Industry

“Blockchain in the Marijuana Industry, Like Blockchain Technology Itself, is in its Infancy, but on the Peak of Rapid Expansion” with Braden Perry and Len Giancola

We counsel MRBs on emerging technology, including blockchain. Blockchain in the marijuana industry, like blockchain technology itself, is in its infancy, but on the peak of rapid expansion. Legal marijuana businesses that see the potential and are proactive in its adoption will likely be the frontrunners in innovation and ahead of the curve when the benefits are fully realized. There is an opportunity for efficiencies in transparency and cost-cutting, and a few high-profile applications are taking hold. When the regulatory landscape evolves with the technology, more marijuana business will likely follow. Supply chain solutions and tracking will likely be the biggest trends in blockchain applications with MRBs.

I had the pleasure of interviewing Braden Perry, a regulatory and government investigations attorney with Kennyhertz Perry, LLC. Mr. Perry has the unique tripartite experience of a white-collar criminal defense and government compliance, investigations, and litigation attorney at a national law firm; a senior enforcement attorney at a federal regulatory agency; and the Chief Compliance Officer/Chief Regulatory Attorney of a global financial institution. Mr. Perry has extensive experience advising clients in government inquiries and investigations, particularly in enforcement matters involving emerging or novel issues. He couples his technical knowledge and experience defending clients in front of federal agencies with a broad-based understanding of compliance from an institutional and regulatory perspective.

Thank you so much for doing this with us! Can you share with us the story about what brought you to this specific career path?

I am a cannabis/marijuana expert and represent clients on the financial aspects and banking push/pull of state’s rights and marijuana as a Class I under the CSA. I am also a Certified Anti-Money Laundering Specialist (“CAMS”) and represent companies in the cbd/cannabis industry and assist them with the myriad and confusing state/federal regulations that criminalize THC/Marijuana and the difficulty with bank acceptance of funds. As a former federal enforcement attorney, and a regulatory, government investigations and defense attorney, I have seen good companies enter regulatory spaces they don’t fully understand. Banking marijuana-related businesses (“MRBs”) is one of those areas, both for financial institutions and the underlying MRBs themselves. Navigating complex regulatory structures is what I enjoy from a legal perspective and this industry is a natural fit.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story?

Starting my legal career in white-collar and government investigations forced an uneasy requirement of quickly gaining knowledge on many different industries and companies. To represent a company adequately, you need to know their industry, and their specific processes within that industry. I worked with a talented group that allowed me the freedom and responsibility to lead legal matters and counseled me as a young attorney.

Can you share your “5 Things I Wish Someone Told Me Before I Started Leading a Cannabis Business”? Please share a story or example for each.

Since we counsel clients, here are some things I make sure they know before involving with an MRB:

For potential MRB investors: On the investment side I advise clients on the due diligence related to potential cannabis investments, but generally, this is a high-risk/high-reward and should be for investors that can stomach the dramatic regulatory risk. The environment, with differing state regulations related to medical marijuana and recreational marijuana, could dramatically shift with the individuals within the legislative bodies of those states. As always, transparency is the key understanding of these novel risks that most industries don’t have. Beginning investors beware but may be a great bet for a diversified and sophisticated portfolio looking for some additional return.

For MRBs on the financial side: I also represent clients on difficulty with bank acceptance of funds. The key to high-risk areas and banking relationships is to have a strong compliance program and transparency. Independent compliance audits of the company either by a third party or someone not actively involved in your compliance management system will add the trust the bank has with the company. And the banks most likely to accepts aren’t major financial institutions, but local and likely state-chartered banks or community credit unions that avoid many of the federal regulations that cripple the industry. But it’s important to remember that it still is federally illegal, and the Bank Secrecy Act makes even the state-chartered banks subject to money laundering issues and can make banking a federally illegal substance difficult. It’s further unclear how the Trump administration will deal with the legality of “legal cannabis.” The main issue is that cannabis is a Class I drug under the Controlled Substance Act at the federal level. The federal government has been hands-off regarding the legalization at the state level, but that cloud of uncertainty still exists because of the supremacy clause and the very harsh federal drug laws. The navigation of guidance and getting MRBs a safe place to store their funds is a priority for our firm and counseling companies on doing that remains one of our main focuses.

