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Ep 41: Disclosure Guidelines for Tokens
48 Plays21 days ago
Legal experts Lilya Tessler (Sidley Austin) and Chris Brummer (Blueprint) pull back the curtain on new token disclosure guidelines that could transform crypto markets. This episode gets real about what transparency actually means for blockchain's next chapter—without the jargon.
Check out two versions of the proposed guidelines here:
October 21st: https://global-dca.org/proposed-u-s-disclosure-guidelines/
Recommended
Transcript
Introduction to OWL Explains and Blockchain Topics
00:00:06
Speaker
Hello and welcome to this OWL Explains Hootenanny, our podcast series where you can wise up on blockchain and web3 as we talk to the people seeking to build a better internet. OWL Explains is powered by Avalabs, a blockchain software company and participant in the avalanche ecosystem. My name is Silvia Sanchez, project manager of OWL Explains and with that I'll hand it over to today's amazing speakers.
00:00:34
Speaker
All right. Welcome back, everybody.
Importance of Disclosure Guidelines in Blockchain
00:00:36
Speaker
Today, we're getting into something big, disclosure guidelines for a particular category of tokens. It's a very important step towards transparency and standardization in the blockchain industry. And who better to guide us through this than our special guests, Lily, Tesla, and Chris Brummer, some of the brilliant minds behind these proposed US disclosure guidelines.
00:00:57
Speaker
So just as a quick intro, Lily Tesler is a partner at the law firm Sidley Austin and head of the firm's global fintech and blushing practice. And Chris Braumer is a professor of law at Georgetown and CEO of Blueprint. And both Lily and Chris have been recognized thought leaders in this space, including on the topic of disclosures, which we'll discuss today. So hi, Lily. Hi, Chris. Great to have you here. Hey, it's great to see you or to hear from you. Hear you. Thanks for having me.
00:01:23
Speaker
Awesome. And I like to start my podcast honoring the core of I Will Explains, the explanation part.
Framework for Digital Asset Disclosure
00:01:30
Speaker
So to kick it off, could you please explain in very simple terms what these disclosure guidelines aim to achieve? What are they? What's the main goal?
00:01:39
Speaker
Okay, I'm happy to start with that. So the disclosures really is provides a framework for a proposed digital asset disclosure regime for only one type of category of tokens, although it with some modification could be applied more broadly to other types of categories of tokens. I also want to discuss what it's not. It's really not specific to any type of regulatory regime, nor does it bucket a token into any type of regulated asset.
00:02:05
Speaker
Rather, it's generic guidelines that can be applied across the board, including disclosures related to a token's network, the token itself, governance of a network, material participants in that network, and certain risk factors. So it's very broad and provides a good framework as a starting point for many.
00:02:23
Speaker
Yeah, you know we thought it was really, really important to to really bear down and think about the essential sort of key ingredients and what one needs to know to buy a token ah and and a crypto asset. you know We didn't want to get too bogged into sort of the regulatory box or where on the regulatory pie chart ah any particular instrument.
00:02:45
Speaker
Would fit that's a question that's obviously being hammered out as we speak, ah but but we still think that there are some basic informational items that really need to attach to some of these Assets and in doing so it it it could act as a flywheel for liquidity. It certainly is central and key to investor protection and And I think it would even help regulators do their job better, regardless as to what the ultimate regulatory outcomes end up being.
Differences from Traditional Securities Disclosure
00:03:18
Speaker
Great. Thanks for that explanation. And just following up on that, what are the key components that make these guidelines stand out from existing regulations? Like how do these specific guidelines differ differ from traditional securities disclosure requirements that that we already have?
00:03:32
Speaker
So um really, these guidelines, they're not intended to and are not regulations. It's really a framework within that can apply within existing regulations or potentially new regulations or legislation that's out there and being proposed by various legislature today. The guidelines do borrow from existing securities regulations, primarily because the US securities laws is really the only disclosure regimes that we have in the U.S. And so it borrows from that. However, the disclosures really don't focus on company-related information, which is what the U.S. securities laws are primarily focused on. It focuses on blockchain-related information that may be material to a potential either investor in this space, a user, or holder of that token.
