The Breakdown - The Importance of the Token Transparency Framework

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Sunday, June 22nd, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly. All right, friends, back with another Long Reeds episode. And this week is something that I think is very cool. A couple of weeks ago, I saw Jason Yanowitz, who is of course the co-founder of Blockworks,

Starting point is 00:00:48 tweet about how they were going to release something soon that about half of people would love and half of people would absolutely loathe. I was intrigued, but rather than just asking Jason on Slack what it was that they were building, I thought I would be surprised along with the rest of you? Well, it turns out, the answer was something called the token transparency framework. On June 18, Yanowitz tweeted, token markets are broken. We believe the solution is token disclosures. No one else wanted to build it, so we took it on. It's a massive endeavor, but one that I genuinely believe will push the industry forward. Stoke to unveil the token transparency framework are standardized open-source disclosure framework. This will go down as our most important

Starting point is 00:01:28 contribution to the industry. So first, let's read a short piece by Byron in the breakdown newsletter called Crypto doesn't have to be a market for lemons. It sets a bit of a backdrop on the whole initiative, turning it over to 11 LabsMe and then I will be back. In his 1970 paper The Market for lemons, economist George Akroloff explained what happens when sellers have more information than buyers. In the market for used cars, for example, the odds you'll get a lemon are disproportionately high, to an asymmetry in available information. Because buyers can't tell good cars from bad ones, they end up trading at the same price, a price that's too low for a good car and too high for a bad one. Owners of bad cars knowing what they have are therefore incentivized to sell, usually to buyers

Starting point is 00:02:14 who can only guess what they're buying. This floods the market with lemons. Gresham's law has made a modified reappearance, Akrolov warned, for most cars traded will be the lemons, and good cars might not trade at all. The result is lower quality for buyers and a market. market that slowly eats itself. It is quite possible, Akarlov wrote, to have the bad driving out, the not-so-bad, driving out the medium, driving out the not-so-good, driving out the good, in such a sequence of events that no market exists at all. This may be where crypto is heading, too. Liquid token investors are concerned that tokens are becoming a lemon market, Felipe Monte-alegré told the Empire podcast this morning. That might seem surprising given that blockchains are inherently

Starting point is 00:02:52 transparent, but that doesn't mean there's nothing for crypto projects to disclose. One argument against regulating tokens has always been that there's nothing to regulate. Regulation is primarily about disclosure, and in crypto, everything you'd need to know about a fully decentralized project is theoretically disclosed on-chain. But few projects are fully decentralized. For all the rest, highly price-relevant details like lockups, market-making deals, and OTC transactions remain opaque. Even the most basic things like how much revenue a project earns or how many tokens exist are often difficult to determine. The primary sellers of any given token, typically the token's creators, know all these things, of course. That asymmetric informational advantage may be turning

Starting point is 00:03:36 crypto into a market for lemons. But perhaps not for long. This morning, Blockworks launched a token transparency framework that will encourage token projects to eliminate the informational advantage crypto sellers have over buyers simply by telling buyers everything they need to know. This is the premise of all securities regulation. U.S. regulators like to say that their goal is protect investors, but their job is simply to inform them. It may be the most important job in markets. Before the SEC was created in 1934, investors had so little information about companies and the equities they issued that most didn't bother with the stock market. They bought bonds instead, knowing at least that companies were legally bound to pay them back.

Starting point is 00:04:17 Those who did try their luck in the stock market spent most of their time attempting to second guess what a company's insiders might do next because the insiders were the only ones that knew anything. The introduction of securities regulation and insider trading laws was an attempt to correct this by creating at least a perception of fairness that would encourage broader participation in stock markets. Forward-thinking companies and exchanges welcomed their regulators, knowing that if people didn't think the investing game was fair, few people would play it. Just visit any schoolyard playground to see how long an unfair game will last. But investing is more than a game, of course, so the stakes were much higher. If capitalization,

