Formal Disclosures Are Coming to Token-based Projects and Protocols

I’ve just written an Opinion piece published in Fortune yesterday, entitled Public companies obey strict disclosure rules—it’s time for crypto projects to do the same.

In this piece, I argue the crypto industry currently lacks proper disclosure practices at the level that regulators (and serious investors) will expect in the future.

“No proper disclosures” has been a refrain used by the SEC in their attempt to paint the industry’s non-compliance.

You can read it on the above link (no paywall) as a preamble to my additional commentary on this topic.

I’ve poured over 3 recent significant legislations pertaining to digital assets:

• the EU’s Markets in Crypto-Assets Regulations (MiCA)
• New York State General Attorney’s Cryptocurrency Regulation Legislation
• Dubai’s Virtual Assets Regulatory Authority’s Virtual Asset Issuance Rulebook

Each one of these recently published regulatory actions mentions the disclosure aspect several times and offers some guidelines for meeting them. However, none of them were detailed enough, nor specific enough about the peculiarities of digital assets and emerging (or established) projects that depend on the token’s utility.

Last month, Paradigm published an excellent essay, The Current SEC Disclosure Framework Is Unfit for Crypto. Although it is clear the current framework and practices do not squarely apply, what would proper disclosures entail? That is where we should be focused, going forward.

Of course, several cryptocurrency projects claim to be sufficiently decentralized, and beg the question: are disclosures necessary? However, being decentralized is not a cop-out for the avoidance of responsibility to disclose comprehensive information about the performance and evolution of a given project.

My counter-argument here is that even the most decentralized tokens such as Bitcoin and Ethereum could benefit from more cohesive disclosures about their evolution via performance metrics and indicators to prove their market status.

Saying that a given protocol is open, therefore anyone can see their on-chain data is not enough, and certainly not a good reason for stopping to disclose a comprehensive view about the ecosystem. The problem with blockchain related data is that information is disjointed, tough to read and not cohesive enough for human comprehension or interpretation. Granted, a flury of analysts publish their own spins on given projects, but the quality of many such reports can be improved, and they don’t replace the requirement for base level data and information.

Furthermore, given the realtime nature of the blockchain, disclosures could be continuously available, and not a one-time regularly scheduled event. And the silver lining behind this approach is that decentralized protocols could disclose their performance autonomously, as I’ve explained in that previous blog post.

Disclosures don’t only protect consumers against excessive and unchecked promotion, they also allow for better correlation between success realities of projects and their market valuations. In essence, disclosures help make token holders and institutional investors better informed and more comfortable with digital assets.

The formalization of disclosures is coming to crypto projects, whether decentralized, centralized or nascent. We should better prepare for it and embrace it.