Why the legal cannabis industry needs the black market & more news here


Because interstate trade in cannabis is prohibited, many brands rely on it illegal operators to market their products nationwide.

In early June, the Empire Cannabis Club, an unlicensed dispensary on Manhattan’s Eighth Avenue, stocks shelves with cannabis products from popular brands such as AbsoluteXtracts, Jeeter, Stiiizy and Kiva. These products were legally manufactured in states like California, Colorado, and Massachusetts, but without federal legalization, there is no legal way for these goods to cross state lines.

Jonathan Elfand, the founder of Empire and a former cannabis entrepreneur who served 10 years in prison in 1998 for operating one of the city’s largest cannabis growing areas in Brooklyn, says the products were legally manufactured and lab-tested elsewhere. When asked how they end up in New York, a state that has legalized recreational marijuana but has yet to launch state-approved sales, he’s shy. “Hey, magic happens,” Elfand said during an interview at a hotel bar near the San Francisco airport in July.

Market forces often prevail over federal law in the $72 billion cannabis industry, which is made up of a $25 billion legal sector and a $47 billion illegal economy. Elfand’s unlicensed pharmacy, which operates as a private club, has been a thorn in the side of New York regulators, but he believes he’s operating legally thanks to a loophole in state law that lawmakers inadvertently created. But more than anything, Empire acts as a marketing tool for some of California’s biggest brands hoping to become household names.

“Everyone participates [legal and illicit market]’ says Elfand. “There’s no way you can market yourself without them or make enough money without them.”

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For Scott Palmer, who founded edibles brand Kiva in San Francisco with his wife Kristi, he doesn’t know how his legally manufactured products end up illegally in states, but he says it’s a symptom of the cannabis industry splitting into two distinct sectors regulators – one legal and one illegal – but that distinction really doesn’t exist in the marketplace. “I don’t think it’s a secret that there is a two-faced market,” says Palmer, who says he doesn’t divert illegal products into the illegal market. “If the demand is there, the market will find a way. Until we have uniform, national regulations, this will remain the case.”

Palmer says when it comes to compliance, he doesn’t want his California-made products to leave California. (Kiva has legally expanded into other states like Massachusetts, but the product must be manufactured and sold in the same state.) But given his ambitions to grow Kiva into one of the best-known THC edibles companies in the country, he’s smart enough to do it knowing that seeing its products in the gray and illegal markets will only help. “We intend to [expand legally] to New York, but of course it’s good brand presence and a good sign that the brand has spread across the country,” says Palmer.

For most cannabis industry insiders, the fact that legal and illegal economies work together, and often compete against each other, is an open secret. Jonathan Rubin, CEO of New Leaf Data Services, an institutional wholesale price tracker, says it’s important to understand that the illegal and legal markets are “two-way porous.”

“There’s illegally marketed cannabis that makes its way into legal chains, and there’s legal cannabis that makes it into illegal channels,” says Rubin.

There are many opportunities for the two markets to do business. First, legal operators have a hard time turning a profit due to ultra-high taxes and strict regulations, so switching to the black market is financially attractive. Second, there’s plenty of “wiggle room,” Rubin says, to diversify from the legitimate market to the illicit market, thanks to loopholes in the industry’s seed-to-sale tracking system and a lack of enforcement and auditing at the testing, distribution, and delivery stages of the supply chain .

Nicole Elliott, Director of the California Department of Cannabis Control, is well aware of the interaction between the two sectors of the cannabis industry. “We’re using about a fifth of what we’ve historically produced,” says Elliott. “California has historically provided cannabis for the rest of the nation, and I don’t think a few years will change that. I think it’s a longer process.”

The DCC is to attempt to curb California’s illicit market — more than half a million pounds of cannabis were seized in the last year, 1.2 million plants were eradicated, and nearly 200 people were arrested — but Elliott says California alone can’t solve the problem. It is believed that for every pound of weed produced in the state, three pounds are shipped to other states. In October 2021, California Gov. Gavin Newsom wrote to Senate Majority Leader Chuck Schumer and Senators Cory Booker and Ron Wyden, who had introduced legislation the previous month that would regulate cannabis like alcohol and tobacco, if passed, and stressed the importance of allowing interstate trade.

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For now, the two markets need each other. Berner, the hip-hop artist and cannabis entrepreneur who is the co-founder and CEO of designer cannabis company Cookies, says his trapping days are over, but he still relies on practices he hones during his illicit market days has to market legal products. During a recent trip to New York, he brought back two ounces of a new “flame of fire” and gave out a gram to everyone he met.

“Let the streets try it first – create that hype, create that buzz before it hits the white market,” says Berner. “I want the drug dealers who sell herbs to come and buy my shit at the store. That’s how you really twist the game. That’s how you keep it going.”

The interaction between the two markets is unlikely to end without tax breaks and federal legalization. Steve DeAngelo, a longtime cannabis activist and entrepreneur who opened one of the country’s first licensed dispensaries, says basic economics, not law, is the only way to regulate an industry, especially one that has operated unregulated for decades.

“You can’t build a system that the human mind can’t avoid,” DeAngelo said during an interview at his home in Oakland, California. “If Prohibition taught us a lesson, it’s that you can’t dominate the market with brute force. The only way to dominate the market is to use market forces.”

In the cannabis industry, like any other industry, supply and demand reign supreme. “The law of supply and demand is a law that you can’t break—it’s going to catch up to you sooner or later,” says DeAngelo.

No matter what happens in Washington, DC, the nation’s cannabis users will be buying California cannabis, legally or illegally. Laws haven’t stopped the industry, and probably never will.

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