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 components. 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 anecdotal evidence suggests that minimum disclosure best practices also positively affect cryptocurrency and utility token prices.
Keywords: Asymmetric & Private Information, Blockchain, Cryptocurrency, Disclosures, Financial Markets, Governance, Information & Market Efficiency, Regulation, Transparency, Utility Tokens
JEL: D53, D82, G14, G18, G34, K22
Blockchain offers the potential to wholly transform global financial services and markets. An entirely new asset class does not often spring forth from the depths of a global recession that fits so well into many modern investment portfolios. But when Satoshi Nakomoto introduced Bitcoin , they birthed a new technology for creating economic systems based on cryptography. Imagine plunking down a few dollars to own a piece of the SWIFT Network or the TCP/IP protocol suite that powers the internet back when they were just a glint in a coder’s eye. Even just a modest share could have created generational wealth as those networks later blossomed into foundations of financial and informational flows today. Similarly, with cryptocurrencies like bitcoin, ether and the universe of distributed applications using utility tokens, the potential for global adoption could entice substantial price appreciation two decades hence. Of course, such prospects are fraught with risk, which makes it imperative that the teams working on these novel projects are more than transparent with their disclosures. In a recent poll conducted amongst 76 industry experts, 83% of participants stated that they do not believe utility token issuers disclose enough information to their stakeholders.1 This essay provides actionable recommendations for disclosures that increase financial and non-financial transparency by utility token issuers and for their buyers, intermediaries, and regulators, with a focus on but not limited to secondary markets.
Information asymmetries in financial markets are by no means a new phenomenon. Our essay relies on the economic theory of adverse selection . Continued poor levels of disclosure by projects would be seriously detrimental to the long-term success of digital asset markets. In fair markets, the adverse selection problem must be overcome by communicating the seller’s superior information accurately to the buyer . In their piece titled "Financial Regulation in the United States: Lessons from History,"  the authors suggest perfect regulation of the financial sector is "extremely unlikely." But one of the few recommendations they make based on their findings is increasing transparency.
To commence discussing transparency in digital asset markets, we briefly review definitions. A cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank . Examples include Bitcoin (BTC), Monero (XMR) and Litecoin (LTC). A utility token gives its holder consumptive rights to access a product or service . In an Initial Coin Offering (ICO), an issuer sells such cryptographically secured digital tokens to fund community and engineering development efforts. The objective is to build the product or service for token holders to spend their balance in the newly constructed economy or to participate in decision making through voting in the ecosystem. Utility tokens include the Basic Attention Token (BAT), Kyber Network (KNC), Chainlink (LINK), and Filecoin (FIL), to name a few examples.
Many blockchain projects leveraged the ICO concept to raise money with little subsequent obligation . Profit-seeking buyers accessed these tokens, either in their primary, via ICO, or secondary markets, via unregulated exchanges. While ICOs came out of nowhere to raise billions in 2017 and 2018 , global financial services regulators scrambled to initiate regulatory scrutiny. Each jurisdiction prepared their own, slightly different forms of regulation. Some, like trade hubs Singapore and Hong Kong, have adopted “fintech regulatory sandboxes” . Traditional tax havens like Malta and Lichtenstein have formalized legislation to create “regulatory certainty” around a “comprehensive regulation of the token economy”  . Larger jurisdictions take completely conflicting stances, with the United States Congress publicly chastising one of its most innovative tech giants for even considering developing its cryptocurrency . Mainland China vows to “seize the opportunity” to use blockchain, but not necessarily cryptocurrencies, to transform society as a whole  . Most recently, South Korea adopted a comprehensive anti-money laundering (AML) framework to both regulate digital asset exchanges and unleash blockchain investment . In short, there is no consensus on how to regulate these markets or even if it is possible. While other researchers have commenced describing the global digital asset regulatory landscape , such developments are ongoing and need to be tracked closely.
Crypto markets are certainly large enough to warrant investor and regulator attention. In January 2021, popular cryptocurrency website coinmarketcap.com reported a total of 8305 coins listed on exchanges that comprise to their dataset. The second most popular cryptocurrency data provider coingecko.com registered 6178 coins. During the period of January 2019 and January 2021, the total global market capitalization of these products varied widely between 111 and slightly above 1 trillion US dollars. Most digital assets of this cryptocurrency and utility token type exhibit high volatility amidst thin trading volumes. Yet, despite the extended market malaise from mid-2018 to the end of 2019, more cryptographic coins and tokens enter this market every day.
