How bad policy favors memes over matter

Chris Dixon

With crypto prices reaching all-time highs again recently, there’s risk of too much speculation in the crypto markets, especially given recent buzz around memecoins. Why does the market keep repeating these cycles — instead of supporting the more productive blockchain-based innovations that will truly make a difference?

Memecoins are crypto tokens used mostly for humor, born of joining an online community that’s in on the joke. You’ve likely heard of Dogecoin, based on the old doge meme featuring images of Shiba Inu dogs. It emerged as a loose community online when someone ironically added a cryptocurrency that later had some financial value. This kind of “memecoin” embodies various facets of internet culture and is mostly harmless, while other memecoins are not.

But my goal here isn’t to defend or to diminish memecoins. It’s to point out the backwardness of a policy regime that lets memecoins thrive — while crypto companies and blockchain tokens with more productive use cases face hurdles. Any mememaker can easily create, launch, and even automatically list tokens, including tokens that derogate specific politicians and celebrities. But entrepreneurs trying to build something real and lasting? They get stuck in regulatory purgatory.

It’s actually safer to release a memecoin today with no use case, than it is to launch a token that’s useful. Think about it this way: We’d consider it a policy failure if we had a securities market that incentivized only GameStop meme stocks, but that rejected the likes of Apple, Microsoft, and NVIDIA — all companies with products people use daily. Yet current regulations encourage platforms to list memecoins and not other, more useful tokens. The lack of regulatory clarity in the crypto industry means platforms and entrepreneurs live under constant fear that the more productive blockchain token they are listing or developing could suddenly be deemed a security.

I call the distinction between these more speculative and productive use cases in the crypto industry the “computer vs. the casino”. One culture (“the casino”) sees blockchains as a way to launch tokens primarily for trading and gambling. The other culture (“the computer”) is more interested in blockchains as a new platform for innovation, much like web, social, and mobile were before it. It is possible that a memecoin community could evolve its token by adding more utility over time; after all, many disruptive innovations we use today once started out looking like a toy. “Utility” matters because at its core, a token is a new digital primitive that offer property rights online for anyone. The more productive blockchain-based tokens make it possible for individuals and communities to own, not just use, internet platforms and services.

Such open source, community-operated services can address many of the issues we face with Big Tech today: They could offer more efficient payment systems. They could verify proof of authenticity to protect against deepfakes. They could allow more voice in, or the ability to exit, from a particular social network — especially if you don’t like the moderation policies or who those networks kick off and keep on. They could give users a vote in a platform’s decisions, especially if those users’ livelihoods are dependent on that platform. They could mark “proof of humanity” against artificial intelligence. Or they could just generally serve as a decentralizing counterbalance to the centralizing power of enterprises.

Our legal frameworks should be encouraging these kinds of innovations. So why are we prioritizing memes over matter? U.S. securities laws don’t empower the SEC to make merit-based judgments about an investment. Nor is it the SEC’s job to end speculation altogether. Instead, the agency’s role is to (1) protect investors; (2) maintain fair, orderly, and efficient markets; and (3) facilitate capital formation. The SEC is failing across all three of these objectives 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 test, which involves assessing 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: While both crypto projects began with the vision of a single person, they evolved into communities of developers with no one entity in control — so potential investors don’t have to rely on anyone’s “managerial efforts”. These technologies now function like public infrastructure rather than as proprietary platforms.

Unfortunately, other entrepreneurs building innovative projects don’t know how to qualify for the same regulatory treatment as Bitcoin and Ethereum. Bitcoin (founded in 2009) and Ethereum (2013-2014) are the only significant blockchain projects to date — both established over a decade ago — that the SEC has deemed, explicitly or implicitly, as not involving managerial efforts. The SEC’s lack of candor and approach — including applying the Howey test through regulation-by-enforcement — has also led to much confusion and uncertainty in the industry. And while the Howey test is well reasoned, it is inherently subjective. The SEC has so broadly stretched the test’s meaning that ordinary assets, even something like Nike shoes, could be considered securities today.

Memecoin projects, meanwhile, don’t have developers, so there’s no pretense of memecoin investors relying on the “managerial efforts” of anyone. Memecoins thus propagate, while innovative projects struggle. Investors end up facing more risk, not less.

The answer isn’t less regulation — it’s better regulation. Specific solutions include adding well-tailored disclosures to provide regular investors with more information. Another solution is requiring long lockup periods to prevent get-rich-quick schemes, and incentivize more long-term building.

Regulators implemented similar protections following the Great Depression, after the excesses of the roaring 1920’s and stock market crash of 1929. Once those guiderails were in place, we saw an unprecedented era of growth and innovation in our markets and economy. It’s time for regulators to learn from the mistakes of the past, and pave the way towards a better future for all.

The author is general partner at Andreessen Horowitz, where he leads the crypto fund, and is author of “Read Write Own”

A condensed version of this article originally appeared in The Financial Times online on April 18, 2024 and in print April 19, 2024.