a16z Partner: How Bad Regulation Favors Memes Over Innovation

Author: Chris Dixon, a16z partner and head of a16z crypto, author of "Read Write Own", first published in the Financial Times; Translation: 0xjs@Golden Finance

With cryptocurrency prices recently reaching all-time highs again, there is a risk of excessive speculation in the cryptocurrency market, especially given the recent buzz around Meme coins. Why does the market keep repeating these cycles instead of supporting more efficient blockchain-based innovations that can really bring about change?

Meme coins are crypto tokens used primarily for humor, born from joining online communities for joking. You may have heard of Dogecoin, which is based on the old dog Meme and features images of Shiba Inu. It became a loose online community when someone ironically added a cryptocurrency that later had some financial value. This "Mmeme coin" embodies aspects of Internet culture and is mostly harmless, while other Meme coins are not.

But my goal is not to defend or undermine Meme coins, but to point out the backwardness of policies and systems that allow Meme coins to flourish, and they face obstacles for crypto companies and blockchain tokens with more efficient use cases. Any meme maker can easily create, launch, and even automatically list a token, including tokens that disparage specific politicians and celebrities. But entrepreneurs who want to create something real and lasting? They are stuck in regulatory purgatory.

In reality, it is safer to launch a meme coin with no use case today than to launch a useful token. Think of it this way: if our securities market only incentivized GameStop meme stocks but rejected companies like Apple, Microsoft, and NVIDIA—all of which have products that people use every day, we would consider it a policy failure. Yet, Current regulations encourage platforms to list meme coins over other, more useful tokens. The lack of clear regulation in the crypto industry means that platforms and entrepreneurs are constantly worried that the more productive blockchain tokens they are listing or developing might suddenly be considered securities.

I call the distinction between these more speculative and productive use cases in the crypto industry “computers vs. casinos.” One culture (“casinos”) sees blockchain as a way to issue tokens primarily for trading and gambling. Another culture (“computers”) is more interested in blockchain as a new innovation platform, just like the internet, social, and mobile platforms before it. Over time, the memecoin community will likely evolve its token by adding more utility; after all, many of the disruptive innovations we use today initially looked like a toy. “Utility” is important because, at its core, tokens are a new digital primitive that can give anyone online property rights. More efficient blockchain-based tokens enable individuals and communities to own (not just use) internet platforms and services. Such open-source, community-run services could solve many of the problems we face with big tech companies today: They could provide more efficient payment systems. They could verify proof of authenticity to prevent deepfakes. They could allow more voices into specific social networks, or the ability to exit specific ones—especially if you don’t like the policing policies of those networks or the people they drive away and keep. They can let users vote on platform decisions, especially if those users’ livelihoods depend on the platform. They can tag “proof of humanity” against AI. Or they can generally serve as decentralized checks and balances on centralized corporate power.

Our legal framework should encourage this kind of innovation. So why do we prioritize memes over innovation? U.S. securities law does not authorize the SEC to make performance-based judgments about investments. Nor is the SEC’s job to end speculation altogether. Rather, the agency’s role is to (1) protect investors; (2) maintain fair, orderly, and efficient markets; and (3) facilitate capital formation. When it comes to digital asset markets and tokens, the SEC has failed to achieve all three of these goals.

The primary test the SEC uses to determine whether something is a security is the 1946 Howey test, which involves evaluating a number of factors—including whether there is a reasonable expectation of profits resulting from the managerial efforts of others. Take Bitcoin and Ethereum: while both crypto projects began as the vision of one person, they evolved into communities of developers that no single entity controls—so potential investors don’t have to rely on anyone’s “managerial efforts.” These technologies now function like public infrastructure rather than proprietary platforms.

Unfortunately, other entrepreneurs building innovative projects have no idea how to qualify for the same regulatory treatment as Bitcoin and Ethereum. Bitcoin (founded in 2009) and Ethereum (founded in 2013-2014) are the only two significant blockchain projects to date that the SEC has explicitly or implicitly deemed to not involve management efforts (both were founded more than a decade ago). The SEC’s lack of candor and approach—including applying the Howey test through enforcement regulation—has also led to much confusion and uncertainty in the industry. While the Howey test is well-reasoned, it is inherently subjective. The SEC has expanded the meaning of the test so broadly that ordinary assets, even things like Nike shoes, can be considered securities today.

Meanwhile, the Memecoin project has no developers, so Memecoin investors don’t pretend to rely on anyone’s “management efforts.” As a result, Memecoins spread while innovative projects struggle. Investors end up facing more risk, not less.

The answer is not less regulation but more. Specific solutions include adding well-crafted disclosures that provide more information to the average investor. Another solution is to require longer lock-up periods to prevent get-rich-quick schemes and incentivize more long-term building.

During the Great Depression following the boom of the 1920s and the stock market crash of 1929, regulators put similar protections in place. Once those guidelines were in place, we saw an unprecedented era of growth and innovation in the markets and the economy. Regulators should learn from past mistakes and pave the way for a better future for all.