For financial institutions: There is a lot of potential upside to banking MRBs. But it’s not easy. The financial institution’s policies and procedures must address their heightened Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) protocols, and outline how at a minimum, a determination of whether the MRBs activities implicate guidance issued by Financial Institutions Crime Enforcement Network (“FinCEN”) on February 14, 2014, entitled “BSA Expectations Regarding Marijuana-Related Businesses” (“FinCEN Guidance”), the requirements of the prosecutorial guidance of the Department of Justice (“DOJ”) to U.S. Attorneys dated August 29, 2013 (“Cole Memo”), subsequent companion letter to the FinCEN Guidance dated February 14, 2014 (“DOJ Companion Letter”), and state licensing and other essential requirements.

It’s important to note, that although Attorney General Jeff Sessions rescinded the Cole Memo, the FinCEN guidance has remained intact, and FinCEN has affirmatively stated that its effect continues to control. This guidance requires financial institutions to adhere to enhanced due diligence requirements, including to review documentation on the MRBs and verify whether the MRBs have valid licenses and registrations, understand the types of products that the MRBs will sell, and document the types of customers that the MRBs will serve, such as medical customers versus recreational customers.

Also, FinCEN provides an extensive list of MRB red flags that financial institutions must monitor for, including but not limited to illogical money movements, large or unusual cash deposits, and attempts to hide ultimate control person identities.

So far, there are no examples where legal MRB activity in financial institutions has been prosecuted, but the financial institutions must tread carefully. Understanding these regulatory issues and how a bank will view the MRBs company/structure/setup is essential in preparing for banking relationships. It critical for the MRB and financial institutions to be on the same page when it comes to compliance, and counsel the two on the ways to achieve their goals. Many financial institutions simply don’t want the complexity or extra attention of regulators.

The reason why we focus on finding ways to assist financial institutions and MRBs is I believe more needs to be done to bank legal MRBs safely. Many stories abound about MRBs storing massive amounts of cash due to their inability to gain banking relationships. This is both dangerous and illogical. Having a strong banking partner can protect the MRBs funds and assist in monitoring for suspicious behavior and potential wrongdoing. This is good for both business and industry. Recently, the head of the Federal Reserve testified on the need for additional guidance and the House Financial Services Subcommittee held their first hearings on banking MRBs. There have been attempts in Congress to address these issues, such as the SAFE Act, which was introduced last year and will likely be introduced again this year. The momentum is there for regulators to create strong guidance to safely bank MRBs and end the ongoing confusion.

For innovation: We counsel MRBs on emerging technology, including blockchain. Blockchain in the marijuana industry, like blockchain technology itself, is in its infancy, but on the peak of rapid expansion. Legal marijuana businesses that see the potential and are proactive in its adoption will likely be the frontrunners in innovation and ahead of the curve when the benefits are fully realized. There is an opportunity for efficiencies in transparency and cost-cutting, and a few high-profile applications are taking hold. When the regulatory landscape evolves with the technology, more marijuana business will likely follow. Supply chain solutions and tracking will likely be the biggest trends in blockchain applications with MRBs. Some solutions we are working with companies on will be able to make the tedious plant tracking (“track and trace”) from the field to supplier efficient and much less burdensome. It will also assist in verifying brands and quality. Also, the use of private blockchains within organizations will change how companies deal with logistics. In our counsel with MRBs, most MRBs would benefit from some aspect of blockchain technology, from the supply of products, fair pricing, efficient supply and improved product tracking. It will also enable marijuana producers to do real-time management of their production and storage. From seed procurement to harvest to sale can be recorded on a blockchain, which assists producers and consumers in quantifying, monitoring, and controlling the agriculture process. Blockchain has vast potential. MRBs looking to innovate and are proactive in its uses will likely reap benefits in ways we can imagine and in likely unimagined areas. As the regulatory framework progresses with innovation, companies will benefit. But that regulatory framework will likely lag the innovation and frustrate those willing to adopt new technology.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

I believe the moment is there, but more needs to be done to safely bank legal MRBs. Many stories abound about MRBs storing massive amounts of cash due to their inability to gain banking relationships. This is both dangerous and illogical. Having a strong banking partner can protect the MRBs funds and assist in monitoring for suspicious behavior and potential wrongdoing. This is good for both business and industry. My movement would be to create strong guidance to safely bank MRBs.

What is the best way our readers can follow you on social media?

@bradenmperry (twitter) and www.linkedin.com/in/bradenperry (LinkedIn).

This was very inspiring. Thank you so much for joining us!

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