Regulation
Cryptocurrency regulation must not prioritize memes over matter
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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The author is a general partner at Andreessen Horowitz, where he runs the crypto fund, and is the author of “Read Write Own”
With cryptocurrency prices hitting all-time highs again recently, there is a risk of too much speculation, especially considering the buzz around memecoins. Why does the market continue to repeat these cycles, instead of supporting the more productive blockchain-based innovations that will truly make a difference?
Memecoins are cryptographic tokens used primarily for humor, born from joining an online community involved in the joke. You’ve probably heard of Dogecoin, based on the old doge meme with images of Shiba Inu dogs. It emerged as a free community online when someone, ironically, added a cryptocurrency that later had financial value. This type of memecoin embodies various aspects of Internet culture and is mostly harmless.
But my goal here is not to defend or belittle memecoins. It’s about underscoring the absurdity of a regulatory regime in the United States that allows meme-only tokens to thrive, while crypto companies and blockchain tokens with more productive uses face obstacles. We see this every day as we work with entrepreneurs and startups. Any meme creator can easily create, launch and even list tokens automatically. But are entrepreneurs trying to build something lasting? They remain stuck in regulatory purgatory.
Think of it this way: We would consider it a policy failure if we had a securities market that only incentivized GameStop meme actions, but has rejected the likes of Apple, Microsoft and Nvidia. However, current regulations encourage platforms to list memecoins and not other more useful tokens that allow individuals and communities to own internet platforms and services. But the lack of regulatory clarity in the cryptocurrency industry has platforms and entrepreneurs fearing that the most productive blockchain token they are listing or developing could suddenly be considered a security.
I call the distinction between these more speculative and productive use cases in the cryptocurrency industry “computers vs casinos”. One culture (“the casino”) sees blockchains as a way to launch tokens primarily for trading and gambling. The other (“the computer”) is more interested in blockchains as a new platform for innovation, just as the web, social and mobile were before. Such blockchain-based innovations include decentralizing artificial intelligence and verifying what is real versus deepfakes.
So why do we prioritize memes over matter? U.S. securities laws do not authorize the Securities and Exchange Commission to make merit-based judgments about an investment. Nor is it the SEC’s job to end speculation altogether. Its role is instead to protect investors; maintain fair, orderly and efficient markets; and to facilitate capital formation. The Commission is failing on all three goals when it comes to digital asset markets and tokens.
The main test used by the SEC to determine whether or not something is a security is the 1946 Howey test, which involves evaluating a number of factors, including whether there is “a reasonable expectation of profits” due to the managerial efforts of others. Take, for example, bitcoin and ethereum: although both crypto projects began with the vision of a single person, they have evolved into communities of developers without any entity in control, so potential investors do not have to rely on anyone’s managerial efforts . These technologies now function as public infrastructures rather than proprietary platforms.
Unfortunately, other entrepreneurs building innovative projects don’t know how to qualify for the same regulatory treatment as Bitcoin (founded in 2009) and Ethereum (2013-2014). These are the only significant blockchain projects that the SEC has deemed, explicitly or implicitly, not to involve managerial effort. The SEC’s approach has brought much confusion and uncertainty to the industry. While the Howey test is well argued, it is inherently subjective. Memecoin projects have no developers, so there is no pretense that Memecoin investors are relying on anyone’s managerial efforts. Memecoins thus propagate, while the most innovative projects struggle.
The answer isn’t less regulation: it’s better regulation. Specific solutions include adding tailored disclosures to provide regular investors with more information. Another solution is to require long lock-in periods to avoid get-rich-quick schemes. Regulators implemented similar protections after the Great Depression, the excesses of the Roaring ’20s, and the stock market crash of 1929. Once these guardrails were in place, we witnessed an unprecedented era of growth and innovation in our markets and our economy. It’s time for regulators to learn from past mistakes.