Proper disclosures are fundamental to investor protection. Nowhere is that more evident than in the digital asset space. From the collapse of Luna to FTX, recent crypto failures have shown that industry disclosures do not adequately inform and protect investors.
Securities and Exchange Commission (SEC) Chair Gary Gensler noted last September that crypto investors “lack fundamental disclosures about the crypto assets themselves and the firms who execute their trades and custody their assets.” In December, the SEC released guidance requiring companies handling crypto assets to disclose their risk exposure.
While self-disclosures are a step in the right direction, digital asset issuers and intermediaries still aren’t doing enough to provide the proper transparency to investors. Any such disclosure requirements must be grounded in fundamental regulatory checks and controls, while also being flexible enough to accommodate new models of business and governance. This is where OTC Markets Group can play an important role.
The world’s largest digital asset investment vehicles trade on our markets. These securitized products help investors gain exposure to digital assets through broker-dealers and investment advisors operating within a robust framework of state and federal securities laws. We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on our Alternative Trading System (ATS). While it will be some time until the regulatory framework and infrastructure develop, we believe our markets are well-positioned to be part of new trading, data, and disclosure solutions for these securities.
We have always employed a disclosure-based model—reflected in our tiered market structure that recognizes a variety of public reporting standards. The digital asset trusts on our markets each provide robust disclosure to U.S. investors pursuant to SEC Rule 15c2-11. The rule applies to brokers trading over-the-counter (OTC) equity securities and requires issuers to make accurate, up-to-date information publicly available under a flexible disclosure framework designed for different types of issuers.
If certain digital assets are in fact securities, they would be classified as over-the-counter equity securities subject to Rule 15c2-11. Some crypto market participants already understand the relevance of this little-known rule. In its 2022 petition for rulemaking, Coinbase asked the SEC “how would Rule 15c2-11 apply to broker-dealers facilitating trading in digital asset securities?” If crypto intermediaries are serious about regulation, they should go a step further and specifically encourage issuers to provide information under Rule 15c2-11.
Rule 15c2-11 contains a “catch-all” provision for non-SEC reporting companies that could be an appropriate disclosure tool for many crypto securities. The “catch all” disclosure requirements apply to non-SEC reporting companies and set forth fourteen discrete pieces of information that an issuer must publish annually: including a description of the business, a list of company insiders, and financial information. OTC Markets Group’s issuer compliance team reviews disclosure published by thousands of publicly traded companies under this catch-all standard. While certain terminology under the rule may not be consistent with crypto issuers, the underlying concepts are the same (Rule 15c2-11 calls for “the total amount of securities outstanding,” Coinbase calls this “circulating supply”). To the extent that there are gaps between the Rule 15c2-11 catch-all requirements and digital asset disclosure availability, the SEC could issue no-action relief accommodating any differences and providing a phase-in period for the industry to come into compliance, as it has done recently with fixed income securities under 15c2-11.
While many token issuers and DeFi organizations claim to be outside the bounds of traditional corporate business structure, that does not put them outside the scope of public disclosure obligations. Many of these organizations are controlled by a handful of individuals who should be disclosed as insiders, as they may have outsized influence over the network and access to material non-public information. Even in a truly decentralized organization, consensus mechanisms can still be leveraged to develop and produce standardized periodic disclosures for investors and users of the network.
Washington has been slow to provide clear regulations and advance comprehensive legislation and regulation. This leaves investors and the industry operating in an uncertain environment. As the crypto industry anxiously awaits clarity on the regulatory environment, proper disclosures can provide investors and regulators the transparency, assurance and protection needed to rebuild trust in the industry.
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