Regulation
Cryptocurrency regulation must not prioritize memes over substance
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The author is a general partner at Andreessen Horowitz, where he leads the crypto fund, and is the author of “Read Write Own”
With cryptocurrency prices recently hitting all-time highs, there is a risk of excessive speculation, especially given the buzz around memecoinsWhy does the market continue to repeat these cycles, instead of supporting more productive blockchain-based innovations that will really make a difference?
Memecoins are cryptographic tokens used primarily for humorous purposes, born from membership in an online community interested in the joke. You’ve probably heard of Dogecoin, based on the former doge meme with images of Shiba Inu dogs. It originated as an informal online community when someone ironically added a cryptocurrency that later had some financial value. This type of memecoin embodies various facets of Internet culture and is generally harmless.
But my goal here is not to defend or denigrate memecoins. It’s to highlight 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 hurdles. We see this every day when we work with entrepreneurs and startups. Any meme creator can easily create, launch, and even automatically list tokens. But entrepreneurs trying to build something sustainable? They find themselves stuck in regulatory purgatory.
Think of it this way: We would consider it a policy failure if we had a stock market that only supported GameStop. meme actionsbut has rejected companies like Apple, Microsoft, and Nvidia. Yet 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 sector means platforms and entrepreneurs fear that the more productive blockchain token they list or develop could suddenly be considered a security.
I call the distinction between these more speculative and productive use cases in the cryptocurrency industry “the computer versus the casino.” 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, much like the web, social media, and mobile were before it. These blockchain-based innovations include decentralizing AI and verifying what is real versus deepfake.
So why are we prioritizing memes over matter? U.S. securities laws do not give the Securities and Exchange Commission the power to make informed judgments about the merits of an investment. Nor is the SEC responsible for stopping speculation. Rather, its role is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The commission is failing on all three goals when it comes to digital asset markets and tokens.
The primary test the SEC uses to determine whether or not something is a security is The 1946 Howey Testwhich involves evaluating a number of factors, including whether there is a “reasonable expectation of profit” from the management efforts of others. Consider Bitcoin and Ethereum: While both of these cryptocurrency projects began with the vision of a single person, they have evolved into communities of developers with no single entity in charge, so potential investors do not have to rely on anyone’s management efforts. These technologies now operate as public infrastructure rather than proprietary platforms.
Unfortunately, other entrepreneurs who create innovative projects are unsure how to receive the same regulatory treatment as Bitcoin (founded in 2009) and Ethereum (2013-2014). These are the only major blockchain projects that the SEC has deemed, either explicitly or implicitly, to not involve management efforts. The SEC’s approach has led to a lot of confusion and uncertainty in the industry. While the Howey test is well-reasoned, it is inherently subjective. Memecoin projects have no developers, so there is no claim by memecoin investors to rely on anyone’s management efforts. Memecoins thus propagate, while more innovative projects struggle to grow.
The solution is not less regulation, but more regulation. Concrete solutions include adding targeted disclosures to provide regular investors with more information. Another is requiring long lock-up periods to prevent get-rich-quick schemes. Regulators put similar protections in place after the Great Depression, after the excesses of the 1920s, and after the stock market crash of 1929. With these safeguards in place, we saw an era of unprecedented growth and innovation in our markets and our economy. It is time for regulators to learn from the mistakes of the past.