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One of the SEC’s biggest complaints about the crypto industry is the lack of disclosure. Proper disclosure is a rite of passage for publicly traded companies but for crypto projects—many of which have public tokens—the practice is often an afterthought at best.
Not only is there a lack of common standards when it comes to crypto disclosure, but many attempts at its projects have been marred by a lack of transparency, opaque performance metrics, and abundant information dissymmetry.
If bona fide token projects or blockchain protocols want to be respected, they need to raise the quality and frequency of their reporting requirements. Token-based projects can no longer live in the wild West of the business world because competent regulators have begun to demand higher standards from them.
The recent EU Markets on Crypto-Assets Regulations (MiCA) The law is replete with disclosure expectations. And last week, Attorney General James of New York suggested sweeping draft law which focuses on the cryptocurrency industry focusing on consumer protection. The bill seeks to make New York the nationwide standard bearer for “protection, transparency, and oversight” of the cryptocurrency industry but, while it repeatedly calls for “disclosure,” it offers little in the way of specific steps.
When it comes to crypto projects, it is reasonable to recognize that they are not the same as traditional companies, and tokens are not the same as securities. Therefore, it is not realistic to simply transfer SEC forms and schedules designed for public companies to the crypto industry. Due to the intrinsic peculiarities and innovations of crypto networks, the agency should consider disclosure rules tailored for the industry.
For example, crypto projects do not have revenues or equity ownership in the same way that traditional companies do. If you hold an Ethereum token or Bitcoin, you are not a shareholder. But if you get staking or mining rewards, does it amount to a dividend? It would be nice to have some clarification here. In the meantime, the SEC should also develop crypto-specific disclosure rules for network security, attack vulnerabilities, management rights, software update permissions, or algorithm changes.
More broadly, regulators must recognize that many tokens are a proxy of the underlying ecosystem, and they simultaneously reflect the hybrid properties of currency, essential functionality, and certain rights. It’s a new world and it doesn’t make sense to try and shoehorn crypto into rules designed for another era.
A crypto-specific disclosure regime will not only help keep projects accountable. This is also important to consumers, many of whom decide to buy cryptocurrency tokens based on news, hype, and unverified promises.
You might think that blockchains are already transparent because of their public nature. But this is only partly true because block explorers like Etherscan are almost unreadable by the average person.
So what exactly does proper disclosure look like for crypto-based projects? Similar to their traditional counterparts, they should include a mix of quantitative and qualitative accounts. In addition, I can think of six specific criteria:
1. Token issuance, economy, and network usage. Explaining tokenomics in layman’s terms and how token utility affects supply/demand. The full list of token allocations, to whom they are distributed, and exact handover schedules.
2. Treasury positions. Everything related to operations including paying for people, services, or generating any kind of income. These are the closest to the actual financial statements.
3. Performance metrics. Success criteria originally envisioned by the creators. Key dashboards that clearly show network health against metrics, including various related revenues (eg, gas, transaction, or mining fees).
4. Risks. All known and unknown risk vectors, including potential network attacks, consensus failures, algorithm hacking, dependencies on smart contracts, model changes , or others.
5. Material events. Any significant ad hoc developments, insider sales, team changes, failures, or successes.
6. Management. How decisions are made, who makes them, and different boards or councils in place.
Token projects should not wait for regulators to dictate the details of their disclosure. They are sure to overshoot or get it wrong. The industry must make disclosure initiatives a priority. That will help convert token holders from hopeful speculators to informed investors.
Proper disclosure is the Achilles heel of crypto. If left untreated, the entire industry is at risk.
William Mougayar has four decades of experience in the tech industry and is the author of The Business Blockchain. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Good luck.
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