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 funny money. However, today, the perception has shifted drastically. Real institutions, ranging from the Avalanche Foundation to Franklin Templeton, now consider meme coins a legitimate application of blockchain technology. On platforms like Solana and Ethereum, meme coins such as dogwifhat (WIF), sillycat (SILLYCAT), and popcat (POPCAT) on Solana, and DOGE on Ethereum, have gained significant traction.
Moreover, there’s a new phenomenon emerging called “PoliFi,” short for political finance, which includes coins like MAGA (TRUMP), jeo boden (BODEN), and elizabath whoren (WHOREN).
These meme coins have gained virality over the past year due to their unique nature, as noted by the Franklin Templeton Digital Assets team. The rally in meme coins, which began in late 2023, has only accelerated since the introduction of U.S. spot bitcoin exchange-traded funds (ETFs).
In a significant move, the Avalanche Foundation initiated a “Culture Catalyst” program aimed at supporting culturally significant Web3 projects by purchasing meme coins. Franklin Templeton attributes the growing usage of Ethereum and Solana in part to the opportunities for quick profits presented by these tokens.
However, despite their rising popularity, meme coin projects face challenges in maintaining longevity. While meme coins are often perceived to lack underlying value, creators are increasingly investing resources into making their projects more robust. For example, shiba inu (SHIB), an Ethereum-based competitor to dogecoin, is expanding its ecosystem with initiatives like Shibarium, ShibaSwap decentralized exchange, Shiboshis NFTs, and digital identity initiatives.
Even newer projects like Dogwifhat (WIF) are gaining attention, raising funds to advertise on prominent platforms like Los Vegas’ Sphere megaproject. Despite their potential, investing in meme coins remains a risky endeavor.
Whether these projects realize it or not, by actively developing or marketing their tokens, they may attract the attention of the U.S. Securities and Exchange Commission (SEC). This is a serious matter as the SEC has shown a willingness to use under-the-radar projects as examples to make a point.
According to U.S. law professor Brian L. Frye, advertising could potentially increase the likelihood of a court determining that an investment is a security, as marketing is a factor in the SEC’s Howey test used to assess whether an asset qualifies as a security.
Neeraj Agrawal, director of communications at Coin Center, emphasized that many meme coin projects claim to be community-led but may not be genuinely decentralized. He highlighted the basic definition of a security, which revolves around whether there is a team controlling the asset and promising actions that would increase its value.
While projects may decentralize over time and involve more stakeholders, Messari researcher Ally Zach outlined critical metrics for assessing meme coins’ legitimacy. These metrics include the rate of change in the number of holders, the ratio of new to returning daily buyers, and the types of buyers.
However, despite efforts to decentralize, meme coins often have a few large bagholders who entered the project early. This contrasts with tokens like Dogecoin, which has a fairly distributed ownership and essential development activities. Despite this, the notion that meme coins are nihilistic jokes or acts of performance art doesn’t necessarily shield them from regulatory scrutiny.
According to Frye, even if the likelihood of profit is low or nonexistent, people are still buying meme coins with the hope that they will increase in value. Columbia Business School professor Austin Campbell acknowledges the complexity surrounding meme coins and securities regulation. He argues that while projects cannot simply adopt a memey logo and conduct legitimate business without scrutiny, the SEC’s theory of why these tokens are securities is debatable. Ultimately, whether a token qualifies as a security remains an open legal question.