The markets for blockchain-based assets are not without controversy. On one extreme are the analysts who argue that most ICOs are a scam. For example, New York-based Satis Group argues in their 2018 report that 78% of ICOs were identified as scams. They take a “guilty until proven innocent” approach. However, a more statistically rigorous approach proves that prominent economists such as Nouriel Roubini exaggerate the number of ICO scams  . The other extreme argues that token-based capital raises are an essential part of democratizing access to funding. The initial bedraggled spasms of the ICO movement are just growing pains on the way to a new, open and wholly disintermediated financial system . However, as data from the initial spate of ICOs seasons, the analysis is grim. Though ICO projects may not have technically been scams, the propensity for founders to behave in ways that are contrary to the benefit of their token holders is troubling.
Hence the central thesis of this essay is that if cryptocurrency and utility token issuers want to list their tokens on public markets, they should provide basic levels of transparency. We hypothesize that such disclosure increases stakeholder confidence, enables more sound decision making and, most importantly, attracts new market participants.
The following recommendations aim to propel the industry forward, providing a guide for ecosystem and community-driven operating models to co-exist with current for-profit corporate models.2 Our recommendations are split into financial and non-financial categories and aim to resolve Akerlof’s adverse selection problem between issuers of cryptocurrencies and utility tokens and respective buyers.
Token issuers can learn from traditional markets. A review of the literature finds evidence suggesting that disclosure regulation and enforcement are foundations of well-functioning traditional markets, specifically a) the value accounting standards ; b) stronger financial markets regulation ; c) reduction of information asymmetries  ; d) increased disclosure levels ; and e) timely disclosure of annual reports . Several studies have investigated the value of providing voluntary information in equity markets in periods with no mandated reporting regulation. Researchers have even confirmed that firms with higher quality financial reporting experienced smaller stock price declines during the market crash of 1929 . Other researchers found an increase in liquidity after the SEC increased disclosure requirements . Brüggeman and colleagues find that especially smaller firms (OTC stocks) that are subject to stricter regulatory regimes and disclosure requirements have higher liquidity and lower crash risk . An important contribution to this discussion is the robust analytical work done by a group of researchers, that specifically evaluates ICOs, finding that raising funds is positively associated with the issuer’s voluntary disclosures . In the United States of America, former Securities and Exchange Commission (SEC) commissioner Dr. Cynthia Glassman states: "Financial transparency means timely, meaningful and reliable disclosures about a company's financial performance. Companies need to provide transparent financials to raise capital. Investors need transparent financials to make informed investment decisions. Therefore, financial transparency is important not only because it is the bedrock of our financial markets, but also because it is absolutely essential to today's investors" .
Some argue that early-stage ICO projects are more akin to a start-up than to a listed company. Disclosures in the primary utility token markets are often limited to the issuance of a (technical) whitepaper, information is disclosed in a simple agreement for future tokens (SAFT), and communication through social media . Still, those resources are vital indicators of quality to potential token buyers . These stakeholders include retail participants who are particularly vulnerable. Leading cryptocurrency exchange Binance recently issued a report stating that only 7% of contributed funds in crypto are from institutions .
Issuers of utility tokens and cryptocurrencies should report a simplified set of disclosures to create transparency in their public markets. These data points include token issuer information, initial cash position, current cash position and details with regards to token treasury.
Disclosing issuer entity details helps token buyers discern underlying motivations. Conceptually, utility tokens are to be spent in a community and hence should be issued by a foundation rather than a company . Issuer incorporation documentation should be shared. The functionality of the token should also be explained. These disclosures should be published before the ICO and again before the utility token or cryptocurrency is listed on a public exchange. The responsibility of that disclosure lies with the legal entity issuing the token or listing it on an exchange. In some jurisdictions—for example, Singapore—strict laws compel gatekeepers to undertake due diligence that bestows additional confidence upon token buyers . The documentation should be notarized whenever it is not government issued and should be published on the issuer website and the exchange website. These disclosures hold the founding team accountable, creating value for the token holder.
Today, the industry over relies on third party data providers like ICObench to scrutinize financial data. This information is often incomplete and inconsistent across offerings, making it impossible to compare them. Issuers should disclose the total amount received from their initial offering in US dollars, as well as the amount retained in cryptocurrency as compared to converted into fiat currency. This data should be disclosed on the day when the fundraise concludes and again one day before the exchange listing takes place. Given the volatility of the cryptocurrency markets, those numbers could be vastly different. The responsibility of that disclosure lies with the legal entity issuing the token or listing it on an exchange. This data should be audited and then published on both the issuer and exchange websites. Disclosing these data points enables prospective token buyers to make more informed decisions.
