Memecoins Are Increasingly Being Used to Exploit Retail Investors

The $4 billion collapse of the Libra (LIBRA) token, which was endorsed by Argentine President Javier Milei, is the latest blow to the sector

Memecoins, once viewed as community-driven digital assets, are increasingly being used to exploit retail investors, leading to a burgeoning number of scams and failed celebrity-backed tokens, ultimately sparking regulatory concerns.

The $4 billion collapse of the Libra (LIBRA) token, which was endorsed by Argentine President Javier Milei, is the latest setback for the sector, especially after eight insider wallets liquidated $107 million in liquidity, causing the token price to plummet by 94% within hours of its launch.

Highlighting the growing difficulties faced by regulators in policing the evolving crypto landscape, memecoin scams pose a significant regulatory challenge, stated Anastasija Plotnikova, co-founder and CEO of blockchain regulatory firm Fideum.

“Memecoins have transitioned from community-driven social experiments to a chaotic domain characterized by attempts at value extraction from retail investors. This includes opportunistic endeavors to capitalize on trending topics, generate hype, and convert coins quickly, often leading to fraudulent activities like rug pulls,” Plotnikova explained.

Investors will also need to differentiate between memecoins that can be viewed as genuine "collectibles" and "outright fraudulent activities" like rug pulls which are "not only unethical but also clearly illegal, with case law to support enforcement."

"In my view, these activities should fall firmly within the jurisdiction of law enforcement agencies," she added.

Further troubling revelations have emerged since the meltdown of the Milei-endorsed Libra token, namely that Libra was an "open secret" in memecoin insider circles and that some members of the Jupiter decentralized exchange knew about the token launch two weeks in advance.

This suggests that the exploitation of retail investors through memecoins is not a new phenomenon, and it appears to be a coordinated effort among insiders to deceive investors and siphon off funds.

However, despite the recent surge in memecoin scams and fraudulent activities, they are unlikely to impact emerging cryptocurrency legislation in the long term, according to Dmitrij Radin, the founder of Zekret and chief technology officer of Fideum.

This is because crypto legislation is usually built with a "long term" perspective in mind, rather than being based on recent events or trends, he explained.

Moreover, the Libra rug pull was different compared to the launch of the Official Trump (TRUMP) and the Official Melania Meme (MELANIA) tokens, with the latter two unlikely to trigger a regulatory response in the US.

"The Trump and Melania coins were launched on Uniswap, a decentralized exchange, and there was no liquidity mining or a specific group of people who were going to cash out. Anyone could participate and there were no misrepresentations or claims made by the candidates themselves. They were also launched in a relatively benign manner, with no hype or promises of riches being made.

"That’s why I believe that Trump and Melania coins might be taken in a different way than Libra, which was launched with a large-scale liquidity mining program and a coordinated effort to deceive investors," Radin concluded.