Blogs & Articles: Fuck The Fed, Go Local 🔗 18 weeks ago

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On November 6, 2012, Washington and Colorado became the first two states in the United States of America to legalize the recreational use of cannabis. While medicinal use of the plant had been allowed in California since 1996, and widespread acceptance slowly dominoed across the country over the next 20 years, Washington and Colorado were the first to allow legal recreational use at the state level.

This was a watershed moment in social politics. It is easy to dismiss this moment as a meaningless advancement, accomplishing nothing material in terms of political gains, and being a win for no one other than deadbeat stoners. But it truly was, in an all-encompassing sense, a profound moment.

These two states stood in open defiance of the federal Controlled Substances Act. Many states’ medical laws technically did as well, given the categorization of cannabis as a Schedule I substance — meaning it has no accepted medical use — but socially it was still a subtly different issue. It was perceived as a necessary medicine versus an optional indulgence, making federal action to contradict the state laws politically risky. Despite conflict with the law federally, it was something already socially past the point of taboo. It was implicitly accepted even though the law allowed for enforcement against such actions.

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Recreational laws stepped across that line into the territory of something still very much governed by social taboo in large parts of the country. A cancer patient using cannabis to deal with the nausea and other side effects of chemotherapy is one thing; a stoner being able to walk into a cannabis shop as they would a liquor store to legally purchase marijuana to get stoned all day, was another. It was clear at the time that demonstration of states’ individual power would not be replicated at the federal level for quite a long time — if ever. Washington and Colorado were essentially blazing the trail in legalizing an activity that had a divisive but wide social support across the country, yet not enough to instigate change from Congress. They were pioneers in telling the federal government to go fuck itself.

That trail would come with many obstacles and difficulties, both internally and externally. An entire licensing scheme had to be designed and established in order for businesses to begin operating. Without such a regime, the state would have no way of collecting taxes on cannabis sales — a huge motivating factor for the bill in the first place. This did not become fully established for a couple of years, and states only started issuing licenses in 2014. On January 1, the first legal sales of cannabis began as stores that had been licensed were finally allowed to begin operations.

It took two full years for the state to structure a licensing scheme for the entire industry to function legally. This included licenses for growing operations, for distribution, for lab-testing facilities guaranteeing products are uncontaminated, and finally for the actual retail storefronts themselves. Each step of the process required explicit licensing from the state, and for each product to be tracked from the very beginning of its production to the distribution at the actual shops. This has essentially been the blueprint for every state’s legalization program since Washington and Colorado.

After everything went live is when the fun really started. The Drug Enforcement Agency (DEA) began raiding legal cannabis shops in Colorado almost immediately. This was an exceptionally harmful situation for these businesses. Already incapable of attaining bank accounts at the time due to the discrepancy between state and federal laws, all of their business was being conducted in cash. These raids didn’t simply result in a loss of current product inventory and cash flow, but rather seizures of massive stockpiles of cash kept locked in safes on premise because the shops had no other means to store their money. While this did happen during the medical-only phase in Colorado, these raids picked up steam after the recreational legalization. While the House in D.C. and a California federal court in 2014 barred the DEA from raiding legal medical cannabis shops and businesses, recreational shops and businesses were another matter altogether.

The federal government was attempting to send a message to Colorado that they would not be allowed to contravene federal law. These raids continued for years in high frequency, but despite a recent, relative decline, they still occur in some states to this day. Cannabis is still legal in these states, bringing in billions of dollars of business per year. So why does this still happen?

Incentives.

States that have legalized cannabis have all enacted special taxes on cannabis sales varying from as low as 15% to over 35%, depending on the state and category of product. Colorado in 2021 generated $423 million in tax revenue from cannabis sales alone. While this is only a tiny portion of the state budget in 2021 — less than 1% — think of it like this: The state passed and enacted this law after a successful, direct popular vote, and on top of abiding voters’ wishes, they also make almost half a billion dollars a year in doing so. Unless the federal government was to deny federal funding for state programs, there is simply no reason to reverse the legislation.

So what is at the core of this adversarial dynamic here?

The tension between the federal and state-level governments when balancing popular opinion nationwide with the popular opinion at the state level.

What is the lesson here?
That a smaller, local government can stand up to and act counter to the laws of the larger government if there is sufficient local support for it. The only question remaining is what is their incentive to do so. What do they have to gain and what do they have to lose?

