Getting rich from getting high

The world of drugs is in rapid flux. We’ve just come to the end of a century in which prohibition was the model for control. It wasn’t always like this. Opium, the precursor of heroin, could be sold and used openly in the US until 1875. In 19th century England, opium and cocaine could be bought from a pharmacy – or even from street vendors.

As you can tell from the continuing wide availability of illegal drugs, the current prohibition-led approach hasn’t exactly worked well. Meanwhile, quality and safety are dangerously low – resulting in problems ranging from overdose deaths, to needle-borne HIV infections.

Far from being eliminated, the continuing international drugs trade has ruined countries all over the world – such as Afghanistan, Columbia, and Mexico. Prohibition has also caused an explosion in the prison population. In the US, it is by far the leading reason for the issuing of a custodial sentence. Further, prohibition has exposed wider society to knock-on crimes – such as dealers’ turf wars, and addicts’ thievery.

You’d have to be on drugs to think prohibition was working well. But the times, they are a-changing.

Three big moves are now turning this illicit industry upside down: internet sales; synthetic drugs; and decriminalisation. Taken together, they form a megatrend – a profound social and economic transformation that touches all portfolios. For example: investments in security, healthcare, etc, will be deeply affected by these changes.

Change number one is internet sales. According to research commissioned by the Dutch government, the UK is the biggest European supplier of illegal drugs on the so-called “dark web”. This is the side of the internet you can only access using special software (usually Tor), to mask your identity. Other than that simple difference, the process is like buying from any other online marketplace. Users of eBay would find the experience familiar – dark web sites have similar systems of reputation scoring, and complaints procedures, to their legal peers. This formalisation means that online drug dealing has the potential for far better control of quality than its street-corner counterpart.

Furthermore, internet sales potentially have far fewer risks of social harm. The drugs just turn up in the mail, so there’s no need to go to dodgy neighbourhoods to stock up. You can’t get mugged by your dealer, raped in a crack den, or run up debts that suck you into crime. Plus, you have to plan ahead to buy – so there’s less temptation to spend your children’s food money on drugs when you’re high.

In the same way that well-run brothels can mean that prostitution is kept safe and kept off the streets, well-run drug dealers may reduce the risks to society from illegal drugs. One benefit is that opiates, such as heroin, tend to form a small part of the online market. As such, it could be argued that online marketplaces actually tend to reduce, not increase, the supply of the most dangerous drugs.

These sites are frequently closed in busts – the capture of the man known as Dread Pirate Roberts became a media soap opera. But as soon as one site is closed, another can be started. The game of whack-a-mole police play with these marketplaces is currently being won by the dealers, and lost by the cops. This is probably something that we should celebrate, and hopefully it will ultimately lead to a more sensible policy than the failed “war on drugs”.

However, despite the obvious transition that dark web marketplaces are initiating in society, there are no legitimate investment opportunities. Running such a marketplace is undoubtedly criminal at present, and I’d strongly advise you to steer clear of even peripheral forays into the industry – lest plod comes knocking on your door.

This leads us onto the second aspect of the drugs megatrend: novel psychoactive substances (NPS).

To get your head round how this market works, you need to appreciate a bit of basic biochemistry. If you think of the active ingredient of drugs as a “key”, you can imagine them fitting into a “lock” in the brain – a receptor. Now, as you’re aware, many of these keys are banned. However, chemists can get round this ban by making small changes to the design of the key. It will still fit the lock, but it might have a differently-shaped handle. Modify crystal meth, and you’ve got Adderall (a prescription ADHD drug). Modify the active ingredient from khat (a stimulant plant popular in east Africa), and you’ve got mephedrone (that’s hardly “novel” – it was first made in the 1920s). As for heroin, there are dozens of variants, which are used both medically, and recreationally.

However, this modification process isn’t necessarily safe. These new keys might work similarly in the target lock of the brain, but they might have very different effects elsewhere. They might be far harder for the body to break down – giving a longer high, and thus increasing the risk of overdose. They may have toxic breakdown products. Additionally, the key might also fit into other locks in the brain, or elsewhere in the body – giving unpredictable effects. The end result is that NPS may be more dangerous than the drugs they’re supposedly a replacement for. It’s supposedly on these safety grounds that the UK government has recently banned them, with a particularly clumsy piece of legislation. The effects of this intervention may be severely harmful. Professor David Nutt has calculated that banning mephedrone will result in a large spike in deaths, as users switch to cocaine. Early statistics have already supported that prediction.

Now don’t get me wrong, there is a potentially-legitimate industry around new recreational drugs. Some, like Professor Nutt’s “Chaperon” (MEAI), are proposed as a way to control binge drinking. To be sold as such, they will have to go through proper clinical trials. At the moment Chaperon is being developed by a non-commercial group, so you can’t invest. But the scary fact is that most NPS didn’t get any formal trials at all, before hitting the market. That’s why they were ostensibly sold for other uses before the ban – such as alloy wheel cleaner, in the case of GHB/GBL. Not all of them were safer than illegal drugs; some were substantially more dangerous, notably PMA (a substitute for MDMA).

So how could you invest in NPS drugs? Unless you’re backing a proper pharmaceutical company, you can’t (legally). Any new substance will have to go through a regulatory process that stringently tests it for safety. Even after that, there will be scrutiny of how it’s to be used. In our Chaperon example above, it’s only under consideration as an aid to controlling binge drinking – not as a recreational drug in its own right. This puritanical restriction may sound bizarre, but any investor needs to be aware that even safe recreational drugs may carry the same political baggage as dangerous illegal ones.

Soon in Exponential Investor, we’re going to be looking at the third aspect of our changing drugs landscape. That’s the decriminalisation movement – and we’ll see how you can profit from it. But remember, anything else to do with drugs that you invest in may land you in the clink – unless it’s through a recognised pharma firm.

Category: Technology

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