The amount of fiat funds available to the project heavily influences the project’s risk profile because cryptocurrencies are not widely accepted as a means of payment with landlords and other suppliers. The respective amounts currently held in fiat currency and cryptocurrency should regularly be disclosed. The responsibility of that disclosure lies with the legal entity issuing the token. This data should be audited and then published on the issuer website and the exchange website. Disclosing these data points enables prospective token buyers to make more informed decisions.
Utility token and cryptocurrency issuers sometimes retain significant stakes in their own token. This token treasury is allocated towards community development, software development, user incentivization and team compensation. The wallet addresses associated with the treasury should be disclosed. Interested stakeholders could then directly investigate blockchain transactions in real time via a blockchain explorer. With this disclosure, the issuer decreases the risk of fraudulent activity. Although industry transparency advocate Messari requires projects that join their Messari Registry to provide this information, many smaller projects do not want to expend the resources, both monetary and labor-wise, to comply with their robust framework. Other more basic information service providers, like CoinGecko and CoinMarketCap, request but do not mandate this type of disclosure before listing a utility token in their database. Our nuanced position is that we expect a granular accounting of token distribution and usage to become an industry norm, without it becoming a chore of compliance.
While an accurate and up-to-date financial assessment of a project is essential, access to information that enables the evaluation of more qualitative factors is also critical. Projects should clearly and consistently provide information-rich communication. This essay outlines three elements for improving non-financial transparency.
Stakeholders should be confident in their ability to honestly inquire about the project. Multiple social media channels are often opened for an ICO and then virtually abandoned. If project leadership is responsive to their Telegram community chat members before raising money, that responsiveness should remain afterwards. Community managers in such chats should be available for at least eight hours a day. Telegram and e-mail are the minimum customer service channels. The longest any token holder should wait before a considered response is 48 hours. Shorter response times are better, and should especially be expected during the business week. In other words, the customer service level should at least be in line with that currently found in traditional financial services firms. For example, Binance’s TrustWallet maintains a Twitter account, @TrustWalletHelp, that responds quickly to customer queries. BlockFi, a US-based crypto wealth management solutions provider, even provides a landline phone number. On the whole, feedback from engaged community members benefits projects.
Stakeholders should be enabled to make informed decisions based on project progress. Because token value in the long run depends on network or protocol usage, the team should regularly provide updated information about meeting short-term and long-term goals. The project should relate on its blog, at least on a monthly basis, the specifics of software development activities while working towards these milestones. Management should at least bi-annually provide higher level insights related to technical, business and community development. Although initial roadmaps are typically included in the whitepaper, and should serve as a basis for initial project commentary, those roadmaps should be updated annually. They should include specific deliverables and the timeframes in which they are expected. To ensure accountability, management summaries and successive roadmaps should be stored on version-controlled repositories, such as GitHub, as PDF documents. Mapping out a timeline for the execution of the team’s ideas renders a complicated technical process into terms that mostly non-technical investors can easily understand.
Within the past decade, the open source paradigm has proven its ability to bootstrap network effects in the developer community. After all, tooling that is not used cannot be broadly adopted. By definition, communities incentivized by a utility token should be powered by open source code. As such, a publicly accessible software repository, with code and associated documentation on GitHub or GitLab, should be maintained. Code should be pushed regularly so that savvy token buyers can compare the advancement of publicly available software versions to published roadmaps. Studies show that actively maintained git accounts are positively correlated with project success .
The following anecdotal examples serve as models for the industry, aspiring blockchain founders and their prospective token buyers.
The Tezos Foundation publishes a progress report  twice a year to update their community on its financial and non-financial situation. In the financials section, the team declares essential data such as total assets held (split by asset types such as Bitcoin, fiat and their own XTZ coin—i.e., the treasury—and other investments). The report includes details on project activities, research and development, core development-related grants, ecosystem grants and total capital disbursed. In the non-financial section of the report, the foundation board reports on several topics. The team discusses industry adoption and a pipeline of future engagements. They share a list of key global stakeholders and network validators (also called “bakers”). The foundation also creates transparency on the governance put in place by describing various committees. This type of disclosure sparks online discussion amongst stakeholders . Although not every party may agree with the reported data, the broader point is that such granular disclosure is a starting point for fertile discussion. The penchant for teams hiding such information, rather than the timely disclosure found at Tezos, is a feature of the young crypto asset marketplace we hope to see improve over time. In the case of Tezos’ XTZ token, the above-described disclosures accompany a ~525% return on the ICO price according to market data platform coinmarketcap.com as of late January 2021.
