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Designer Drug Markets Get Boost From Crypto

·11 min read

Conversations on drug forums can get nerdy. People looking to push the barriers of their mental and bodily experience tend to know a lot about the vagaries of the law, organic chemistry, metaphysics and, increasingly, the ins and outs of blockchain technology. For many, the first step towards opening the doors of perception is managing a bitcoin (BTC) key.

Technology and drugs have always been intertwined. Marijuana was the first thing ever sold over the ARPANET, an early version of the internet, in a cross-country deal between graduate students. Magic mushrooms were the first thing listed and sold on the Silk Road, a shuttered anonymous marketplace that was proving ground for commercial use of Tor and Bitcoin.

This article is part of CoinDesk's Sin Week.

And now, crypto is serving as a bedrock tool for an emerging world of novel drugs, the interaction of which is fundamentally reshaping the recreational drug industry. Research chemicals, aka designer drugs, are new synthetic substances sold primarily online that exist in a legal gray area.

These are chemical cousins to familiar, illicit substances like LSD, ecstasy and meth that, through a few chemical tweaks as well as ambiguities in global regulations, can be sold and advertised with almost total impunity. They have names like 2C-B, AMT and 5-MeO-DMT, and hundreds of variations are synthesized annually.

“The internet has allowed for easy access to drugs, weapons and other criminal activity through the dark web as well as other criminal organizations who make their living off the backs of those unsuspecting young people looking to score any number of drugs,” James Capra, the retired chief of global operations for the U.S. Drug Enforcement Agency (DEA), told CoinDesk.

That’s only the half of it. While darknet markets remain a popular place to score, the research drug industry thrives on the “clearnet,” or the part of the web you can explore with a Google search. This has enabled people who otherwise would not have access to recreational drugs to discover them.

Roy Gerona, a drug monitoring specialist at the School of Medicine at the University of California, San Francisco, said “the explosion” of research chemicals can be attributed to three concurrent and interrelated trends: the democratization of information over the internet, easy shipping through globalization and the adoption of digital payments – including credit cards and crypto.

“The market has evolved so rapidly,” Gerona, who was one of the first to model novel synthetic cannabinoids, said in an interview from a book-lined office. The internet has allowed for an entirely new type of market to emerge, creating a platform for demand to surface and for suppliers to meet it.

There are dedicated forums, like Erowid and on Reddit, where psychonauts (those who experiment with the new pharmacopeia) act as guinea pigs to study the effects of these never-before-seen chemicals and post about their experiences. They titrate doses and write trip reports, breaking down their experiences by the minute or hour.

(leyre del rio/Unsplash)
(leyre del rio/Unsplash)

The internet is a flat communications platform, allowing people from all corners to interact and share information. An illegal industry that was already difficult to police became infinitely more so now that the chain of distribution and knowledge has fragmented and dispersed online. Permissionless blockchain networks, a step change in empowering individuals through software, further complicates law enforcement.

See also: Inside a Manhattan Web3 Sex Club | Sin Week

“For the first time, you had an online payment mechanism that cannot stop you from using your own money,” Nicolas Christin, a computer science professor at Carnegie Mellon University who studies online marketplaces including the Silk Road, said about the beginnings of bitcoin.

Market size

“More brazen than anything else by light years” is how U.S. Senator Charles Schumer (D-N.Y.) characterized the Silk Road, the Tor-based marketplace founded by Ross Ulbricht, before it was shut down by the FBI in 2013.

In less than three years, some 3,877 vendors sold approximately $183 million worth of various goods and services to 146,946 users on the Silk Road. That information, a government estimate, is available because the marketplace only used bitcoin. Bitcoin was once thought to be fully anonymous, but turned out to be only pseudo-anonymous, where alpha-numeric addresses can be traced back to real identities with a little legwork.

“As law enforcement agencies get better at shutting them down, the necessary trust for such large marketplaces to function has eroded leading the way to exit scams and a general sense of wariness within the darknet market ecosystem,” Carles Lopez-Penalver, a senior cybercrime analyst at blockchain analytics firm Chainalysis, said.

For years, authorities believed the next phase of the war on drugs would involve shining lights on darknet marketplaces. After the Silk Road shut down, Silk Road 2.0 emerged, which was shuttered a year later. Copycats were easy to spin up because the original marketplace’s code was open source.

Hydra, the longest-running dark web marketplace before closing this year, took its name from this phenomenon – if you cut off one head of the mythological Hydra, two new heads grew in its place. While darknet markets are still being founded, much of the drug industry has begun to shift into public view.

“The darknet market ecosystem has changed dramatically over the past decade,” Lopez-Penalver said. The industry has moved, in part, instead to “single-vendor” shops including Next Generation and Heineken Express. Telegram and Wick, encrypted messaging platforms, allow dealers to spin up groups or interact with clients directly.

OpenBazaar, another darknet marketplace, which aimed to go mainstream, closed due to a lack of volume. Christin, who studied the marketplace, called it a “ghost town” with interesting technology that deployed decentralized file storage network IPFS, privacy-preserving cryptocurrency Zcash and Tor. Part of this issue is OpenBazaar, to appease investors, disabled drug queries in its search bar.

Part of the research chemical industry’s growth is due to its ability to operate in open view. Exact figures for the size of the industry are not available, due, in part, to its semi-clandestine nature, global spread and constantly changing bevy of available substances. In 2013, the United Nations’ World Drugs Report found 90% of countries surveyed attributed synthetic drugs a “significant” market share.

See also: Can Crypto Save the Cannabis Industry? | Sin Week

When asked how Chainalysis might treat cryptocurrency transactions involving research chemicals, Lopez-Penalver said categorization is tricky. “Some research chemicals/designer drugs may be ‘legal’ in one country; however, they may be controlled substances in another country.”

