A few months ago, a Canadian teenager did something crazy. He created his own cryptocurrency called Gen Z Quant. It wasn’t intended to be a serious project, just a fun memecoin. For those wondering what memecoins are, they’re basically cryptocurrencies inspired by internet jokes, pop culture, or social media trends, like Dogecoin, you know. They don’t have a real-world use case, but people buy and sell them anyway, hoping to make some quick cash. These coins can raise or lower their prices in an instant, making them extremely volatile and risky.

Gen Z Quant was no different. The teenager launched the coin and then bought 51 million of them, about 5% of the total supply, for just $350. Then he did something smart. He started live streaming on a website called http://Pump.Fun , a platform that makes it incredibly easy to create and distribute memecoins. Before that, launching a cryptocurrency was complicated and expensive, but http://Pump.Fun has changed the game.

But there was a problem. While http://Pump.Fun tries to prevent direct scams (like rugpulls), it doesn’t stop creators from buying and selling their own coins. So while the youngster was livestreaming, viewers got excited and started hitting the ‘buy’ button on Gen Z Quant. And in just 10 minutes, the price had increased by a jaw-dropping 8,400%! That meant the youngster’s $350 investment was suddenly worth $30,000. And without wasting a moment, he sold it all and cashed out.

The result? A huge price drop. But the youngster wasn’t done yet. Seeing an opportunity, he quickly created two more memecoins, pulled the same trick, and walked away with a total of $50,000 in just one night. In the market, this is called a pump and dump — buy low, hype the stock, convince others to buy, and then sell high, making everyone lose. But in the crypto world, things are different. There aren’t many rules, and much of what happens exists in a legal gray area.

This gray area has only gotten bigger because the U.S. Securities and Exchange Commission (SEC) recently ruled that memecoins are not securities. Simply put, people who create or trade memecoins are not required to register with the SEC. So if you lose money due to a scam or price manipulation, you can’t cry to regulators. Sure, you can try to sue under regular fraud laws, but the strict protections that exist for stocks (like insider trading and pump-and-dump schemes) don’t apply here.

This stance has raised some eyebrows, especially considering how much scamming there is in crypto. For context, Chainalysis estimates that about 5% of all crypto tokens issued by 2024 could be rugpull, resulting in $2.8 billion in investor losses. And with numbers like that, you’d think the U.S. government would want to tighten up its regulations to boost investor confidence. So why doesn’t the SEC step in, you might ask?

Their decisions aren’t based on whims and whims. Instead, they’re based on something called the “Howey Test.” This legal precedent determines whether an asset is a security and should be regulated. And it comes from a 1946 U.S. Supreme Court case between SEC and W. J. Howey Co.

To put things in perspective, W. J. Howey Co. was a Florida corporation that sold citrus groves to buyers who then leased the land back to the corporation. And the corporation sued the regulator for not recording these leasebacks with the SEC. The SEC argued that this counted as an investment contract, and the court agreed. So how did the court decide this? It checked four criteria:

1. There must be an investment of money – Investors must put up money or something of value. In Howey’s case, investors paid for the land. (Memecoins pass this test because people buy them with money or other cryptocurrencies.)
2- It must be a joint venture – The funds must be pooled in a venture where the profits are shared, like the investors and Howey’s part of this citrus grove project. (Memecoins fail this test because they don’t involve a shared investment.)
3- There must be an expectation of profit – The investors must believe they will make money. Here, the investors expected to make a profit from the deal, which is why they leased the land back to Howey in the first place. (This certainly applies to memecoins!)
4- The profit must come from the efforts of others – The investment must be based on someone else’s work. In Howey’s case, the investors made money based on how well the company managed everything from planting to harvesting to selling the citrus products. (Memecoins also fail this test because their prices are determined by hype, not the performance of a business or team.)

Memecoins fail two out of four tests, so they are not considered securities. But here’s where things get tricky. The SEC’s previous Chairman, Gary Gensler, believed that most cryptocurrencies were securities. Guess what? He used the Howey Test, which we just reviewed, to prove his point. There were concerns that cryptocurrency traders would use loopholes to avoid regulation. But now the SEC seems to be saying something different. So what changed? Two things.

First, each cryptocurrency is unique. Take USD Tether (USDT), for example. It has a much stronger case for being considered a security than a memecoin. USDT is a stablecoin pegged to the US dollar, and its backing by Tether Ltd. can be seen as a joint venture. Furthermore, its value is dependent on the actions of Tether Ltd., meaning that the profits (or stability) come from the efforts of others. Therefore, it has a much higher chance of passing the Howey Test. This is why Gensler previously argued that most digital assets should be regulated.

Second, the SEC’s essence is the principle of form. This means that even if a cryptocurrency technically meets the Howey Test, the SEC can still decide that it’s not a security based on how people actually use it. For example, if a cryptocurrency is marketed as a utility token (used to pay fees or unlock premium features of the cryptocurrency), but investors are buying it solely for the purpose of making a profit, the SEC might say, “Sure, it looks like an investment, but it’s really just a collectible.”

All of this makes regulating crypto incredibly complicated. So yes, there may be a need for a separate governing body to properly oversee it. Until that happens, anyone can create a memecoin without worrying about violating securities laws. That’s exactly what the Canadian teenager did. After his Gen Z Quant show, he went back and launched two more memecoins called test and dontbuy. The names were clear warnings, but investors rushed to buy them anyway. And just like before, he made big money.