00:04:19
Speaker
Yeah, one of the things that that you notice when you when you think about sort of legacy disclosure rules is that, for the most part, disclosure rules are, as Lee said, kind of kind of ah identified in securities ah law land, although there are I guess, a couple of really interesting um regimes in consumer protection. But but ultimately, when you when you think about what guides disclosure in capital markets, a lot of the work or initial initial work was done over in in securities law land.
00:04:53
Speaker
but That legacy disclosure stack doesn't necessarily um sort of speak to the particularities of blockchains. right So you know when you get to a traditional corporation, if you go back to 1933 and 1934, you're thinking about certain kinds of companies that um have existed for a while and they're they're trying to reach a certain kind of scale.
00:05:20
Speaker
and This is very, very different from what's happening ah with lots of on-chain ventures. And so we're asking questions not just about corporate governance, but about you know your blockchain governance. We're asking questions that really are designed to go to what um a reasonable investor or holder of an asset would probably want to know ah when having that asset. The kinds of questions that you ask are going to be very different from you know whether or not you know you're you're the Ford Motor Company looking to go public. right and and And so that kind of hard work was taken by the group to think about what what are the kinds of questions and the kinds of line items that um the traditional disclosure stack doesn't address, and then what are the kinds of questions that the traditional disclosure as ah stack may ask,
00:06:22
Speaker
but which may not necessarily be relevant um to a blockchain based company or a a token in in in particular. And you know that's a little bit of an intellectual exercise, but it's really important work and it's really foundational to how companies and regulators ah speak to each other and to themselves.
00:06:45
Speaker
Yes, indeed. and And that's a great point to clarify. And I liked what you mentioned earlier that these disclosures are not regulations. They are just a framework that can apply to these existing regulations. But let's get a bit wider now. I'd like to address why disclosures are are important. Like, why is it a big deal to disclosure disclose material information about about tokens?
Role of Disclosures in Financial Communication
00:07:06
Speaker
I think that that it's certainly clear that even when it comes to crypto assets, um you know there are lots of terms of of art ah that ah mean that sometimes people can talk past one another, even within the industry. And there aren't always the kinds of standards on which everyone can kind of hang their hat in order to be able to communicate effectively.
00:07:32
Speaker
and And I start with this even before you get into the questions as to whether or not um communications are are truthful or whether or not there are sort of material misstatements or omissions, as we will say, regulatory in communications. ah Disclosures ah have at least traditionally functioned as a kind of lingua franca and in industries. it's It's the medium through which ah different players in industry can communicate with each other and and ultimately cooperate and and to do deals and to ah grow their companies, their products, and their financial services.
00:08:09
Speaker
So disclosure is one of those bedrock issues in ah financial services. And when you move to financial regulation, it's also core as well. you know I think that the sort of initial um run at financial regulation focused on AML KYC rules. But what I always tell my students and what I tell other sort of market participants is that when you think about even on the financial regulatory side, you can almost think of it as like ah as a bit of a financial regulation, as a bit of a triangle. And at the very, very, very top of that triangle, you may have like the AML KYC, but really when you think about financial regulation, the the corpus of financial regulation is kind of divided between sort of operational rules. So if you think about like banks, like ah know your your your your capital standards so and and and the like,
00:09:00
Speaker
ah And then there's disclosure. you know How are companies, how are firms, how are fundraisers, entrepreneurs, and even regulators, how are they communicating? And and that's one of those elements that helps um industries and and and sectors grow, and and to grow safely ah for the people who are stakeholders and in those sectors. So so you know disclosure is one of those foundational things that you kind of have to have if you want to grow and and thrive.
00:09:34
Speaker
And I would also add, you know typically disclosures and material information are thought of from the perspective of what an investor may need to know to purchase the asset. But when we are putting this together with the group, one of the other areas that we thought would be important is material information for a user or developer on a particular blockchain to decide, is this the right blockchain? How can um the technology that I'm building or using thrive based on certain information associated with that blockchain? and and team and the protocol. So that to me, that's different than the way we typically use disclosures, but I think it's really important in this space.
00:10:11
Speaker
And that is so key. I'm so glad that really sort of back ah you know cleaned up my my comments there, because you know the the traditional way of looking at you know the reasonable investor standard of materiality, ah you know it it fits in some ways, but just presupposes um a very particular and limiting set of circumstances. And when you think about what happens on chain and what's happening in the industry,
00:10:39
Speaker
You know, your world of of ah of stakeholders and the people who will use that information is is is broader. And having a kind of an updated system to think about it is really is really key and and I think important.
