FT stories don’t tend to involve Moo Deng and Hawk Tuah Girl. The only one that does is this morning’s sixth most-read on FT.com:
Cryptocurrencies representing a euthanised grey squirrel, a Thai pygmy hippopotamus and a cartoon dog have exploded in value since last month’s US presidential election, as Donald Trump’s victory triggers a surge in speculation in so-called memecoins.
It’s a fun story, but is it really about financial markets? There are familiar terms, like market value and liquidity, and the familiar theme of extraordinary popular delusion. Bigwigs from legitimate businesses are quoted to the effect that things gone too far. “Memecoins are little more than frothy assets representing the market’s over-exuberance,” say “critics, including some of the biggest figures in the crypto industry.”
That’s all fine and good, but unless memecoins are securities, why should we care?
The US Securities and Exchange Commission takes the view that many crypto tokens are securities, and should trade only within the confines of US securities law. And under the leadership of Chair Gary Gensler, SEC actions against crypto companies have been based on one clear and easy-to-apply rule: don’t try anything. Consumer protection is by prohibition. The SEC’s pursuit of Coinbase, for example, would seem to send the message that crypto trading is bad even if there’s US-grade levels of regulatory compliance at the corporate level.
Memecoins are in effect exploiting a loophole in that regulatory perspective, which was framed around the last-but-one crash, when everyone was getting bilked by DeFi and Web3 vapourware. As Gensler said in a 2022 speech:
Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. . . In general, the investing public is buying or selling crypto security tokens because they’re expecting profits derived from the efforts of others in a common enterprise.
No one talks much about common enterprise projects any more. Selling tokens on the claim that the money will be used to build or maintain something is, the SEC says, creating unauthorised investment securities. Selling tokens that lack common enterprise and involve no effort from anyone are more like caricatures of investment securities, so they slip below the regulatory threshold. The Howey Test is difficult to apply to a mark in a ledger that has the same name as an internet-famous hippo and relates to nothing.
Gensler’s exit in January, when memePOTUS is inaugurated, is widely predicted to mean pro-crypto regulation. There are two ways to read that:
US securities laws are rejigged to make crypto a conventional asset class that’s integrated into the mainstream financial system, which would add all sorts of regulatory costs and frictions.
Crypto continues to do what it does and US regulators are instructed to look the other way. This would be exciting and would make a lot of people rich, though it would also make a lot of people poor, so it;s impossible to say if it’s bad or not.
In scenario one, memecoins could be in trouble. They are very unlikely to be classified as securities, and the recent resurgence is pretty much irrelevant to the integrity of capital markets, but that’s no reason to pursue two-tier regulation. Even the most pro-crypto lobbyist may see some risks in letting shitcoin shenanigans run rampant when trying to give bitcoin the same status as T-bills.
In scenario two, memecoins are pretty much unaffected. The chances of a novelty token being classified as a security moves from vanishingly small to zero and the current nonsense can continue for as long as people find entertainment in it. Of the two scenarios, this feels the most plausible.
The SEC’s consumer-protection-by-prohibition regime failed because it started in the wrong place. It was a mistake to lump crypto in with capital markets based on their superficial similarities.
It’s reasonable for a regulator to ban any crypto tokens that could be mistaken for investment securities. But the hostile environment that created has hindered any possibility of useful innovation in the mainstream, while ignoring the growth of a home-brew gambling industry where all the cards are crimped and all the dice are capped.
Any government that wanted to stop its citizens putting wagers on digital Jenga would be better served by giving the task to different types of regulators.
And perhaps the newly pro-crypto US will take the lead? We’re one high-profile rugpull away from public sentiment turning, with industry grandees like CZ already preparing for the backlash. With the SEC soon to be bypassed, it’s within the realms of possibility that Trump’s government introduces federal legislation that mandates some form of crypto exchange licensing on top of the US’s state-level patchwork of gambling regulations.
It’d be a useful reclassification. Tokenised assets would be regulated by whichever regulators are already responsible for those assets, whereas tokens without assets would be gaming chips. Consumer protection would move into the realm of gambling-related harm. Instead of saying the PEPE token has the market value equal to Sainsbury’s, we could say it’s worth a third of a Super Bowl sportsbook. Neither comparison is perfect, but the latter is probably more informative than the former.
In the meantime, the most useful thing we can do is stop thinking of memecoins as securities. They’re not securities. They’re not going to be securities any time soon. They’re tokens for MMOG games of chicken.
There’s a common assumption that chicken is a stupid game played by stupid people. That may be true at the margin, but most of the players are acting rationally. They have rightly deduced that their chances of getting out in time are improved by choosing a funny name, or wash-trading a tiny free float up to some absurd valuation, or tapping the virtual boiler rooms, or whatever the hell GOAT is. Even those arriving late can profit if, for example, an influential media organisation puts the memecoin on its homepage and pulls in more punters willing to try their luck.
This keeps working because most financial news doesn’t reference Moo Deng and Hawk Tuah Girl. It’s mostly about securities, which are by design quite boring.
Once we stop thinking about memecoins as if they’re securities and treat them like any other gambling market, the parasitical attention cycle should be broken. But for that to happen, you’ll have to stop clicking on stories like this one. It’s your fault we keep doing this, basically.
Further reading