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Review Summary: An Exploratory Essay on Minimum Disclosure Requirements for Cryptocurrency and Utility Token Issuers

Published onOct 22, 2021
Review Summary: An Exploratory Essay on Minimum Disclosure Requirements for Cryptocurrency and Utility Token Issuers


Information asymmetries in financial markets are not a new phenomenon. In a recent poll conducted amongst 76 industry experts, a staggering 83% of participants stated they do not believe utility token issuers disclose enough information to their stakeholders. This essay provides actionable recommendations for disclosure that increase financial and non-financial transparency. These recommendations are valuable for utility token issuers, buyers, intermediaries, and regulators. Financial details include token issuer information, initial and current cash positions as well as token treasury information. Non-financial information includes contact information, project progress updates, and open-source software elements. We highlight exemplary token issuers and conclude with the expectation that increasing the amount of information-rich project disclosures should assist in the expansion of the blockchain industry in general. Initial evidence suggests that minimum disclosure best practices also positively affect cryptocurrency and utility token prices.

Paper Summaries

“Based on previous research into public financial markets, this paper argues that a similar disclosure regime (of certain financial and non-financial information) would increase investor trust and confidence and make cryptocurrency markets more efficient. The paper begins with an overview of the hodgepodge of regulatory regimes around the world. It then lists several specific types of information that should be disclosed and how often that information should be disclosed, and includes several case studies of projects that, in the view of its authors, have done a good job with disclosure (and have seen their token appreciate post-ICO).”

Author Comment: A brief clarification: We do not argue that a disclosure regime as we see it in today's traditional markets is suitable for utility tokens. Rather, our objective is to present a workable first step to disclosing certain key information to token buyers and the market. We aim to balance the associated effort for the issuer with the value these disclosures would create for interested parties.

“The essay provides actionable recommendations for financial and non-financial disclosure to improve transparency in digital asset markets. The central thesis is that ‘[i]f cryptocurrency and utility token issuers want to list their tokens on public markets, they should provide basic levels of transparency.’”

“The paper proposes suggestions for minimum disclosure requirements on cryptocurrencies and utility tokens.”

“This manuscript contributes specific policy directives for cryptocurrency financial disclosure. The first section of the manuscript provides a brief summary of the risks involved when information asymmetries are permitted in markets. The second section provides policy recommendations.”

Paper Strengths

“The paper provides a simple, uniform, and actionable set of disclosures that could be used to provide some predictability and consistency in an area with no global consensus.”

“The paper is to the point, well drafted and includes data to back up most the authors' claims. The topic is timely and has practical significance to token issuers that are easily implementable.”

“The paper is correct to highlight both the importance of disclosure, as well as the lack of disclosure and information asymmetries that are common in cryptocurrency markets today. Tying this into previous literature that demonstrates the importance of disclosure regulation and enforcement in traditional markets is a helpful comparison and provides useful context.”

Paper Critiques and Author Responses

“While the proposal provides a simple solution to an important problem in the digital asset markets, the concern is that the simplicity of your proposal may mask the underlying complexities of these digital assets. It may convey to prospective investors a false sense of transparency when all the issuer has done is to disclose only the basic details regarding the issuance. It is also unclear how and by whom the disclosures will be verified.”

Author Response: Thanks for highlighting this dilemma that we acknowledge. In our view, the global digital asset market, mostly unregulated today, is in its infancy. Regulators around the world are beginning to define how they want to risk-manage service providers and products in the markets. We believe that over-regulation has the potential to stifle innovation. Therefore we do not want to suggest a very comprehensive reporting framework, but we do like [a] "middle ground" approach. With our essay, we want to initiate a broader conversation and build on incremental successes over time, as the industry matures—this is where our main contribution stands. Please note: Compared to today's status quo, the disclosure of, for example, the bank account balance alone would already be a significant improvement. It would help interested parties to conduct more fundamental assessments. Unfortunately today token prices are primarily driven by behavioral factors (in the absence of relevant and meaningful data).

“The case studies (Tezos, Hedera, Algorand, Thorchain) are highly subjective and not empirically-based. The authors feel subjectively that these projects have set a positive standard for disclosure, but the argument would be much stronger if it were backed by more objective data. Furthermore, while correlation between this subjectively good disclosure and token price is indicated, there is no evidence for causation (and the paper doesn't mention this).”

Author Response: Thank you for this comment. To clarify: We did mark them as case-studies, not empirical evidence. They are examples of certain types of disclosures and our language reflects this.

“The paper would also be stronger if it addressed core questions of blockchain/cryptocurrency such as identity and enforcement regime. The authors quote from "A Cypherpunk's Manifesto" so I assume they are familiar with these concepts. To whom is a blockchain core team, project, or community accountable if they are not clearly within the jurisdiction of any particular existing regulator? What effect does decentralization have on disclosure and enforcement? Does a new regulatory regime need to be established? What might this look like? How would it operate?”

“The authors use ‘he’ for Satoshi Nakamoto. Since the identity/ies and therefore gender(s) are unknown, it is more suitable to denote Satoshi Nakamoto as ‘they.’”

