Meme Coins, Gambling and Crypto Regulation

As the Biden administration develops a crypto regulation framework, one type of token could be due for particularly close scrutiny.

By David Z. MorrisLayer 2
AccessTimeIconApr 8, 2022 at 5:29 p.m. UTC
By David Z. MorrisLayer 2
AccessTimeIconApr 8, 2022 at 5:29 p.m. UTC

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

The Wall Street Journal on Thursday published a useful dive into meme coin trading. It was pegged to a token called “Will Smith slap inu” that appeared, surged and imploded within a couple of days early last week after the infamous Oscars fracas. “Meme coins” are usually recycled code rebranded to capitalize on this sort of fleeting news cycle. The Journal correctly frames meme coin trading as a high-risk activity with little or no broader social benefit.

First of all, I’m compelled by professional pride to point out that if you’re reading the Journal for crypto coverage, you’re getting the story more than a week late – we warned about Will Smith slap inu and similar meme coins on March 28. Though in fairness, why wouldn’t a story about meme coins be a knockoff?

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Credit where it’s due, the Journal does add some depth to the story, particularly by talking to meme coin traders directly. But the report reaches the same conclusion that we did last month: “Nearly all analysts agree that participation [in meme coin trading] is essentially a form of gambling.”

Meme coin traders who are self-aware about the game they’re playing aim to get in and out at precisely the right times within a window of, in some cases, less than a day. At the end of a memecoin’s rise and nearly inevitable fall, those who have timed their trades right make money and everyone else loses.

As one analyst told the Journal, it’s all a “zero-sum game,” in which wealth is merely transferred between participants. No wealth can be created because meme coins offer no innovation and have no real utility (this gets more complicated in cases like the shiba inu [SHIB] coin, where a formerly meme-based community at least appears to be building actual features).

On the spectrum of crypto assets, these are the real garbage. That simplicity makes them quite useful for thinking about crypto and financial regulation. Treasury Secretary Janet Yellen on Thursday laid out the Biden administration agenda on crypto, broadly stating that rules for the new technology should be similar to those for the traditional financial system, including prioritizing protecting investors from fraud.

As much as knowledgeable crypto insiders may be tempted to laugh at meme coins as a funny and marginal quirk of the space, most are unambiguously frauds and they’re costing people money based on implicit or explicit deception. Not everyone who buys a meme coin knows that they’ve really bought a ticket for a time-limited, augmented-reality casino that can wipe them out faster than they can blink.

Those with even the slightest bit of insight may find it hard to believe anyone would genuinely think “Will Smith inu” was a buy-and-hodl asset, but the human experience is a rich and varied tapestry. Some people in that tapestry are more frayed around the edges than others – more vulnerable, more desperate, less educated. It’s their money that ends up in the hands of meme coin creators, and of lucky and savvy meme coin traders.

Low-hanging fruit

So the question becomes, do we as a society have an obligation to protect people from their own urge to gamble? On the face of it, “no” seems like a compelling answer for a couple of reasons. First, because freedom and bald eagles and semiautomatic handguns. I feel strongly I should be able to engage in reckless speculation if that’s what I want, because this is America.

Second, and more substantively, a truly free market in small-dollar frauds is also a potentially amazing educational experience for millions of people. Losing money really has a way of sharpening the critical mind, or at least attuning people to their own appropriate level of risk. On a longer timespan, an unregulated market populated with this type of investor ­– once-burnt but now well-informed and risk-conscious – would produce stronger macroeconomic outcomes than one reliant on a central regulator to warn against bad bets.

Unfortunately, that’s an unrealistic vision: Even supposedly sophisticated “accredited investors” with access to less-regulated traditional finance markets like private equity and hedge funds get taken to the cleaners by cheap-suit con men all the time. A clear-eyed analysis would admit that unregulated securities markets, particularly markets in which there’s no control of asset issuance or punishment for misrepresentation of assets, is going to be rife with what amounts to theft disguised as speculation.

Further, this is about more than individual losses by the uninformed or unlucky – there are also broader social effects to consider. By way of analogy, we already know that traditional gambling not only has devastating effects for individuals with addiction issues but can harm society as a whole. Research increasingly indicates that higher levels of gambling lead to worse public health and other damage at the population level because problem gambler behavior and losses harm family and community, not just themselves.

Meme coin trading seems likely to be implicated in similar harms. That would make cracking down on them a question of social impacts, not just individual freedoms.

Meme coins are a relatively easy problem to tackle as the U.S. continues developing its crypto regulation approach. There are some issues in crypto that will require new rules and clarifications, such as whether miners are financial agents. But issuing a security and promoting it under false premises is already illegal, and pursuing issuers using existing rules is exactly the sort of “technology neutral” approach Yellen has argued for.

What’s key here is that the emphasis be on enforcement rather than new technological restrictions, surveillance or other forms of prior restraint. That’s important to protect real innovation.

But there’s no coherent argument to be made that overt fraud helps improve the crypto industry, or society as a whole. Finding and punishing the issuers of manipulative meme coins like Will Smith slap inu might not always be easy, but it’s exactly the sort of low-hanging fruit regulators would focus on if they really wanted to protect average speculators.

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David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.