This post was originally published on this site
https://content.fortune.com/wp-content/uploads/2022/09/Crypto-Infrastructure-14.jpg?w=2048
One of the SEC’s biggest gripes with the crypto industry is lack of disclosure. Proper disclosures are a rite of passage for publicly traded companies but for crypto projects—many of which have tokens in the public realm—the practice is typically an after-thought at best.
Not only is there a lack of common standards when it comes to crypto disclosures, but many projects’ attempts at them are marred by 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 elevate the quality and frequency of their reporting requirements. Token-based projects can no longer live in the wild West side of the business world because competent regulators are starting to demand higher standards from them.
The EU’s recent Markets in Crypto-Assets Regulations (MiCA) law is peppered with disclosure expectations. And last week, New York’s Attorney General James proposed sweeping draft legislation that targets the cryptocurrency industry with a focus on consumer protection. The bill seeks to make New York the nationwide standard bearer for the “protection, transparency, and oversight” of the cryptocurrency industry but, while it repeatedly calls for “disclosure,” it offers little in the way of specific measures.
When it comes to crypto projects, it’s fair to acknowledge they are not the same as traditional companies, and that tokens are not the same as securities. Therefore, it’s not realistic to simply transpose the SEC’s forms and schedules designed for public companies onto the crypto industry. Given the intrinsic peculiarities and innovations of crypto networks, the agency must 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 a Bitcoin, you are not a shareholder. But if you earn staking or mining rewards, are these equivalent to a dividend? It would be nice to have some clarity here. Meanwhile, the SEC should also develop crypto-specific disclosure rules for network security, attack vulnerabilities, governance rights, software update permissions, or algorithm changes.
More broadly, regulators must recognize that many tokens are a proxy to an underlying ecosystem, and they simultaneously exhibit hybrid properties of currency, essential utility, and certain rights. It is 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 would not only help keep projects accountable. It would also be invaluable 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 due to their public nature. But this is only partially true given that blockchain explorers like Etherscan are barely readable by the average person.
So what exactly would proper disclosures look like for crypto-based projects? Similar to their traditional counterparts, they need to include a mix of quantitative and qualitative narratives. Additionally, I can think of six specific criteria:
1. Token issuance, economics, and network utility. Explanation of tokenomics in layman’s terms and how token utility affects supply/demand. Full list of token allocations, to whom they are distributed, and exact vesting schedules.
2. Treasury positions. Everything related to operations including paying for people, services, or generating any type of revenue. This is the closest to actual financial statements.
3. Performance metrics. Success metrics the creators originally envisioned. Key dashboards that unequivocally display the health of the network against those metrics, including the variety of related revenues (e.g. gas, transaction, or minting fees).
4. Risks. All known and unknown risk vectors, including potential network attacks, consensus failures, algorithms hacking, smart contracts dependencies, models iterations, or others.
5. Material events. Any significant ad hoc developments, insider selling, team changes, failures, or successes.
6. Governance. How decisions are made, who makes them, and various boards or councils in place.
Token projects should not wait for regulators to dictate disclosure details to them. They will most certainly overshoot or get it wrong. The industry should make disclosure initiatives a priority. That will go a long way in converting token holders from hopeful speculators to informed investors.
Proper disclosures are crypto’s Achilles heel. If not dealt with, the entire industry is at risk.
William Mougayar has four decades of tech industry experience 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 Fortune.