Author Response: Good point. Consider this addressed with high priority.

“As to the Projects listed, the authors suggest that the appreciation of the token price since its ICO supports their finding that more disclosure leads to better token price performance. This assertion stands unsupported, and is anecdotal evidence at best. A more rigorous statistical comparison should be provided comparing those projects with projects that do not provide the data. Please note that [projects such as] Messari collect similar data from many leading projects and that those leading projects actually pay Messari to standardize the information.”

Author Response: We see a statistical comparison (one could use necessary condition analysis/NCA or a regression model) to explore how transparency/disclosures correlate with the token price as an opportunity for further research and definitely beyond the scope of an essay… We like the work [does] and are familiar with the data they collect from issuers. We propose to include a reference to this useful platform and mention that our recommendations are in line with what they have commenced doing. Please do note that there are some gaps between what messari collects and what we believe should be disclosed. For example, the (fiat) bank account balance.

“The paper assumes that token issuers always list their tokens on secondary exchanges actively, which regularly is not the case. It is not uncommon for a hyped token to be listed by an exchange (and this was even more so the standard in the past) without the initiative of the project. With the DeFi hype this is again the case. Further, the paper does not consider DEXs and listings of tokens on DEXs. Regularly, the persons listing tokens on DEXs have little to do with the token issuers.”

Author Response: This is an excellent detail to highlight, and you are correct. We propose to recommend that exchanges should collect the data outline in the essay before they list a new token. We believe this will also contribute to the (good) reputation of the exchange. We already highlighted that exchanges play a crucial role and can augment as proposed above. [Additionally,] the recent DeFi developments pose a challenge. We propose that this is an opportunity for further investigation

“Care should be taken to not make this paper US centric. Why oblige projects to list the financials in USD? Why not EUR, YEN, GBP, CNY? Here, the paper again assumes the project itself is listing the token on an exchange. This is regularly not the case, as exchanges list tokens on its own motion.”

Author Response: Thanks for this. Please allow us to clarify: We recommend to use USD as it is currently the most widely used fiat currency. Our intention is not at all to be US-centric. Most individuals are familiar with the US dollar. We hope to make it to compare for token buyers. In our research work that includes reviewing term sheets from various jurisdictions, we convert to US dollar for the same reason—ease of interpretability. Please also note that the majority of stable coins issued today represent the US dollar.

“The paper is missing a discussion of how federal securities laws apply to digital assets, including the SEC's recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta.”

Author Response: Thank you for this comment. As per our current understanding, global financial services regulators are not on one page with regards to the application of securities laws to digital assets. Some jurisdictions like Singapore and Switzerland are more in line with Howel et al.'s definition of a utility token (consumptive right for a product or service) than, for example, the SEC in the US that relies mostly on the Howey Test. Jay Clayton, at the time, stated that he had not seen any ICO that he would not consider being a securities offering. There is an implied assumption in our recommendations for utility tokens, and that is that they are not securities. We do acknowledge that our objective is a difficult one to achieve we wanted to create recommendations that are applicable across a variety of jurisdictions. We propose to include a discussion on SEC vs Etherdelta but would want to shy away from discussing all projects mentioned in your comment. Instead, we propose to add more information about additional jurisdictions, for example, Liechtenstein and Germany where there are, for example, (draft) laws for the recording of securities on the blockchain. We could also include essential points about the recent EU efforts that largely excludes securities and focuses on other types of digital assets.

“The weakest section of the paper is the second half, which provides regulatory recommendations. This section of the paper makes strong regulatory claims, which border on moral claims, but fails to provide strong justifications for specifics. E.g., the author recommends 48 hour response time for customer service, but why 48 hours, and why are “shorter response times… better?” Pre-critically, this strikes me as good, sound advice, but there is no defense of these claims beyond current industry norms. The practical examples are rich and interesting, but suffer from the same lack of argument. This appears to be a case of is-ought fallacy.”

Author Response: Thank you for this comment. With our essay, we try to start/contribute to the transparency conversation in fast-developing digital asset markets. Please note that our essay does not suggest that more rigorous empirical research should not be conducted in the future. We, therefore, want to propose adding a sentence that suggests such enquiry when we introduce the examples as a next step.

“[The authors state:] ‘Conceptually, utility tokens are to be spent in a community and hence should be issued by a foundation rather than a company.’ This is an assertion and no footnote is provided to support the claim. I do not see any reason why a foundation would be better suited for an issuer of utility tokens than a for profit company. Also please note that at a corporate law level there is often not much difference between a Swiss foundation (used for profits) and a Limited company incorporated in Delaware or elsewhere.”

Author Response: With regards to the foundation / for-profit discussion: We will add [and] reference a paper that agrees with our point of view in a footnote as per your suggestion. Our main point here is rather ideological and stems from the purpose of issuing a utility token—redemption for products or services. Foundations are legal entities that can represent such interests of a community nicely. For-profit entities make token holders more akin to ‘investors’ rather than consumers. This topic is discussed by scholars, regulators and practitioners alike. To our knowledge, no consensus has been achieved yet.

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