The staff of the US Securities and Exchange Commission has declared that meme coins are not securities. Promoters do not need to be regulated, and buyers are not protected by securities laws.
Is the SEC ducking its responsibilities?
Whatever these coins are, some commentators argue, investors are buying them — and shysters are taking advantage of the unwary with all kinds of tricks. Someone, even if not the SEC, ought to put a stop to these abuses.
Scams and rip-offs are clearly a social evil, and ought to be combated. But in their opinion of February 27 — which does not constitute a decision or rule of the SEC — the staff of the regulator’s division of corporation finance explain with clear authority why meme coins fail the Howey test of being a security.
Derived from the 1946 case SEC v WJ Howey Co, the proof of securityhood is that “there is an investment in an enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”.
Meme coins fail that test, the staff say, because their value “is derived from speculative trading and the collective sentiment of the market, like a collectible. Moreover, the promoters … are not undertaking (or indicating an intention to undertake) managerial and entrepreneurial efforts from which purchasers could reasonably expect profit”.
Since meme coins are not securities, their buyers should probably not be called investors. The SEC does not do so.
Prevention and punishment of malpractice ought to be the task of the police, just as it is with fraud in, say, stamp collecting. Or perhaps some other regulator should take it on.
Unfortunately gambling, the most appropriate category, is regulated in the US at state and territory level, and it is difficult to tie meme coin promoters to any one state.
There is, therefore, a gap that legislation ought to fill.
Toss of a coin
But the SEC turning its nose up at meme coins prompts another question. How are they different from many other crypto assets?
The regulator’s statement on meme coins describes them as “inspired by internet memes, characters, current events, or trends for which the promoter seeks to attract an enthusiastic online community”.
But try crafting a legally convincing distinction between meme coins and other tokenised instruments.
Since the staff are only offering an opinion, not a rule, they didn’t have to.
Meanwhile, on another page of the SEC’s website, we find a different declaration: “The SEC is dedicated to protecting investors in crypto markets”.
So there are good coins out there, which are securities, and do benefit from the SEC’s oversight. Their buyers deserve to be called “investors” and receive protection.
What are some of these securities like?
A few inches lower down the same page, we find out. In October 2024 the SEC “charged Chicago-based Cumberland DRW LLC with operating as an unregistered dealer in more than $2bn of crypto assets offered and sold as securities”.
In January 2024 it “charged Xue Lee (aka Sam Lee) and Brenda Chunga (aka Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7bn from investors worldwide.”
Fourteen such enforcements are listed for 2024.
Of course, there is fraud in conventional securities markets, too.
Give crypto the benefit of the (massive) doubt and assume it’s not more prone to fraud than regular markets.
But still, surely the under-resourced regulators, their faces in their hands, are groaning “why did we have to take this lot on too?”
And isn’t it just possible that at least some of those alleged crypto crims would not have got so far without the lustre the SEC has cast on crypto markets, as legitimate spheres where investors should be protected?
Neither fish nor flesh
The original promise of crypto, going back to the start of Bitcoin, was to create currencies outside the control of central banks and commercial banks.
It quickly became clear that the instruments had another use: they went up and down in price, spawning speculation — and that in turn meant they could be used to raise money from investors hoping for a win.
But neither as currency, nor as speculative asset, do crypto assets belong in the world of the SEC.
It does not regulate currencies, and has stated that Bitcoin, for example, is not a security.
That is a relief. While it may be intellectually satisfying to create a private sector, libertarian currency, and fun to experiment with it, any actor who really needs such an instrument must be up to no good. For legitimate payments, what is wrong with dollars or rupees?
Claims that crypto is useful to cut payment costs ring hollow. True cryptocurrencies introduce FX risk, while stablecoins are an admission that the conventional money system is indispensable.
The whole thrust of financial regulation for decades has been to bring money business out of the shadows and into the light, to prevent sins from tax evasion to money laundering.
That governments have countenanced the crypto industry blowing an enormous hole through that policy is astonishing.
But the SEC under Gary Gensler, chair for four years until this January, was avidly seduced by the idea of crypto assets as securities. The SEC fought many legal battles with crypto players including exchanges and wallet providers, to force them to accept securities regulation.
Ironically, this was making the problem worse.
For centuries, companies and governments wanting to raise money from investors have found ways to do it — equity, debt, securitization.
A system of regulation has rightly grown up around this process. Organisations wanting to take investors’ money must publish audited financial results and follow rules to ensure that they behave legally, invest the money honestly, and ensure fair, transparent markets in their securities. Insider trading, sloppy disclosure and market abuse are banned.
Are the kinds of organisations promoting crypto assets so new, different and socially valuable that they deserve to be able to raise money without obeying these rules?
If not, why are they allowed to do so, using mere tokens? Why is the SEC using the term “security” for things that are not shares or bonds?
If distributed ledger technology is truly efficient, by all means use it to support capital raising — but legally, these should be debt and equity instruments.
Power of self-restraint
It goes against the grain for any organisation not to try and extend its power. And it’s a brave thing in today’s world for an authority to turn its back on trouble and say “not my problem”.
But the SEC was right to do so with meme coins. Unfortunately, it went the wrong way by taking a zoo full of other crypto mutants under its wing.
On his first day in office, new chair Mark Uyeda signalled a new, more proactive approach to crypto asset regulation. Rather than regulating “retroactively and reactively” through enforcement battles, it will develop a “comprehensive and clear regulatory framework”.
Crypto, in other words, has entered the mainstream. It will get its own set of SEC rules, conveying respectability. Investors’ trust will grow — as will their expectation of protection.
Nice work, SEC. You’ve created another class of security. But can you answer this: if crypto assets are securities, what intrinsic job do they do, not performed by debt and equity? And will your new investor protections be as strong?