"The More You Regulate, The More It Gathers"... Behind the Meme Coin Craze 'Overregulation' [Hankyung Koala]

The meme coin trend has become more than just a fad; it has established itself as a satire and mockery of the excessive virtual asset regulations by the United States Securities and Exchange Commission (SEC). The excessive regulations based on the 'securities' criteria presented by the SEC have ironically triggered the meme coin craze, which lacks practical utility. Let's take a closer look at how coins with images of dogs or frogs have formed a market worth $100 billion. "The More You Regulate, The More It Gathers"... Behind the Meme Coin Craze 'Overregulation' [Hankyung Koala]

History of Meme Coins

After the downturn in 2022, Bitcoin began to rise in 2023. With expectations of ETF approval, Bitcoin prices surged, and institutional finance focused its attention. However, within the crypto ecosystem, another movement was happening: the emergence of 'meme coins.' In a situation where altcoins were sluggish amidst Bitcoin's solo run, 'web3 natives' known as 'degens' created and traded meme coins without business plans or practical utility, establishing their own unique world.

The origin of meme coins is Dogecoin (DOGE), created in 2013 based on Bitcoin's source. Developers Billy Markus and Jackson Palmer reportedly created Dogecoin to make a cryptocurrency that anyone could easily access, moving away from the complexity of Bitcoin. In 2020, Shiba Inu (SHIB), similar to Dogecoin but using a different dog as its logo, emerged. Since the logos of these two coins originated from internet memes, people began calling them meme coins. In 2023, with the launch of PepeCoin (PEPE), which borrowed the internet meme 'Pepe the Frog,' the number of meme coins exploded. The meme coin trend was particularly prominent on the Solana network, known for its speed and low fees.

There is no clear legal or technical definition of meme coins, but most coins recognized as meme coins lack a business plan, utility, an issuer or have anonymous issuers, no issuer holdings (so-called 'foundation holdings'), and borrow names or logos from internet memes. In other words, meme coins have unclear issuing entities, no practical use, and are not clearly defined as to 'what they do,' but they use provocative logos and names.

The astonishing fact is that the total market capitalization of these playfully issued meme coins has exceeded $100 billion. While meme coin trading mainly took place on decentralized exchanges (DEX), they have recently been listed on major centralized exchanges, drawing social attention and criticism. So why have 'useless' coins become so popular?

Causes of the Meme Coin Craze

Every phenomenon has its causes. The fundamental cause of the meme coin craze is the SEC's excessive regulation. The SEC considers most virtual assets, except Bitcoin, as 'securities,' causing legal uncertainty across the industry by suing numerous virtual asset-related companies.

The SEC's argument is based on the Howey Test. According to the Howey Test, if there is an investment of money in a common enterprise with an expectation of profit from the efforts of others, it is considered a 'security.' The SEC attempted to classify coins as 'unregistered securities' if their prices rose through the business activities of coin issuers and sought to punish issuers and traders for violating U.S. securities laws. This significantly hindered the business development of coin-issuing companies.

As a result, despite the launch of numerous coins, there are hardly any widely used coins in real life, except for stablecoins. This is because only a few companies can withstand lawsuits from U.S. government agencies. Most issuers reduced or abandoned their businesses due to litigation risks, and coins ambitiously launched failed to achieve significant business results beyond technical achievements. If the market had grown normally, coins would have been valued based on business performance or utility, but due to the SEC's excessive regulation, coin prices became heavily dependent on future expectations or market interest.

The Ripple lawsuit had a significant impact worldwide. As the legal risks associated with Initial Coin Offerings (ICOs) increased due to the Ripple lawsuit, global market fundraising through ICOs plummeted, and crypto venture capital (VC) took its place. Instead of the public participating in ICOs when coins are first issued, a few VCs became investors, leading to a phenomenon where coin prices plummeted after exchange listings due to large-scale cash-outs by VCs.

Last year and the year before, many coins were designed with 'low float and high fully diluted value (FDV)' to facilitate VC exits (investment recovery). This created another structure where VCs dumped coins bought at low prices onto retail investors at high prices after exchange listings, similar to the 'foundation holdings dumping' frequently occurring on domestic exchanges.

The meme coin craze arose in this context. The SEC created an environment where coin prices were determined solely by expectations or interest rather than business performance, leading to the proliferation of coins with provocative names and logos without business plans or specified utility.

The SEC attempted to punish issuers and traders together but did not regulate the behavior of VCs using their financial power to gain unfair profits in the market. Therefore, many meme coins adopted a 'fair launch' approach, distributing most of the coins to the market immediately upon issuance without the issuer holding a large amount. This stemmed from a backlash against the practice of VCs using retail investors as a means of liquidity and the lack of investor protection measures.

Implications of the Meme Coin Craze

The fact that tens of thousands of 'useless' meme coins are issued and traded daily, with the surviving coins' total market capitalization exceeding $100 billion, is a satire and mockery of the SEC's regulatory failure. Governments worldwide should have established order in the rapidly growing market and protected investors rather than making moral judgments that 'coins are bad.' However, the SEC attempted to 'suffocate' all coins except Bitcoin by considering them 'unregistered securities,' and other countries followed the SEC's direction. And that attempt ended in failure.

While governments failed to establish market order, powerful forces with capital exploited investors' pockets. The 'Kimchi coin foundation holdings dumping' frequently occurring on domestic exchanges, the recent intensification of 'pump and dump volatility,' and the cashing out of 'low float and high FDV' coins after listing are all in the same context. Insiders are profiting from retail investors in a market with inadequate investor protection measures.

The meme coin craze is a message from the market to financial authorities worldwide. The SEC's approach of considering coins as 'bad' and trying to suppress them was wrong and failed. The coin market is still growing, and the countless dog, cat, and frog coins pouring in daily hope for reasonable regulation to establish market order, protect investors, and nurture sound business entities.

When Turkey's Prime Minister Erdogan blocked access to Twitter in 2014, Turkish citizens learned to use VPNs to access Twitter, and two weeks later, access was restored, resulting in an increase in Twitter usage in Turkey. Reporters Without Borders opened an 'Uncensored Library' within the Minecraft game for countries like Egypt, Mexico, Russia, Saudi Arabia, and Vietnam, allowing access to articles censored by their respective national media.

Unreasonable regulations fail. The market always finds an answer. Financial authorities should take the implications of the meme coin craze seriously. 'Crypto President' Trump's second term begins in five days.

Kim Min-seung, Head of Korbit Research Center...

He is a founding member and head of the Korbit Research Center. He works to simplify complex events and concepts in the blockchain and virtual asset ecosystem and help people with different perspectives understand each other. He has experience in blockchain project strategic planning and software development.

▶This article is an external contributor column introduced to provide various perspectives to cryptocurrency investment newsletter subscribers and does not reflect the views of the Korea Economic Daily.

Jo Mi-hyun, Reporter mwise@hankyung.com