The Legal and Market Dynamics of Meme Coins

Forward the Original Title：Meme 币走向合法对于 Meme 币来说是最糟糕的事情

TL;DR

When Elon Musk semi-ironically endorsed dogecoin during the last bull run, most people saw it as a joke: a high-profile business guy playing with the funny money. Nobody is laughing anymore. These days, there are real institutions — from the Avalanche Foundation to Franklin Templeton — willing to say that meme coins are a legitimate use of blockchain tech.

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On Solana, there’s dogwifhat {{WIF}}, sillycat (SILLYCAT) and popcat (POPCAT). On Ethereum, (DOGE) remains top dog. Then there’s the emerging field of “PoliFi,” short for political finance, with its roster of coins like MAGA (TRUMP), jeo boden (BODEN) and elizabath whoren (WHOREN).

These would-be jokes have gained virality in the past year “due to their unique nature,” the Franklin Templeton Digital Assets team wrote in a recent report. A rally that kicked off in late 2023 has only picked up steam since the release of U.S. spot bitcoin exchange-traded funds (ETFs), the financial giant noted.

In some sense, meme coins are reaching escape velocity. The Avalanche Foundation launched a “Culture Catalyst” program that has started buying up meme coins in a bid to support what it believes to be “culturally important” Web3 projects. While Franklin Templeton (which for a while sported bitcoiner’s laser eyes on Twitter) attributes growing use of Ethereum and Solana in part to these token’s “opportunities to make quick profits.”

See also: The Memecoin Grift and How It Threatens Ethereum Culture | Opinion

And yet, meme coin projects are also seemingly doing everything in their power to self-destruct. While the conventional wisdom about meme coins is that they have “no underlying value,” more and more meme coin creators are investing time and money into making their projects stand out. It’s a risky trade.

For instance, shiba inu (SHIB), the Ethereum-based competitor to the first and likely most well-known meme coin dogecoin, is building out an entire tech ecosystem including its own scaling layer called Shibarium, decentralized exchange ShibaSwap, Shiboshis NFTs and even a a digital identity initiative and project incubator.

Dogwifhat (WIF), a spin on the “dog token” trend by adding on a pink beanie to the canine mascot that has rallied over 600% in the past month, raised over $600,000 in (USDC) to advertise on the side of Los Vegas’ Sphere megaproject.

Whether these projects are aware of it or not, by looking to develop or market their tokens, they could be raising the ire of the U.S. Securities and Exchange Commission (SEC). It’s not really a laughing matter, considering the SEC has been more than willing to make an example of under-the-radar projects to make a point.

“Advertising would theoretically make it more likely for a court to find that an investment is a security, because ‘marketing’ is a factor in the application of the Howey test,” U.S. law professor Brian L. Frye told CoinDesk in a direct message, referring to the test the SEC deploys to determine whether an asset is a security.

Neeraj Agrawal, director of communications at Coin Center, a lobby group, echoed that point and cast doubt on an argument many meme coin projects like to project, that these are “community led” initiatives.

“Remember a lot of these meme coins are not decentralized in any real way. They may ride on a decentralized network, but it wouldn’t surprise me to learn the contract itself is controlled by a couple of people,” Agrawal said. The basic definition of a security is whether there is “a team in control of this thing that is promising to do things that will increase the value of the thing,” he added.

Projects can certainly decentralize over time and gain stakeholders. Messari researcher Ally Zach wrote a guide (“Navigating the Memecoin Mania”) that tracks three critical metrics: “the rate of change in the number of holders, the ratio of new to returning daily buyers and the types of buyers.”

In particular, there is a “critical threshold” of 3,000 holders that tends to indicate a project is gaining traction. The next phase, characterized by the number of new buyers exceeding existing traders, typically sees holder counts jump to 10,000 and the involvement of whales without extreme market swings.

Dogecoin, launched in 2013 (and since renounced by its creator), is fairly well distributed, and its development activities are essential for keeping the network safe to use. While the biggest DOGE holder owns over 22% of the token’s circulating supply, there are also nearly 7 million dogecoin holding addresses (compared to 9 million wallets that hold solana (SOL)).

See also: The One Word That Defines Ethereum’s Goals | Opinion

While there is a not-for-profit Dogecoin Foundation that coordinates development, the project benefited from launching during the proof-of-work era, which enabled a number of people to earn tokens by mining at home. Today’s breed of meme coins are dominated by a few large bagholders who got in early.

Likewise, the argument that these are nihilist jokes or acts of performance art, or that there’s no real expectation of profit, isn’t much of a legal cover.

STORY CONTINUES BELOW

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“The likelihood of profit may be low or nonexistent, but people are still buying them at least in part because of the possibility they’ll become popular & increase in value,” Frye said.

That said, Columbia Business School professor Austin Campbell argues that projects can’t just call themselves “Dog Co. and have a memey logo” and do legitimate business practices without running afoul of securities regulators. Yet there is room for nuance.

“The SEC theory of why these things are securities is pretty clearly on the rocks (e.g. just buying products is not enough),” he said. Just because a token resembles a security, or was even issued under an “investment contract,” doesn’t necessarily mean the underlying token is a security. It’s an open legal question.

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