California’s new marijuana laws don’t take effect until 2018, but a big-money race to help the state regulate the industry is already in progress.

Even though California was the first state to legalize medical marijuana and is the largest legal marijuana market in the country, it has not yet adapted a system for the government to track product. These kinds of protocols, similar to those that exist for pharmaceuticals, have become standard in other legal states.

In Colorado, Radio-Frequency Identification (RFID) chips track plants from grow rooms to the dispensary, even if a plant is ultimately processed into an edible or vaping oil. By having a record of every legal plant in the state, regulators can ensure, among other things, that legally grown product is sold according to code.

Next month, California will begin accepting proposals from the companies that want to sell California a platform for tracking pot throughout the state. It’s a way to ensure that “businesses will be run like
a regular business as opposed to operating like drug dealers,” says David Dinenberg, CEO of L.A.-based Kind Financial, one of the companies planning to bid on the state contract.

Dinenberg says these seed-to-sale systems, which government agencies call track and trace, “give businesses as well as the states a handle on what's happening on a second-to-second basis.”

Kind made news last June when software giant Microsoft said it would market the company’s
Agrisoft software to state governments. The partnership with Microsoft was a major
credibility boost for Kind. It also was one of the highest-profile confirmations of the widely suspected belief that big mainstream companies are eager to wade into the green rush once they
feel comfortable with the legal climate.

Within the industry, software is considered an ancillary business, meaning that it doesn’t require companies to directly grow, process or sell marijuana. Offering an ancillary product or service is generally considered less legally risky than businesses that “touch the plant.” Still, it suggests something about the lingering risk that Microsoft will offer Kind’s software only to government regulators and not directly to the pot companies that need it. And that decision came before President-elect Donald Trump nominated Sen. Jeff Sessions as U.S. attorney general; Sessions' anti-pot stance has made many marijuana entrepreneurs nervous.

The budget Gov. Jerry Brown unveiled last week allocates more than $50 million for cannabis regulation, a substantial chunk of which is expected to fund the tracking system. Whatever company wins California’s contract will have a strong foundation to pursue similar opportunities in other newly legal states, and perhaps eventually the federal government.

Yet earlier this month, dispensary owners nationwide got a taste of what can happen when this software goes down. Starting Jan. 8, MJFreeway, a Colorado company that makes cannabis tracking software for businesses, suffered a major outage. More than 1,000 businesses in 23 states reportedly saw their software go down.

The company, which also won the state tracking contract in Nevada, indicated that all systems would be operational again soon, though restoring historical data could take weeks and in some cases may be impossible. MJFreeway says the outage was the result of a “direct attack” on its system, though encrypted data has not been compromised.

Regulating marijuana like a legal industry remains a fairly new phenomenon, and there are still different schools of thought on how it should be done. Pranav Sood, CEO of Trellis, an Oakland startup that makes inventory management software for cannabis businesses, points out that Canada has no central tracking system and its couple dozen legal medical marijuana producers are required to report their data to the federal government. Inspectors also can drop in for surprise visits. (In Canada, legal patients receive their medicine by mail, though that could change as the country moves to fully legalize this year.)

The Canadian approach isn't really an option in California, Sood says, where there are thousands of growers, processors and dispensaries, many of them not recognized by any government body.  “Because of the size and scale and scope, having a self-reporting model is not ideal, because the inspections can be cumbersome,” he says.

LA Weekly