This article explores why, despite a favorable backdrop of technology, policy, and market conditions, Web3 still lacks breakthrough applications. It analyzes the constraints imposed by unclear regulations, particularly the SEC's classification of crypto assets through the Howey test, while explaining why meme tokens have instead become star assets in this environment. Finally, the article looks forward to potential policy shifts with the Trump administration's arrival and new trends in on-chain value distribution in Web3, providing readers with a forward-looking assessment of opportunities in the next cycle.
I wonder if anyone has noticed that over the past year, aside from Bitcoin and meme tokens performing well, projects in other Web3 sectors have shown mediocre results. Logically, from a technical perspective, the infrastructure of Web3 has become increasingly mature, with the rise of layer-2 chains and new public chains sufficient to support larger-scale applications; from a policy perspective, the approval of Bitcoin and Ethereum ETFs has indicated a shift in institutional and governmental attitudes towards the Web3 industry; and more and more individuals and businesses in the market are looking forward to transitioning from Web2 to Web3. Yet, even so, why have we still not seen any breakthrough applications emerge?
Unclear policies are the biggest bottleneck.
One significant reason is the lack of clarity in policies. For a long time, regulatory lag and vague standards have trapped the development of the crypto industry. The U.S. Securities and Exchange Commission (SEC) is a typical example. The SEC has not provided clear rules for the industry through explicit legislation but has replaced regulation with litigation, using the Howey test from 1946 to classify and manage crypto assets. Those targeted are classified as "securities," leading to hefty fines. According to the Howey test, many Web3 projects can be defined as securities as long as they involve business and practical applications.
What is the Howey test?
The Howey test is the core basis for the SEC to determine whether an asset is a security, requiring the following four conditions to be met:
- Investment of money: Investors invest money in a project or entity;
- Common enterprise: The funds are pooled and managed by a common enterprise or goal;
- Expectation of profits: Investors expect to earn profits from the investment;
- Efforts of others: The profits primarily depend on the management or operation of the project initiators.
For example, in the SEC's lawsuit against Ripple, it was argued that XRP is a security because investors expect to profit from Ripple's operations, and the realization of those profits relies on the efforts of the Ripple team.
Why are crypto projects reluctant to be defined as securities?
In the Web3 world, most projects are unwilling to be classified as securities for several reasons:
- High compliance costs: Once classified as securities, project teams must adhere to strict registration, disclosure, and ongoing reporting obligations, which can be burdensome for startups.
- Liquidity restrictions: Securities can only be traded on regulated exchanges, severely affecting the liquidity and market demand for tokens.
- Conflict with decentralization ideals: The core of cryptocurrency is decentralized governance, while the securities identity requires a single entity to bear legal responsibility, which contradicts the community-driven model of Web3.
- Increased barriers to user participation: Securities laws impose strict qualifications on investors, potentially excluding ordinary users and reducing community engagement in projects.
- Potential legal risks: If a project is defined as a security and fails to comply, it may face lawsuits, fines, or even shutdowns.
Due to these reasons, many projects go to great lengths to emphasize "decentralization," even deliberately avoiding any practical functionality for tokens, ultimately leading to the phenomenon of "projects and tokens being two separate entities."
Why have the least valuable memes become stars?
Web3 projects cautiously avoid regulation, resulting in many valuable projects being unable to materialize, making it difficult for investors to gain returns from these projects. In contrast, meme tokens, which are almost entirely driven by sentiment and community, have evaded the definition of securities due to their decentralized nature and lack of reliance on practical applications, becoming objects of market pursuit. This phenomenon of "the least valuable tokens" becoming stars highlights the contradiction between the current regulatory system and Web3 innovation.
Policy shifts under the Trump administration
This situation may change with the arrival of the Trump administration. From his family's involvement in the issuance of meme tokens to his supportive attitude towards innovative industries, signals of friendliness towards the crypto industry have emerged. New regulatory policies may become clearer and more defined, potentially ushering the crypto market into a new "dividend era."
In the future, the scope of value sharing in on-chain applications is expected to expand significantly, with more projects distributing profits to token holders through revenue sharing or treasury fund models. Especially in the DeFi sector, protocols may directly distribute income to users, and the combination of AI and crypto will explore models for token burning and value accumulation.
In conclusion
Currently, the development of Web3 is severely constrained by unclear policies and regulatory lag, but the growth of technology, market, and user demand has never ceased. We believe that as regulations gradually clarify, Web3 will usher in a new explosion. In this process, "decentralization" and "value distribution" may be the most noteworthy keywords, which could also bring new opportunities for investors.
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