The Limitations of SEC Disclosure in the Crypto Era
Venture capital firm Paradigm has published a policy piece calling for a new approach to disclosure requirements for crypto assets. The article highlights the fundamental differences between crypto assets and securities, arguing that the Securities and Exchange Commission’s (SEC) current disclosure framework is unsuitable for the unique characteristics of the crypto market.
Differences Between Crypto Assets and Securities
In traditional securities markets, legal entities issue stocks and bonds, which represent a legal claim against the assets and profits of the company. The SEC’s disclosure framework for securities is tailored to these centralized entities, requiring detailed disclosures about the company’s history, operations, financial statements, leadership, risks, and other information relevant to investors.
However, the decentralized nature of crypto assets means this framework fails to adequately inform crypto asset users and investors.
The article argues that crypto asset markets differ significantly from securities markets and require a different regulatory framework with disclosures tailored to their unique nature. Such a framework must take into account that crypto assets exist independent of the entity that initially sold them in fundraising transactions, that they can accrue value differently than securities, and that they operate, trade, and settle on a very different technology stack than that used for the trading of securities.
Despite the SEC Chair’s claims of regulatory clarity for crypto projects, the agency’s failure to provide actionable guidance on when transactions involving crypto assets are securities transactions and what type they are has created uncertainty in the market. This uncertainty makes it impossible for projects to conclusively determine when registration is required and how it should be effected.
Paradigm argues that the SEC’s insistence on applying an ill-fitting disclosure framework to crypto assets will ultimately harm users, investors, and the market generally. The agency’s brute-forcing of crypto into a traditional disclosure regime will result in the quality of crypto assets degrading over time, leading to harm for market participants.
The article concludes that the SEC must work with the crypto industry to develop tailored disclosure requirements that provide users and investors with the information they need. The agency’s catchphrase of “come in and register” is not a substitute for a thoughtful policy that considers the unique characteristics of crypto assets.
In conclusion, the SEC’s current disclosure framework is inadequate for regulating the crypto market due to its fundamental differences from securities. While the SEC has been unrelenting in its efforts to regulate crypto, it has failed to recognize the unique qualities of the market and the need for tailored regulatory frameworks. Instead of attempting to force crypto into an ill-fitting disclosure regime, the SEC should work with the industry to develop specific disclosure requirements that provide crypto users and investors with the information they need.
Failure to do so could result in a degradation of the quality of crypto assets and harm to users, investors, and the market as a whole. It is time for the SEC to radically change course and embrace a more thoughtful policy toward the regulation of the crypto industry.