By and large, the most popular sites for designer drugs are hosted in Eastern Europe. Actual drug synthesization is done in “loosely regulated” facilities in China and India, experts have said. Increasingly, manufacturers are operating in Canada, one retailer who asked not to be identified said.

Loopholes

Governments have been slow to respond to the wave of research chemicals, which can pose serious risks for users. Manufacturers play a cat-and-mouse game with law enforcement, tweaking scheduled substances to avoid prohibition and drug testing. Because these are literally novel substances, often the effects are unknown before a drug forum guinea pig tries them.

Although entire classes of drugs have been made illegal in varying jurisdictions – such as how fentanyl and its analogues (fentalogues), synthetic opioids that can be thousands of times as potent as heroin, were banned outright in the U.S. – that is not always possible or advisable for other chemical structures that may have medicinal or other uses.

It comes down to “risk assessment,” Gerona said. The U.S. “blanket-banned” fentalogues due to their potency, wagering any potential benefits of later studying them did not square with their contributing negative effects on the ongoing opioid epidemic.

“For others, we know there are legitimate uses for synthetic cannabinoids for pain relief. Some stimulants and psychedelics can also have therapeutic effects,” Gerona said. Banning research chemicals completely would essentially be a ban on chemistry.

The United Nations Office on Drugs and Crime records under 300 banned substances globally. Because laws are typically based on specific chemical formulas, these variants, created by tacking on or snipping off groups of atoms, are legal until they are broken down in government laboratories and explicitly banned.

“While new harmful substances have been emerging with unfailing regularity on the drug scene, the international drug control system is floundering, for the first time, under the speed and creativity of the phenomenon,” the U.N. wrote.

Technically speaking, the U.S. does have a law on the books that outlaws whole ranges of chemicals that mimic illegal drugs. Other nations have similar laws and have also banned import/export of certain precursors needed to synthesize various illicit substances. But it’s a patchwork system, and hundreds of novel chemical structures continue to slip through loopholes in the law.

"The darknet market ecosystem has changed dramatically over the past decade,” Chainalysis' Lopez-Penalver said.

Jerry Martin, founder of MicroDelics, a research chemical retailer based in “beautiful” Vancouver, British Columbia, Canada, said his wares are unregulated and for research purposes. Sometimes simply sticking a “not for human consumption” sticker on packages makes all the difference.

Martin did say some of his customers, typically people interested in microdosing trace amounts of psychoactive drugs, prefer transacting in crypto even if what they’re buying is not illegal. “A lot of customers want to make their purchases discreetly,” he said.

This was echoed by Gerona, who investigates drug forums to stay up-to-date on the market. “The main attractive feature of that community is the non-traceability of the transaction,” he said.

Tammy Jarbeau, a representative of the Public Health Agency of Canada, sent CoinDesk a series of documents spelling out Canadian regulation of pharmaceutical drugs for human use, of drug analogs and controls on chemicals and precursors, which together allow authorities to trace financial flows as part of criminal investigations.

But as it stands, the Canadian government is not necessarily tracking cryptocurrency transactions to drug retailers or manufacturers.

Portrait of psychopharamacologist Alexander 'Sasha' Shulgin, developer of MDMA, at his home laboratory in Lafayette, California. (Anthony Pidgeon/Redferns)
Portrait of psychopharamacologist Alexander 'Sasha' Shulgin, developer of MDMA, at his home laboratory in Lafayette, California. (Anthony Pidgeon/Redferns)

“I have reached out to many departments, and from the Canada Border Services Agency there are currently no reporting requirements under the Cross-border Currency and Monetary Instrument Reporting Regulations (CCMIRR) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) related to virtual or crypto currencies,” Jarbeau said via email.

“Most marketplaces are now cognizant of the fact that bitcoin is not a panacea, and instead recommend that people use privacy coins. We've seen dash also, to a lesser extent, and monero seems to be more prominent than it used to be,” Christin said.

Information spreads

The most hardcore research chemical users often see their experiments as ways to improve their lives and possibly better humanity. Many of the chemicals currently sold today were first synthesized or theorized by professional biochemist Alexander Shulgin, whose books “TIHKAL” and “PIHKAL,” short for Phenethylamines and Tryptamines “I Have Known and Loved,” have become touchstones for the community. In both, Shulgin describes routes of manufacturing as well as his and his wife and friends’ subjective experiences with various substances.

The complicated chemistry he wrote about was once privileged information, which began to spread on the Usenet message boards in the early days of the web. Self-described psychonauts have taken up his tradition of experimentation. For them, drug use is a personal choice that should not be intermediated by governments.

Shulgin, who died in 2014 and is credited with inventing MDMA, argued that drug prohibition has the opposite effect to the one intended and argued for decriminalization. Although he didn't live to see the rise of the internet or the mass sale of some of the many compounds he first created, his prediction was likely correct.

See also: Criminal Crypto Use Is Growing, but That’s Just Half the Story | Sin Week

Gerona said prohibition is a double-edged sword. On one hand, it limits legitimate use and research into potentially helpful chemicals. On the other hand, it likely prevents death, addiction and other societal harms. He did say that the thousands of posts on message boards about recreational use of novel drugs has “legitimate” scientific value.

James Capra, of the DEA, said it’s not uncommon for drugs to be “counterfeit” and “deadly” when bought online. Christin said you should assume you’re talking to someone in law enforcement when using a darknet service.

Research chemicals are similar to crypto in at least one way – it’s an industry that seems to have hit escape velocity. Neither seems to be slowing down soon, and the more individuals who join the truer that is.