a16z crypto: Criticizing Meme Coins

Original Title: How bad policy favors memes over matter

Author: Chris Dixon

Translated by: DAOSquare

With the recent cryptocurrency prices hitting new all-time highs again, there is a risk of excessive speculation in the cryptocurrency market, especially with the recent buzz around meme coins. Why does the market keep repeating these cycles instead of supporting truly transformative blockchain innovations?

Meme coins are essentially joke coins created by online communities that understand the meme. You may have heard of Dogecoin, which is based on a meme featuring a Shiba Inu that has been part of internet culture for a long time. When someone humorously assigned it a cryptocurrency that later gained some economic value, it formed a broader online community. This "meme coin" reflects the diversity of internet culture, mostly harmless, while many other meme coins are not.

However, my goal in writing this article is not to defend or disparage meme coins. My aim is to point out a lagging policy framework that allows meme coins to thrive while hindering more productive blockchain businesses and tokens. Any meme creator can easily create, publish, and even get their tokens listed on exchanges, including those that disparage specific politicians and celebrities. But what about entrepreneurs trying to build real and lasting businesses? They find themselves in a regulatory hell.

In fact, it is now safer to launch a meme coin with no utility than to introduce a token with practical value. Imagine if our securities markets only incentivized GameStop meme stocks while rejecting companies like Apple, Microsoft, and Nvidia (whose products are clearly used by people every day); we would consider this a policy failure. Yet current regulations encourage platforms to list meme coins instead of those with more practical value. The lack of regulatory clarity in the crypto industry means that platforms and entrepreneurs have been worried that the more productive blockchain tokens they are listing or developing could suddenly be classified as securities.

I refer to the distinction between these more speculative and productive use cases in the crypto industry as "computers versus casinos." The "casino" culture views blockchain primarily as a means for token issuance for trading and gambling. The "computer" culture is more interested in the blockchain itself, seeing it as a new innovation platform, much like the previous internet, social, and mobile networks. Over time, the meme coin community has the potential to evolve its tokens by adding more utility; after all, many of the disruptive innovations we use today once looked like toys. "Utility" is important because the core of a token is a new digital primitive that provides online property rights to anyone. More productive, blockchain-based tokens enable individuals and communities to own internet platforms and services, rather than just using them.

These open-source, community-operated services can address many of the issues we face today with large tech companies: they can provide more efficient payment systems; they can verify authenticity to prevent deep fakes; they can include more diverse groups in joining or exiting specific social networks (especially if you dislike their censorship policies, or if those networks selectively drive away and retain users). They can allow users to vote on platform decisions, particularly if those users' livelihoods depend on the platform. They can mark "human proof" to combat artificial intelligence. Or they can generally serve as a decentralized counterbalance to corporate centralization.

Our legal framework should encourage this kind of innovation. So why do we prioritize memes over substance? U.S. securities law does not grant the U.S. Securities and Exchange Commission (SEC) the authority to make value-based judgments on investments, and completely ending speculation is not the SEC's job. Instead, the agency's role is to 1) protect investors; 2) maintain fair, orderly, and efficient markets; and 3) facilitate capital formation. In the digital asset market and tokens, the U.S. SEC has failed on all three fronts.

The primary test the SEC uses to determine whether something is a security is the Howey Test from 1946, which involves assessing many factors, including whether there is a reasonable expectation of profits derived from the efforts of others. Take Bitcoin and Ethereum as examples: while both crypto projects started with an individual's vision, they have evolved into developer communities not controlled by any single entity, meaning potential investors do not have to rely on anyone's "management efforts." These technologies now operate like public infrastructure rather than proprietary platforms.

Unfortunately, other entrepreneurs building innovative projects do not know how to obtain the same regulatory treatment as Bitcoin and Ethereum. Bitcoin, established in 2009, and Ethereum, founded in 2013-2014, are the only significant blockchain projects to date, both created over a decade ago, and the SEC has explicitly or implicitly deemed that these projects do not involve management efforts. The SEC's lack of transparency and methodology, including applying the Howey Test through enforcement, has led to much confusion and uncertainty in the industry. While the Howey Test is well-founded, it is inherently subjective. The SEC has broadly expanded the meaning of the test to the point where ordinary assets, even items like Nike shoes, can today be considered securities.

Meanwhile, meme coin projects lack developers, creating the illusion that meme coin investors do not rely on anyone's "management efforts." As a result, meme coins proliferate while innovative projects struggle. This situation ultimately poses greater risks for investors rather than less.

The answer is not to reduce regulation but to improve it. Specific solutions include introducing carefully tailored disclosure requirements to provide more information to ordinary investors. Another solution is to require long lock-up periods to prevent the invisible market harms of overnight wealth and to incentivize more long-term building.

Regulators implemented similar protective measures after the Great Depression, following the boom of the 1920s and the stock market crash of 1929. When these guidelines were in place, we saw unprecedented growth and innovation in the markets and the economy. It is time for regulators to learn from past mistakes and pave the way for a better future for everyone.