Why Are Illicit Markets Still So Strong?

IT’S BEEN OVER 12 years since Coloradans passed Amendment 64, which allowed adults 21 and older to legally purchase cannabis, and more than a decade since the first legal sales. As of last November, 21 states and the District of Columbia had fully legalized adult-use cannabis, while 37 states and D.C. had medical programs.

One of the main policy arguments for legalization was that regulated markets would irradicate the illicit market and remove crime from our communities. Yet 10 years later, that hasn’t happened—and we shouldn’t expect it to happen anytime soon. But why? Here are some factors:

THE COST OF DOING LEGAL BUSINESS. The reason I hear the most is because of cost. Too much regulation and exorbitant taxes hinder legal operators’ ability to compete on price. This is important as price continues to be the main driver of cannabis consumers’ purchasing decisions. If consumers can access their cannabis from the illicit market for less, they will.

The good news is, cost parity is a metric regulators monitor closely. Cannabis regulations are always in a state of flux. If certain regulations are not serving their original purpose, or are no longer needed, those regulations should be removed. The proper evolution of state regulations should bring down costs, over time.

BRAND DEVELOPMENT. Regulatory costs will always make legal cannabis more expensive, but legal cannabis has one major advantage over its illicit counterpart: brands. However, this advantage isn’t being fully realized yet.

There is obvious value in brands like Coca-Cola, McDonald’s and Nike. By delivering consistent product at consistent prices, these brands build value.

Through advertising, they build recognition of that value. Yet in most legal jurisdictions, there are restrictions or outright prohibitions on cannabis adverting, making it difficult to build recognition of that brand value.

Over time, we’ll see states loosen these restrictions—but it will be with a measured approach, and rightfully so. Allowing brands to build value will help legal operators but policymakers need to ensure the pros outweigh the cons. Diminishing the illicit market is an honorable objective, but not at the risk of increasing negative health outcomes like increased usage, earlier adoption or inflating cannabis use disorder within your population.

FEDERAL PROHIBITION. We all know by now that states like California and Oregon have too much cannabis and other states like New York may struggle to produce enough. Every state, with legal cannabis or not, has its own supply and demand dynamics. But only illicit cannabis can cross state lines to balance those markets.

Without federal legalization and interstate commerce, the illicit market will always be there to take advantage, eating away at legal market share. Federal legalization would go a long way in helping to address the issue, but when is that going to happen?

GREATER COORDINATION NEEDED. Illicit cannabis markets have existed for decades, let’s not forget that. New legal markets are competing with seasoned operators, an established infrastructure and a mature distribution system.

To date, no state has successfully found a way to transition legacy operators into regulated programs. With a lack of enforcement, why would they? This is not to say we should start throwing people in jail, because we shouldn’t, but to think access to legal markets alone would do the trick is simply unrealistic.

Lawmakers, regulators, law enforcement and industry stakeholders need to develop sensible approaches to address illegal operators. This level of coordination has not happened yet in a successful way.

The reason we continue to struggle with the illicit cannabis market in the United States is not solely because of high taxes, federal prohibition or any one single reason. It’s a sum of all parts. Policy makers and regulators are aware of the inherent challenges and are working towards new and creative multi-prong approaches to address the issue. It simply takes time.

The belief that simply legalizing cannabis would snuff out illicit sales was misguided. As we work on solutions, we should all get used to hearing about the illicit cannabis market, even as more states continue to launch legal programs.

I’m optimistic we’ll get there, but this issue isn’t going away anytime soon.