The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, D.C., June 24, 2011.
The U.S. Securities and Exchange Commission (SEC) officially ruled Thursday that meme coins were not securities, instead likening them to collectibles.
Meme coins have long been at the center of debate among regulators and the cryptocurrency industry, especially amid the rise in scams and rug pulls in the wild blockchain segment.
In a statement, the Wall Street regulator clarified “transactions in the types of meme coins described in this statement, do not involve the offer and sale of securities under the federal securities law,” effectively stating that meme tokens were not securities and instead were “akin to collectibles.”
Under the SEC’s designation, coins like Dogecoin (DOGE), Official Trump (TRUMP), and other similar meme-based coins are non-securities.
Key features of the SEC statement
The SEC’s reasoning for designating meme tokens as non-securities focus on the following aspects:
- Definition of a security: According to the regulatory agency, a meme coin “does not constitute any of the common financial instruments” that securities laws enumerate. This also means meme coins aren’t federally protected, which implies the SEC may not provide assistance to investors who incur major losses and want to pursue a certain individual or developer.
- What meme coins do not provide: The SEC went on to note that meme tokens do “not generate a yield or convey rights to future income, profits, or assets of a business.”
- What investors actually invest in: As per the statement, the offer and sale of such cryptocurrencies do not involve investing in an enterprise and there is no “reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others,” meaning the expectation of profits among investors is not derived from other people’s efforts.
- Where value is derived: The SEC also explained that endorsers of meme tokens are not undertaking efforts to manage the assets of meme coin holders, and the value of meme tokens come from “speculative trading and the collective sentiment of the market.”
SEC warns against abuse of the new designation
While the SEC, under a new leadership, has provided clarity on the status of meme coins, it also warned bad actors against abusing the system.
“Although the offer and sale of meme coins may not be subject to the federal securities laws, fraudulent conduct related to the offer and sale of meme coins may be subject to enforcement action or prosecution by other federal or state agencies under the federal and state laws,” it clarified.
The agency reiterated that the SEC staff’s statement to clarify the status of meme tokens does not apply to coins that were not consistent with the descriptions mentioned.
It also does not apply to products labeled as meme coins “in an effort to evade the application of the federal securities laws by disguising a product that otherwise would constitute a security.”
The meme coin sector – an innovation with much frustration
The meme coin industry has a collective $56 billion market cap and has been down by over 8% in the last seven days.
Scams have also been rampant across the segment, with many of the incidents being rug pulls, or projects that aggressively promote a token only to “rug” on investors after they’ve bagged gains from price surges.
For instance, the team behind U.S. First Lady Melania Trump’s Melania Meme (MELANIA) coin has dropped below $1 since its launch ahead of inauguration day last month.
Some people say investors who put their money on the meme asset were “scammed by the First Family.”
The more recent incident that caught the world by storm was the launch of the LIBRA meme coin, which Argentine President Javier Milei initially said should help drive the country’s economic growth.
Blockchain analytics firm Nansen recently dove deep into the token’s launch, revealing how the meme coin surged to a staggering $4.55 billion market cap only to plunge to around $200 million in two days after Milei pulled support for the coin.
Most of the traders in the coin ended up with realized losses, compared to just a few winners who were able to take home millions before the meme coin plummeted.