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Rula Khalaf, editor of the Financial Times, selects her favorite stories in this weekly newsletter.
The author is a general partner at Andreessen Horowitz, where he heads a cryptocurrency fund, and is the author of Read, Write, Own.
With cryptocurrency prices hitting all-time highs recently, there is a risk of a lot of speculation taking place, especially in light of the hype around memcoins. Why does the market keep repeating these cycles, instead of supporting more productive blockchain-based innovations that would make a real difference?
Memecoins are crypto tokens mostly used for humor, created as a result of joining an online community participating in a joke. You’ve probably heard of Dogecoin, based on the old Doge meme featuring images of Shiba Inu dogs. It emerged as a loose online community when someone, ironically, added a cryptocurrency that later had some financial value. This type of memecoin embodies different aspects of internet culture and is mostly harmless.
But my goal here is not to defend or belittle meme currencies. It’s to point out the absurdity of a US regulatory system that allows only tokens to flourish — while cryptocurrency companies and blockchain tokens with more productive uses face hurdles. We see this every day while working with entrepreneurs and startups. Any meme maker can easily create, run, and even automatically insert tokens. But entrepreneurs trying to build something lasting? They are stuck in regulatory purgatory.
Think of it this way: We’d consider it a policy failure if we had a stock market that only motivated GameStop meme stocks, but 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 means that platforms and entrepreneurs fear that the most productive blockchain token they list or develop could suddenly be considered a security.
I call the distinction between the more productive and speculative use cases in the cryptocurrency industry “computer versus casino.” One culture (“casino”) sees blockchain technology as a way to release tokens primarily for trading and gambling. The other (“the computer”) is more interested in blockchains as a new platform for innovation, just as the Internet, social media, and mobile phones were before it. Such blockchain-based innovations include decentralizing artificial intelligence and verifying what is real against deepfakes.
So why do we prioritize memes over material? U.S. securities laws do not allow the SEC to make merit-based judgments about an investment. It is not the job of the SEC to completely end speculation. Instead, its role is to protect investors; maintaining fair, orderly and efficient markets; And facilitating capital formation. The commission fails to achieve all three goals when it comes to the digital asset and token markets.
The primary test the SEC uses to determine whether 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 management efforts of others. Take Bitcoin and Ethereum, for example: While both cryptocurrency projects started with the vision of one person, they have evolved into communities of developers with no single entity controlling them — so potential investors don’t have to rely on anyone’s administrative efforts. These technologies now operate like public infrastructure 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 administrative efforts. The SEC’s approach has led to a lot of confusion and uncertainty in the industry. While the Howey test is well justified, it is inherently subjective. Memecoin projects do not have developers, so there is no claim that Memecoin investors are dependent on anyone’s management efforts. Memecoins thus proliferate, while more innovative projects struggle.
The answer is not less regulation, but better regulation. Specific solutions include adding well-designed disclosures to provide regular investors with more information. Another solution is the need for long lock-in periods to prevent get-rich-quick schemes. Regulators implemented similar protections in the wake of the Great Depression, the wild excesses of the 1920s and the stock market crash of 1929. Once these barriers were in place, we witnessed an unprecedented era of growth and innovation in our markets and our economy. It is time for organizers to learn from past mistakes.