lost revenue, diminished productivity, and remediation costs. It’s also scaring away potential investment capital and costing states millions in lost tax revenue.

The major malfunctions of cannabis tracking systems

Several challenges and areas of friction have arisen during these early stages in the development of cannabis tracking systems (CTS) — also called track-and-trace systems, traceability systems, or seed-to-sale systems.

Some of these challenges include excessive diversity and complexity in CTS systems, adoption and integration challenges, deficiencies in training and technical support, user errors, technical difficulties, and security breaches.

In an undated and uncredited page on Marijuana Venture’s website, an author writes:

“Proponents of cannabis legalization sold voters on a closely scrutinized and tightly regulated market. Monitoring every cannabis plant from seed to sale would enable regulators to prevent out-of-state diversion, safeguard product safety and ensure collection of the lucrative taxes legal cannabis promised… Predictably, attempts to deliver this brave new world have instead created a chimera of regulation, big data, and state-sanctioned monopolies. The result has been increased burdens on cannabis businesses, intolerable risk to consumers and harm to competition.”

In terms of the role of cannabis tracking systems in the aforementioned increased burdens and risks, a post by MG Retailer outlines some of the issues being faced by licensed cannabis businesses that hinder efficiency.

“In 2017, Oregon’s marijuana growers and distributors complained of spending valuable man-hours updating inventory in Metrc [a cannabis tracking system] and dealing with slow connections during peak harvest season. [Another tracking system] MJ Freeway’s glitches in Pennsylvania and Washington have halted commerce for dispensaries, and the company has suffered multiple hacks and security breaches, plus a troubled, months-delayed launch in Washington earlier this year. Before inking a deal with MJ Freeway, Washington worked with BioTrackTHC [a third tracking system] for four years, but growers bemoaned performance issues and lacking functionality.”

How much is this going to cost us?

Fixing all of the issues surrounding cannabis regulation and tracking will be expensive. But the potential losses in revenue and the missed opportunities resulting from over-regulation and systemic issues are sure to be even more enormous.

Difficulties arising out of problems with cannabis tracking systems can saddle license holders with losses sometimes in the hundreds of thousands of dollars and cost states millions in potential tax revenue.

Security breaches alone have already cost states and cannabis companies millions of dollars. And breakdowns in cannabis tracking systems have cost states millions more.

Even just performing maintenance on complicated CTS systems can result in outages that can be costly for operators.

Over the summer of 2019, errors associated with botched software updates prevented many Washington state cannabis businesses from transporting their products.

According to one report on SeatleTimes.com, these glitches cost growers, distributors, and retailers hundreds of thousands of dollars in lost sales even forcing some to furlough workers.

The executive director of the Washington CannaBusiness Association, Vicki Christophersen, called the software issues “crippling.”

In a report by Marijuana Business Daily, the author writes:

“A survey about the outages conducted by nonprofit association The Cannabis Alliance asked Washington state cannabis business owners to estimate what it cost them by way of employee pay, lost revenue and other factors. Respondents’ answers ranged from $1,000 to as much as $80,000. Eight businesses said they’d lost more than $25,000 in sales.”

Moreover, tracking requirements have become so complicated that some cannabis license-holders are forced at great expense to employ teams of full-timers whose jobs consist mainly of entering tracking data.

The high cost of data breaches

For a cannabis retailer, the financial losses associated with a data breach, especially for a smaller operation, can be devastating.

According to the U.S. National Cyber Security Alliance, 60% of small businesses that have suffered a data breach have gone out of business within six months.

In an article titled, “The Impact of Cyber Crime in the Cannabis Industry,” Cybersecurity expert, Matthew Dunn, writes:

“For a cannabis retailer, the financial losses associated with a data breach, especially for a smaller operation, can be devastating. A study conducted by IBM and the Ponemon Institute in July 2018 determined the global average cost of a data breach to exceed $3 million. This figure factored in costs for remediation, notification, and credit monitoring, which are mandatory components of data breach response in most states.”

And according to a July 2019 report by Leafly:

“Cities like Baltimore, as well as the state of Georgia’s court system, and Lake City, Florida, have been the recent targets of sophisticated ransomware infections, with attackers demanding payment to stop their disruption of crucial municipal data systems. Officials in Lake City, facing the potential loss of the entire city’s information systems, paid a $460,000 ransom. Baltimore refused to pay a $75,000 ransom and is now dealing with an $18 million cleanup job.”

The Leafly post goes on to mention additional breaches in traceability systems in California and Washington State as well as Alberta and Ontario, Canada.

Potential for diminished investments

The pervasive difficulties associated with cannabis regulations and tracking systems can also result in missed opportunities in the form of a loss of potential investment into the state’s cannabis industry.