Starting point is 00:04:55 is to be maintained, NYSE President Emil Schramm told Time Magazine in 1941, the stock exchange has to be accepted by the public, a place where we can raise the capital we need. We have to get people out of the idea that the exchange is just a big gambling den. It seems to have worked. An estimated 62% of U.S. adults now own equities, first less than 3% in the 1930s. With luck, Blockworks Transparency Framework could do something similar for crypto. Dan Smith describes the framework he helped create as a crypto-native S-1, referencing the exhaustive IPO filing in which the SEC compels companies to divulge every possible thing a prospective investor could possibly want to know. And that is pretty

Starting point is 00:05:36 much the SEC's entire job. Regulators don't pass judgment on whether a stock offering is good or bad, only that a company is sharing enough information to allow investors to make that determination for themselves. Blockworks Transparency Framework is an important step in the same direction. To prevent crypto from becoming a market for lemons, buyers just need to know what sellers do. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been

Starting point is 00:06:20 innovators at the intersection of tradfi and crypto. And one of the benefits for a lot of us is that grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Okay, so like I said, back to real NLW here, appearance piece provides an intellectual background and framework for this. But what exactly is the initiative? Well, for that, I'm going to read, and I'm going to do this one personally, not with AI, the thread through which Blockworks announced it. They write, token markets are broken and suffer from information asymmetry

Starting point is 00:07:07 and hidden risks. We're changing that. Introducing the token transparency framework, a new standard for leveling the playing field. Most tokens are characterized by extreme opacity. Often, critical information is fragmented and hidden deep in Discord chats at best. At worst, it is only available to well-connected and powerful insiders. This framework fixes this, enabling a flywheel that elevates our industry. They then show a flywheel where issuers elevate their compliance with transparency. Transparency builds confidence, confidence invites broader investment in transparent tokens, and investor participation rewards transparent issuers, feeding back into a positive feedback loop. Continuing on, Blockworks writes, designed as a one-time-time-time-

Starting point is 00:07:48 filing, the framework focuses on 18 criteria, critical for understanding any token, including supply schedules, market maker and exchange listing agreements, related party transactions, revenue streams, the relationship between equity and token, foundation token allocations, off-chain entity structures. The framework is open source, grassroots, evolving, and collaborative. Over the past weeks and months, we've leveraged feedback from project teams, liquid funds, venture funds, and regulators to build a standard that is fair, objective, and most importantly evolving. The framework seeks to dramatically change industry disclosure standards. Our auditing team is already seeing new information being brought to market and disclosure standards

Starting point is 00:08:25 changing in real time. So how is this received? Well, the short answer is good. Yenowitz followed up from his earlier tweet saying, I was wrong about 50% loving and 50% hating. In nearly eight years of blockworks, we've never had a launch like this. It's almost like the industry is sick of backroom games and actually wants transparent markets. What a concept.

Starting point is 00:08:45 Thank you all for the support. He also added that they had seen 50 or more inbound submissions in a day. Transparent tokens, he argues, want to separate themselves from shady tokens. The timeline for investors and exchanges demanding transparency just got pulled forward. So look, here's what I have to add about this. Crypto is no longer some tiny little backwater industry that can avoid the normal things that industries have to do. In general, the crypto industry is also a group of people who prefer less rather than more regulation. Well, guess what brings more regulation? That's right, bad behavior. When things happen that hurt consumer investors, the government gets involved. And a great way to

Starting point is 00:09:24 make it so that it doesn't get to that point is voluntary standards and self-regulation, where the industry takes the lead in saying what it believes the norms should be. All of the information that is in this token transparency framework is duh obvious stuff that should be easy for issuers to provide, and that investors should demand to know. It's one of those things that I think in retrospect will look so obvious we'll have a hard time remembering when it didn't exist. I say this not just because this podcast is a Blockwork show, because I genuinely believe it, this is exactly the type of thing that I want to see from this industry, as it evolves away from what it has been in the past. Great job to everyone at Blockworks who worked on this,

Starting point is 00:10:03 and good on you to the dozens and dozens of tokens that are jumping on this new opportunity. However, for now, that's going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - The Importance of the Token Transparency Framework

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.