Dogecoin, Pepe, Trump. They are a few examples of meme coins, a category of crypto that the SEC stated Thursday are akin to collectibles and not covered by federal securities oversight.
It was the latest example of a Securities and Exchange Commission under Republican leadership that is quickly warming to to crypto.
“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,” the SEC’s Division of Corporation Finance wrote, noting that such coins also have limiting to zero 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.”
Because meme coins don’t amount to securities, people who offer them for sale won’t need to register transactions with the SEC under the Securities Act of 1933, the statement noted.
Notably, President Donald Trump and First Lady Melania Trump launched their own meme coins shortly before the new president took office. Though crypto assets are notoriously volatile, those coins lost most of their value in a very short timeframe.
The SEC under new leadership has already been showing how much friendlier it is to the crypto world than it was under former chair Gary Gensler. The agency now has a crypto task force headed by Commissioner Hester Pierce that promises to “develop a comprehensive and clear regulatory framework for crypto assets.”
Also on Thursday, the SEC dismissed a civil enforcement action against Coinbase, which it had accused of violating securities laws in trading a range of crypto assets.
Commissioner Caroline Crenshaw, the lone Democrat remaining on the commission, objected to both the SEC’s statement on meme coins and the dismissal of the enforcement action.
A sticking point is that meme coins don’t have a clear definition, Crenshaw said in comments Thursday. The SEC’s statement “generally describes a meme coin as an asset reflective of online or social trends, of speculative value, that tends to experience high volatility,” she said. “But these are near universal hallmarks of crypto assets. 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.”
On the Coinbase case dismissal, she said the agency was getting ahead of itself.
“We say we are dismissing the action because of future recommendations that may be made by the ‘crypto task force dedicated to helping the commission develop the regulatory framework for crypto assets,’” she said. “But whatever the law may be tomorrow, market participants should not be able to avoid the law as it stands today.”
Still, the SEC’s clarification on meme coins was somewhat expected, one lawyer said.
“I don’t think it changes that much when it comes to meme coins. There was always a very strong argument that they were not securities. This provides a level of clarity that was not there previously,” said Christopher Gerold, partner at Lowenstein Sandler. “I would expect to see more clarifying releases coming out” around crypto, he said.
While the SEC found that meme coins are generally not securities, that doesn’t mean that anything that calls itself a meme coin would get the same treatment, Gerold said. The agency uses the so-called Howey Test to help determine if something is a security, and aspects of certain novelty coins could tip them into securities territory, he said.
Whereas the SEC under Gensler was viewed as being too restrictive on crypto, the regulator is quickly going in the opposite direction, said Mike Alfred, who runs hedge fund Alpine Fox, which invests in bitcoin and other assets.
“I think we're at risk of going from an overly activist SEC that uses regulation via enforcement to potentially an overly passive SEC that allows the kinds of actions that the previous SEC was correctly trying to prevent,” Alfred said in an email. “It's not a surprise though given that the president and first lady launched meme coins just days before taking office.”
The development could be setting a dangerous precedent for investor protections, according to Wall Street watchdog group Better Markets.
“Meme coins are frequently the subject of what the crypto community calls rug pulls, where insiders buy up a large percentage of the tokens in advance and then sell them after the price soars as a result of efforts to hype the tokens, leaving regular investors with tokens that are essentially worthless,” said Benjamin Schiffrin, director of securities policy at the group, in a statement. “These rug pulls are akin to pump and dumps in traditional securities. The fact that the SEC would leave investors in these meme coins to fend for themselves is deeply troubling.”
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