There is no way to determine the financial repercussions. The damages could be staggeringly large.

Potential for federal intervention

As long as marijuana remains federally illegal, cannabis tracking systems present a golden opportunity for the US Drug Enforcement Agency (DEA) and Depart of Justice (DOJ) to disrupt the cannabis industry by providing these federal agencies with a list of millions of drug transactions.

State medical marijuana programs enjoy tenuous protections at the federal level such as those provided by the Cole Memo. However, the document does not apply to recreational cannabis.

Accordingly, states that have legalized recreational marijuana, in particular, run the risk of a major federal intervention. This risk is heightened by deficiencies in traceability systems.

In Aug. 2019, a report on cannabis tracking systems written by Anthony D. Phillips and published on the Marijuana Venture website states:

“Moreover, the weak oversight evidenced by system vulnerabilities increases the likelihood of federal intervention in states incapable of preventing illicit market diversion as promised. And a zealous prosecutor is only a subpoena away from terabytes of evidence of millions of drug deals — a fact that is also increasingly realized by local authorities keen to collect unpaid taxes and fees promised them under legalization. The requirement on businesses to gather and maintain all of this information makes them targets too, necessitating additional insurance, IT and legal costs.”

Any intervention in state cannabis markets by federal agencies is sure to cause reverberations throughout the cannabis industry, thwart institutional investments in the cannabis space, and further devastate stock prices.

Lapses in reliability and security reduce trust

Most of the issues revolving around cannabis industry regulation and traceability are, for the most part, the result of the conflict between cannabis policy reform advocates and those factions that oppose legalization. Much of the regulatory red tape is meant to appease opponents.

The more that can be done to increase the liability of security of cannabis tracking systems, the more trust the industry will cultivate amongst opponents and stakeholders alike, and the lower the costs of tracking will be to stakeholders and regulators. Moreover, improvements will ultimately result in higher tax revenue.

In fairness to lawmakers, regulators, and CTS vendors alike, some progress is being made in increasing the reliability and improving the usability of cannabis tracking systems as well as beefing up security, technical support, and training.

That being said, with such a monumental yet immature institution, even with the best of intentions, making progress on the development of its nervous system will be slow going.

This report is the first of a series of articles detailing the challenges associated with state cannabis tracking systems. Future posts will go into greater detail on each of the issues outlined in this report including candid interviews with cannabis industry leaders and pioneers. Follow us to get the full story.

Photo by Next Green Wave on Unsplash

Sources:

• MOGreenway.com — State asks court to say no to tag fees in Metrc suit response 12/3/2019
• MGRetailer.com — Track-and-Trace Systems Are Still Working Out the Kinks 1/8/2019
• Slate — Software to Regulate Legal Marijuana Is Just as Error-Prone as Other Government Software 9/11/2018
• Observer.com — Could Blockchain Help the Cannabis Industry? We’re About to Find Out 10/2019
• Seattle Times — Software problems cripple Washington state pot industry 7/24/2019
• Leafly/Associated Press — Glitchy Track-and-Trace Systems Are Hobbling Cannabis Companies 7/26/2019
• Marijuana Business Daily — California cannabis firms struggle to make sense of new track-and-trace system, fanning fears over its expanded rollout 3/21/2019
• Marijuana Business Daily — California’s track-and-trace system slowly spreading through marijuana supply chain, but hiccups remain 7/3/2019
• Seattle Times — Washington pot-tracking system, already dogged with problems, was hacked, state says 2/8/2018
• Cannabis Industry Journal — The Importance of Traceability 4/20/2016
• Politico — The Great Seattle Pot Heist: A rash of marijuana thefts has Seattle growers wondering: Is the government leading the thieves right to them? 8/23/2019
• Marijuana Business Daily — Hiccups with traceability system rollout costing Washington state cannabis producers thousands 2/8/2018
• Leafly — Why cannabis buyers are uniquely vulnerable to cyber attacks 7/11/2019
• Ganjapreneur — Washington’s Broken Seed-to-Sale System Has Cost $2M
• Cannabis Industry Journal — Why Traceability Is Crucial for the Cannabis Industry 5/22/2018
• Marijuana Business Daily — ‘Breakdown’ in Washington state traceability system update costs cannabis businesses thousands 7/17/2019
• Leafly — Washington’s New Cannabis-Tracking Software Is Disrupting the Industry 2/6/2018
• IEEE Spectrum — Cyber Intrusion Creates More Havoc for Washington State’s New Marijuana Tracking System 2/16/2018
• Kroll.com — Growing Cyber Threats Against Cannabis Retailers
• Kroll.com — The Impact of Cyber Crime in the Cannabis Industry
• Kroll.com — The Three Pillars of Cyber Security for Cannabis Retailers