In the case of cannabis legalization, they have a large tax revenue source to gain, as well as the contentment about the issue from local residences having their wishes and attitudes reflected in law. On the side of what they have to lose, in the extreme, the risk is potential withholding of federal funding, negation of state laws in federal courts, or other forms of indirect economic coercion. When it comes to the issue of states’ cannabis legalization, the federal government at this point seemingly sees such actions as an overreaction. They have engaged in none of them. The Supreme Court even rejected a lawsuit from Oklahoma and Nebraska against Colorado for the problems caused in those states by the legalization. Many people from those states were traveling to Colorado to purchase cannabis and traveling back across the state border. The highest federal court actually defended Colorado’s legalization legislation from challenges by other states.

The question Bitcoiners should be asking themselves is: Can Bitcoin be a similar issue? Where in the United States (or local territory in your country if you aren’t American) is there enough popular support for Bitcoin (or individual freedom in general) to practically inspire defiance of overbearing regulations or restrictions that might come? Bitcoiners should not be concerning themselves with winning over politicians in Washington, D.C., or attempting to pass protective legislation at the federal level. Things are too divided at that scale. Even something like cannabis, which has been legalized in almost half the country at the state level, still does not have the degree of popular support necessary to pass at a federal level. And as hard as it might be for Bitcoiners to hear, cannabis has much more popular support with more users (at least politically involved ones) in the issue than Bitcoin does — by a wide margin.

Skeptics to my line of thinking here might be wondering how this dynamic and strategy can be applied to Bitcoin. They might think that cannabis is just a harmless drug, so why would the federal government really care at the end of the day about states defying them? Bitcoin is much more dangerous; they will care about that. Well, let’s look at something a lot more “serious” than cannabis legislation that has demonstrated the same political dynamic and tension: Gun laws.

In 2021, the state of Missouri blazed a trail on an issue much more controversial and dividing than cannabis legalization. They passed bill HB0085T that nullified all federal gun restrictions in the state of Missouri. This bill even goes so far as to make it an offense for state authorities to assist in the enforcement of federal gun restrictions, making officers who do so liable for a fine of up to $50,000. It is essentially the same situation as cannabis legalization over a much more “serious” issue. As of 2021, a dozen states — Alabama, Arkansas, Nebraska, Oklahoma, South Carolina, Tennessee, Wyoming, New Hampshire, North Dakota, South Dakota, West Virginia, and Iowa — have made, or are making, steps toward introducing similar legislation locally. This is shaping up to be the next large issue that state governments openly defy the federal government on.

These types of situations ultimately boil down to the nature of how governments actually scale the enforcement of a law across a territory as large as the United States. There is a great deal of cooperation up and down the “stack” of jurisdiction, from local city government to the county level, the state level, and finally all the way up to the federal level. Each level depends on the level below it to actually help enforce laws from larger government levels. The federal government does not have enough manpower to actively police and enforce federal laws all over the country. They depend on more local agencies to catch a large number of violators of federal laws, and refer them after arrest or apprehension in other matters for criminal charges. Many offenses that are violations of federal law are actually never prosecuted; depending on the severity or context, such offenses are also violations of state laws which are simply left to prosecutors of that jurisdiction. Local jurisdictions very often pass laws mirroring federal laws, allowing things to be delegated in this way.

Ultimately, Colorado’s cannabis bill and Missouri’s firearms bill are withdrawals from this integrated cooperation between different jurisdictions on these specific issues. This creates an interesting dynamic. If a single area or region opts out of this cooperation, then it is still feasible for federal agencies to reallocate resources to ramp up enforcement actions in that area. However, if a large number of regions opt out of this cooperation, then it quickly becomes infeasible for the federal agencies to deploy their own personnel to keep enforcing federal law in these areas. It is very much a chicken-and-egg problem. Once things start to domino, it quickly becomes prohibitively expensive for the larger jurisdiction to enforce the law the smaller jurisdictions are ignoring.

A good demonstration of this is Virginia’s unsuccessful attempt to pass an assault weapons ban in 2019-2020. There were over 75 counties in the state whose Sheriff Offices openly stated their intent to refuse to enforce the ban if it passed the state legislature. For context, there are only 95 counties in Virginia; almost 80% of the counties in Virginia would have refused to enforce legislation passed at the state level. The state legislature even threatened, before the bill ultimately failed, to activate and deploy the national guard to enforce the law in counties where sheriffs refused to. That is ultimately what these situations will always come down to: The need for an expensive and completely out of the ordinary deployment of personnel to pick up the slack for uncooperative local agencies. This is not a scalable option if more and more jurisdictions refuse to cooperate.