By sharing the professionally crafted meeting minutes of their governance council , Hedera provides a prescription for transparency on non-financial matters. Meeting minutes also clearly state attendees, suggesting superior governance that creates accountability even at the individual level. The meeting agenda includes qualitative topics such as platform features, an executive report, governance topics and a book of work. Hedera is a leader in providing financial transparency to their token holders as well. In a recent proposal to change investor terms for a Simple Agreement for Future Tokens (SAFT) agreement ex post, the organization openly disclosed their run rate and the nature of previous expenditures. While not all stakeholders might agree with the strategic decisions of the project, the transparency created is commendable.
Another positive example is the Algorand project . The team discloses the active wallets of Algorand Foundation on a website for the public to review via a blockchain explorer; for example the one hosted at https://algoexplorer.io. The team also publishes quarterly transparency reports  on their website. These reports include the total number of ALGO tokens in treasury as well as guidance on their future use and possible implementations of such changes. The report also discloses allocations for ecosystem building, venture capital and application development. Algorand even publishes the amounts allocated to the management of the token price, market making and token lending, for example, in their report.
Thorchain developers are anonymous except for the Project Lead. But, in all other respects, the project is extremely transparent. The team provides weekly “dev updates” and immediate disclosures of material information via its Medium blog. In addition, monthly treasury reports reveal the current cash position, denominated in fiat and cryptocurrency. Updates on the token treasury, which includes allocations of their own RUNE utility token for the community and operational reserves, are also provided. These disclosures are made specifically to provide insight into the current runway of the project. The project was also the first to conduct an Initial DEX offering (IDO) on Binance’s decentralized exchange . This event required a long list of disclosures including previous raise amounts, the price of tokens sold during those raises, and a precise overview of the evolution of token supply for the next five years. Material information, like selling blocks of RUNE from their treasury at the trailing market price, are shared in a timely manner . Token buyers seem to appreciate this information, as RUNE price has increased more than 12,300% since its IDO in July 2019.
The community-based economies that evolve around utility tokens and cryptocurrencies are an important future path of digital transformation. For such ecosystems to grow, the continual maturation of associated secondary markets is essential . Therefore, cryptocurrency and utility token issuers that want to list their tokens on public exchanges should provide basic levels of financial and non-financial transparency. 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, documentation and open source software repositories. Most token issuers do not set out to scam their token buyers. Issuers do exert considerable discretionary power over the funds entrusted to them . Adherence to the transparency recommendations in our essay provide a valuable touchstone for the relationship between the issuer and the token holder by enforcing accountability.
The above recommendations represent, in our view, the minimum requirements for disclosure. Service providers that support stakeholders with detailed reporting capability at a reasonable cost are emerging. Accounting-focused Verady is one example . The wholesale importation of practices found in public markets is neither advised nor warranted. Instead, we observe the utility token and cryptocurrency markets with fresh eyes and a view to support issuers, their intermediaries and buyers alike. For the benefit of these developing markets, there are many opportunities for improvements ahead. They include standardization and development of other valuable reporting requirements. We expect that increasing the amount of information-rich project disclosures should assist in the expansion of the blockchain industry in general, and may have a positive effect on token prices. Initial evidence from Tezos and Thorchain suggest this association. It does, however, not replace a rigorous empirical analysis. Exchanges have a responsibility in creating more transparency, too. We would hope that they incorporate our recommendations into their listing rules. This guidance is especially important when they list tokens without the involvement of the cryptocurrency or utility token issuer’s consent or collaboration.
We also acknowledge two recent trends. First, utility token projects exist that do not raise external funds. In such cases the alignment of incentives and related reporting requirements might differ. Understanding this dynamic in detail represents a research opportunity. Second, the decentralized finance (DeFi) ecosystem includes decentralized exchanges (DEXes) where anyone can list a token. In the context of minimum disclosures, this represents an additional challenge, and we encourage fellow researchers to investigate this area in the future.
We are actively engaged in creating more fair, transparent and inclusive cryptocurrency and utility token markets. Let us proceed together apace. Onward !
We would like to thank (i) David Lee Kuo Chuen, residing in Singapore, Professor at SUSS; (ii) Patrick Schueffel, residing in Singapore, Professor at HEG-FR; and (iii) Josef Gregory Mahoney residing in Shanghai, Professor at ECNU; and (iv) the Managing Editor and the four peer-reviewers of the Cryptoeconomic Systems journal (MIT Press) for the useful discussions and inputs during the preparation of this essay.
Nicholas J. Krapels is with the International Graduate Program in Politics, East China Normal University, 3663 Zhongshan N. Rd, Shanghai, China, [email protected]
Daniel Liebau is with Rotterdam School of Management, Erasmus University, PO Box 1738, 3000DR Rotterdam, The Netherlands, [email protected]