Last week, four different views of meme coins were put forward. On Thursday the US Securities and Exchange Commission (SEC) provided staff guidance that meme coins would not be considered securities. SEC Commissioner Caroline Crenshaw dissented. The following day, Joe Rogan posted an interview with Elon Musk. Rogan thinks meme coin pump and dumps should be regulated, but Musk think’s meme coins are okay provided people treat them as a bit of fun and don’t risk too much.
Unsurprisingly, the Rogan – Musk excerpt is more entertaining.
“The whole meme coin thing is bananas,” observed Rogan. “It is so bananas that people dump real money into these coins and then you could just pump them up and sell them.”
“It’s like a casino or something,” Elon Musk responded, comparing it to “the greater fools theory and musical chairs. Whoever’s the last to sit down loses.”
To which Rogan replied, “And somehow or other it’s still legal”.
“If you expect to win at a casino, you’re being a fool,” answered Musk. “At the risk of saying something bold and outrageous, don’t bet the farm on a meme coin.”
Rogan spoke about pump and dumps, where people often hope they are the one who will dump, but they end up on the losing end. He repeated, “It’s just weird that it’s legal still”. Musk responded that people lose money at casinos. Rogan’s view is that pump and dumps make meme coins different and observed that you could run “a real pyramid scheme”.
With that context, let’s turn to the SEC’s new guidance on meme coins. By saying most meme coins are not securities, the SEC also conveniently sidesteps a potentially awkward position regarding the $TRUMP meme coin.
The SEC’s position on meme coins
Following the change in administration, the SEC has swiftly dropped many of its outstanding cases and investigations into major crypto firms, where the allegations revolved around classifying most cryptocurrencies as securities (rather than outright fraud). But meme coins are amongst the first pieces of guidance provided.
Here’s the core paragraph on meme coins:
“Meme coins typically are purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation. In this regard, meme coins are akin to collectibles.”
“Meme coins also typically have limited or no use or functionality. Given the speculative nature of meme coins, they tend to experience significant market price volatility, and often are accompanied by statements regarding their risks and lack of utility, other than for entertainment or other non-functional purposes”
The key legal aspect is whether a meme coin is sold as part of an “investment contract”, the so-called Howey test.
The SEC continued,
“The offer and sale of meme coins does not involve an investment in an enterprise nor is it undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
It says that the price movement is the function of speculation and “collective sentiment” rather than any efforts of a third party. Again it compares them to collectibles.
That’s not to say there’s a free pass for fraudulent behavior, because the SEC highlights that it’s possible for others, most likely the Department of Justice, to pursue bad actors.
But for now, it certainly seems like it’s a situation of buyer beware.
Commissioner Crenshaw dissents
Democrat Commissioner Crenshaw disagrees. Her concern is that the new meme coin definition put forward by the SEC doesn’t have a foundation in law.
She wrote,
“The lack of a useful definition alone makes the value of this guidance questionable, except perhaps as a roadmap for crypto enterprises looking to evade oversight by labeling themselves as a meme coin.”
Commissioner Crenshaw believes that other crypto issuers will downplay the role of managerial efforts in order to fit into the meme coin classification and escape oversight.
She asserts that most meme coins rely on managerial efforts, whether it’s structuring offerings to limit supply or via buybacks or burning. The Commissioner highlighted the prevalence of manipulation through pump-and-dumps and rug pulls. And she noted that getting a listing on an exchange involves managerial effort.
Apart from meme coins, the Commissioner also has reservations about Crypto 2.0. While she recognizes the intent to provide more guidance on what is or is not a security, she’s concerned that the withdrawal from many cases before providing that guidance raises many questions. These include,
“How can we pursue fraudulent conduct in this space while casting doubt on our regulatory jurisdiction? Are we eroding our ability to police fraudulent Ponzi schemes? Are we poised to give special treatment to crypto assets over traditional assets, or even other emerging assets?”
