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Crypto and cannabis regulations, the value of money
Programming note: Welcome to the ‘finance’ edition of Money Puff! On Tuesdays and Thursdays, we will focus on the biggest financial storylines of the last 5 years, all fascinatingly interconnected: pot, pumps, and the pandemic.
Since around 2018, billions flowed into cannabis and crypto companies — as well as the adjacent fintech space — thanks to late-cycle yield hunting and changes in regulatory structures (or lack thereof). When the pandemic hit, the fed pumped trillions more into the economy, the last of the ‘easy money’ that defined the 2010s. But, very quickly, other ‘pumps’ were underway, namely in buzzy crypto schemes and meme-stocks that retail investors sent to the moon.
Now, it’s seemingly all disappeared in a puff of smoke. Who’s to blame? Who’s left holding the bag? Was any of it for real, or was it all just a ponzi? These are the answers that Money Puff - Finance will seek to answer.
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Fish in a barrel
One of the most important storylines in both crypto and cannabis is regulation (or lack thereof). Recently, the SEC and other agencies have come down hard on some of the large extant crypto players, like Coinbase. Here’s Matt Levine from last week:
The position of Coinbase — and of the crypto industry more broadly — is “look, SEC, if you want to have a flourishing system of legally compliant, safe, trustworthy crypto assets, you will need to work with us a little bit to write new rules,” and the position of the SEC is “no, we don’t want that, we want all of you to go away forever.” If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.
On the other hand Coinbase is an SEC-registered public company with an SEC-registered broker-dealer license! The approval is kind of already there! The SEC’s attitude to crypto is extremely negative, but it is only slowly getting around to doing anything about it — and in particular it is only slowly getting around to going after big respectable crypto firms like Coinbase. And in the interim, those firms have had time to get bigger and more respectable, with the SEC’s quiet acquiescence.
A similar situation has been playing out in New York cannabis. Thanks to the slow and confusing rollout of the recreational market, ‘illicit’ cannabis dispensaries have flourished in the five boroughs. Now, many in the legal industry want a crackdown. But that’s hard to do when there has been an implicit approval for the last 18 or so months — if it was so bad, they would have done something about it by now.
New York cannabis czar Axel Bernabe has a unique perspective on the dilemma, particularly in the government. He seems to believe that the proliferation of illegal pot shops is actually a boon for enforcement:
What we’ve been hearing is that the really well-established, really difficult to dislodge illicit market – all the messenger stuff, all the home delivery that’s been around for 100 years in New York City – is actually being driven out of the market because of the 2,000 pop-up dispensaries that are flooding the New York market. There’s so much weed in these stores that they’ve actually driven out of the market the delivery folks that we thought we were going to have a hard time getting dislodged.
If you believe that brick-and-mortars are a lot easier to shut down than an invisible delivery system, then you actually may want to actively allow pop-ups to come in, flood the market, disrupt the consumer patterns, and then shut them down more simply, because they’re like fish in a barrel, because they’ve got a brick-and-mortar store.
That’s a dubious claim, particularly as even the cops express hesitation to shut down shops. When business is done in the shadows, regulators have plausible deniability. People will say ‘hey, there is illegal activity happening’ and the regulators can go ‘huh, where, we can’t see it, don’t worry about it.’ The SEC wasn’t so concerned with cryptocurrency when it was just used to purchase drugs on the internet.
But now drugs are being sold in bodegas and crypto is being used to just blatantly steal retail investors’ money. So the SEC and the Office of Cannabis Management (which didn’t even exist until a couple years ago) have different mandates. It’s no longer enough to ignore the problem: they’re supposed to do something about it.
Of course, for Bernabe and the Office of Cannabis Management, it’s better PR to claim this was all part of the master plan from the beginning. This newsletter is skeptical.
These results, from a recent WSJ poll, fit the thesis of Money Puff:
While values like having children and religion may be on the decline, they’re likely just being replaced by other, unnamed values, like adopting pets or joining the church of weed. But you know what’s impossible to replace in a capitalist economy? Money.
Money also happens to be the only real ‘product’ in a ponzi. Bernie Madoff never even placed any trades! And that’s what makes SBF — the Madoff of crypto — difficult to nail down. He did place trades, albeit the wrong ones. And, yes, he did knowingly misappropriate customer funds. But I think that’s actually beside the point.
The point is, what were those customer funds even being used for? Risky derivatives on totally made up digital coins? FTX didn’t sell a product. They sold money — they printed it themselves, legitimized other made-up currencies, and then allowed folks to make even more by selling all of it to the greater fool. But at the end of the day, it was all fool’s gold. Nothing was real; it was all made up. Can you ponzi a ponzi?
I’m not here to defend SBF or FTX or any other cyrpto acronyms, but here at Money Puff we want to go a layer deeper. What was really behind the crypto boom, one that apparently coincides so well with a loss of traditional American values? There’s something to the fact that you can replace so many things in America with something else — after all, that’s the promise of capitalism, is it not? But the one thing you can’t replace is money.
In finance, obfuscation is a feature, not a bug. Fractional reserve banking is built on the premise that your money in the bank is not really your money, after all. With all the smoke and mirrors, we’re often left in the dark about anyone’s real intentions, motivations, or values. Until, sometimes, all that’s left is a puff of smoke — and then it’s too late.