This is how Bitcoiners should be approaching the subject of politics and law when it relates to Bitcoin. The idea of Washington, D.C., as some territory that can be “conquered” through politicians aligned with Bitcoiners’ goals is frankly delusional. D.C. is a cesspool of corruption, lies, and broken promises; it’s also just slow and inefficient. Almost half of the United States has legalized cannabis, yet no real progress has been made at reflecting that federally. Not even a removal of cannabis from the schedule system — which could be done to leave the matter entirely up to state governments as opposed to explicitly legalizing it nationwide — has been successfully floated. Gun laws that are more and more restrictive keep gaining momentum, despite disapproval from a large chunk of the population. Yet half of the country has Sheriff’s Offices that would not enforce gun laws they disagree with or find unconstitutional. Many state governments are looking at approaching the issue of gun rights in the same manner that cannabis legalization has been. Still, politicians in D.C. continue to push for more restrictive gun laws. Still, agencies like the Bureau for Alcohol, Tobacco, and Firearms push more restrictive interpretations of existing laws. The entire process is broken and out of alignment with the conflicting popular opinions of different segments of the population. Do you see the pattern? Things to loosen restrictions don’t happen; things to increase them do. That’s the gist of the direction things move in D.C.

Now, there are important aspects to consider in terms of approaching things this way. Firstly, concessions. Cannabis wasn’t legalized freely with no thought on the part of state governments that adopted legislation to do so. There were numerous conditions, including licensing schemes required to engage in different areas of the business: Everything from growing, refining, and actual distribution to consumers required a license to operate by the state and compliance with safety regulations. Taxes were another big one. Rather high vice taxes have been consistently applied in every state that has legalized recreational cannabis use. The government wants their cut, especially when some degree of risk or complication exists for them defying a larger jurisdiction that they exist under.

So the question is, what are you going to give to get what you want? The little guy needs to have an incentive to stand up to the big guy. Whether that incentive is financial, ideological, or some combination of the two, doesn’t matter. There needs to be an incentive.

Bitcoin can create a number of different incentives all across the board. Mining is probably the biggest example here in terms of potential for revenue generation or other indirect financial benefits. They are a potential source of tax revenue (although realistically any meaningful tax here could be a serious handicap to miner profitability). They are a possible source of heat for any other business activity that requires heat generation, improving the profitability of any such business. They are a very beneficial presence for the operation of electric grids by being a consumer of excess electricity generation that can be spun down almost immediately if that capacity is required for other uses. Just looking at the mining industry alone, these are three separate financial incentives that can be created for state governments to take a protective attitude toward Bitcoin regardless of what regulations the federal government may attempt to pass: One direct, albeit small, revenue stream and two material benefits for business owners and every citizen of the state.

Texas is actually in the process of doing this right now with HCR 89, which explicitly protects and codifies Texan citizens’ right to hold bitcoin in self custody. It also specifically carves out liability for people who develop software for Bitcoin. This preemptively puts Texas in a position where federal laws enacted to restrict any of these activities will not be enforced by any agency under the control and jurisdiction of the state of Texas. Now imagine Kentucky, Tennessee, Wyoming, and Florida all follow suit with similar laws.

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That completely changes the cost if the federal government were to restrict those rights or activities, because now enforcing them in all those states means doing so without the assistance of any state-level agency. The consideration of federal restrictions of Bitcoin becomes a very different game if a large number of states proactively enshrine protections for using Bitcoin. Rather than amortizing the cost across all the local agencies in the area, the federal government must bear those costs entirely on its own.

Legislation could take further steps beyond just protecting the right to own or mine bitcoin if popular support was substantially built up. Many Americans do not necessarily care about people’s right to use Bitcoin specifically, but large swathes of the population do care deeply about the right to conduct activities that do not negatively affect others without government interference.

A popular meme in this space is Uncle Jim, the notion of a more experienced Bitcoin user holding someone’s hand to protect them from losing access to their coins. Imagine a specific exemption for people who run small custodial LN banks, or clones of services like Casa and Unchained without charging any fees or profiting from it in any way. This could be a major benefit to the security of unsophisticated users without forcing them to depend on larger companies or services. There are numerous very small-scale (or some large-scale) custodial tools in this ecosystem, and many of them have or are operating in a legal gray area. Legislation could address this and give these operations the option to operate in a safe haven either under certain scales or as long as they are not generating profit directly from charging users.

Acting smaller and more locally is bound to be more efficient, quicker, and ultimately more effective than trying to address issues of legality and regulation at the federal level. Consensus is quicker to build at the local level, and after doing so successfully, it becomes a major factor at the larger levels. It is also possible at the local level to ignore the popular opinions of people outside of that area, whereas trying to enact legislation or change in a larger area will require engaging with and satisfying those dissenting opinions.

Bitcoin is a ground-up grassroots system; on a technical level that is how it has evolved and functioned for its entire existence. It’s also the most effective way to ensure it continues functioning socially.

Oh, and fuck the Fed. 

This article is featured in Bitcoin Magazine’s “The Primary Issue”. Click here to get your Annual Bitcoin Magazine Subscription.

Click here to download a PDF of this article.