There is the heavily regulated legal, and there is (the still thriving) illicit cannabis market in the US,
with the illicit market still outselling the legal market by a multiple of six by some estimates.
A Partial History and the Outlook
Federal cannabis prohibition dates back roughly 90 years in the U.S., with the 1937 passage of the Marihuana Tax Act, which outlawed the nonmedical use of cannabis and regulated cannabis importation, cultivation, and distribution. In October of last year, a bipartisan bill to legalize and regulate marijuana at the national level, known as the States Reform Act, was introduced in the House of Representatives. The bill was first introduced, the States Reform Act, in 2021 with support from four Republican co-sponsors, while the new version of the legislation has bipartisan support. At the federal level, cannabis would be regulated like alcohol, with the U.S. Department of Agriculture responsible for regulating growers while the Food and Drug Administration would oversee medical uses.
The Here and Now
For all the talk of equity and “righting the wrongs” of the drug war, all of this is still taking place in an industry without bankruptcy protections, where individuals carry personal liability for business taxes, and where businesses are barred from writing off normal expenses. The state excise tax on a bottle of wine is 4 cents. For an eighth ounce of cannabis, it is $4.90 or over one hundred times more. Products are also subjected to countless local taxes. A product may be taxed at cultivation, manufacturing, distribution, and retail. Some jurisdictions even charge a “road tax” for merely transporting products. These taxes compound the supply chain, resulting in an aggregate burden of 50% or more of the original price.
Currently, two out of every three cannabis purchases are made in the illicit market. This creates a scenario that makes it difficult for legal companies to compete with the much lower prices of illegal products. We can assume with reasonable confidence that illicit sales are not subject to high taxation by the county or the State and are certainly not subject to the rigorous testing requirements for legal sales.
The Redeeming Part
However, one (far-fetched?) redeeming side to the illegal scene exists. In the realm of cannabis, the illicit market serves a crucial role in support of the legal market. It serves as a test market akin to the lab rats in the pharmaceutical industry. It acts as a testing ground for new strains, effects, and efficacy of cannabis products, paving the way for the (eventual) commercialization, legalization, and marketing of successful contenders to the legal market.
| Real-World Laboratory
Just as pharmaceutical companies conduct extensive research and trials on lab animals to determine the safety and effectiveness of new drugs, the illicit cannabis market functions as a real-world laboratory where various strains and products are experimented with and evaluated by consumers. This underground ecosystem allows for the exploration of diverse genetic combinations, cultivation techniques, and consumption methods that may not yet be approved or regulated by the legal framework.
The Innovation
Through this unregulated testing environment, innovative and high-quality cannabis strains emerge, highlighting unique properties and effects that resonate with consumers. The illicit market provides a platform for growers, breeders, and enthusiasts to push the boundaries of what is possible with cannabis, leading to the discovery of highly sought-after attributes such as potency, flavor profiles, and therapeutic benefits.
The best products, picked by consumers from a wide variety of offerings, gain popularity and recognition within the illicit market, creating a ripple effect and establishing a demand that eventually influences the legal cannabis industry. The success of specific strains and products on the underground market can signal to legal business regulators and policymakers that consumers demand these innovations. This, in turn, paves the way for the legalization, regulation, and commercialization of these winning products in the legal market.
Moreover, the existing knowledge and experience in the illicit market can be utilized as a large testing lab and contribute to developing best practices, quality standards, and industry norms that can be adopted and refined within the legal cannabis sector. By leveraging the insights and feedback from the underground community, legal businesses can adapt and improve their offerings to better meet consumers’ evolving needs and preferences and provide a safe product to consumers in the legal market, a customer group that will not buy an illegal and largely untested product.
In essence, the illicit market, if utilized properly, can serve as a dynamic and adaptive ecosystem that drives innovation, experimentation, and evolution within the entire cannabis industry. Just as lab animals play a crucial role in advancing pharmaceutical research and development, the illicit market plays a pivotal role in shaping the future of cannabis. It can identify, refine, and provide a basis for commercializing the most promising strains and support the cultivation and manufacturing of safe products ready for consumption by the general population.
The Transfer
As we move towards a more regulated and legalized cannabis landscape, we must acknowledge and appreciate the valuable contributions of the illicit market in fueling the growth and progress of this burgeoning industry. We assume that with the continuing crackdown on illegal operations, expanding legalization, and ease of burdensome regulations and taxation, the valuable experience of illicit market operations can be seamlessly transferred into the legal market for the benefit of all consumers.
Rainer Poertner
Chief Analyst
StockWatchIndex |
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Stay Tuned – The Story Continues
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