00:10:53
Speaker
Absolutely. and And that communication through all the levels is super important. And pretty much we already mentioned that they're not regulation per se, but what role do you envision these guidelines playing in the broader policy landscape? Perhaps I think it would be and it's helpful to just give some context to our audience if you could maybe cover disclosure requirements in other areas like in the EU or what could we see there?
EU's MICA Framework for Crypto Asset Disclosures
00:11:18
Speaker
So we've been really grappling with this over at at Blueprint, and where we're a startup that whose work is largely geared towards providing disclosures in the crypto asset space. And the first thing that we did was actually to go to Europe, which ah people thought was kind of interesting for a nerdy law professor sitting around in Washington, DC, in part because they they do have rules that are um sort of on the table ah that have been passed and that that are actually mandated rules for the crypto industry when it comes to um disclosures. And as a result, they're a little bit of ah of a beacon of sorts ah where people ask themselves, well, what are what have other regulators done in the space?
00:12:04
Speaker
Now, what the Europeans did was to demarcate and to identify different kinds of tokens. So they went through the work of not just defining disclosures, which is very important, and requiring that disclosures are published in ah white papers. And again, these are not just your typical sort of engineering white papers. These are very specific regulatory documents with certain line items that have to be filled out. And then they also created a different regime for crypto assets and they kind of categorize those crypto assets based off of um two different kinds of stable coins and sort of a bucket for for for everything else.
00:12:45
Speaker
And the way that ah the disclosure ah part of the regulatory regime works is that in it also tries to identify what you would expect, um like ah ah sort of you know sort of the critical team members, for lack of a better word. But it also asks the questions that do overlap with what the working group is trying to think about in terms of ah the underlying network, the underlying technology. um There's a requirement to think about what are are the risks associated with any particular ah token. um Now, again, ah even under these very sort of explicit rules that were put out
00:13:30
Speaker
In MICA, there are lots of opportunities for the private sector and for other stakeholders to kind of clean up and to clarify. So when you think about Dodd-Frank and all these other kinds of rules in the past, it sometimes takes a decade to kind of clarify rules. ah You know, there's probably not going to just be MICA. There's probably going to be MICA 1, MICA 2, MICA 3. And what we've spent a lot of time trying to do is to standardize and to clarify um even the language within Mika. So ah one of the things that we've done is, is for example, on on the taxonomy part, which leads to a machine-readable white paper, is to and go through the hard work of identifying what that taxonomy should look like. So even though
00:14:22
Speaker
you know a partial taxonomy was released with only about 15%. I told my engineers of our blueprint, let's just just do all that work for as much as they haven't finished it and then sort of to provide a package for them. But that kind of work, it's very technical, but it is standard setting. And I think that creating those standards, creating those common reference points,
00:14:46
Speaker
for industry helps not only with compliance, but again, when you think about disclosure, it's not just this this thing that you kind of have to do. It clarifies words and terms and expectations in a way so that people can um coordinate much better. and And I think that that framework that's being developed on our side in the United States um which will invariably be critical for people on the hill, it also is a good exercise just in and of itself because it gets lots of different people from different parts of the industry and the regulatory stakeholders who are watching it to kind of agree upon and to kind of make more concrete certain kinds of words, expectations, and just methodologies in terms of how you think through um you know the opportunities and risks associated with with
00:15:37
Speaker
um holding ah or investing in different tokens. um I think there's a lot Chris covered a lot of grants. I don't think much to add, except that we're looking at this disclosure framework from a US perspective. We did take into consideration a lot of what's happening in the rest of the world, including in the EU. So that was definitely taking into consideration. We hope other countries look to what's what's being proposed in the US going forward.
00:16:04
Speaker
great Great to know. Can you share some examples of the types of tokens that these guidelines specifically target?
Focus on Blockchain Native Assets
00:16:10
Speaker
yeah so i was just say really looking at the disclosure framework, which is linked here to to this podcast episode, um it really is intended to focus on a native DLT, one type of blockchain native asset, although the same disclosures could apply to other types of assets, but in tackling this um exercise, really tried to focus on one type, given the examples and and types of disclosures that are relevant, maybe different for other types of digital assets.
00:16:41
Speaker
And were you asking about our project, by the way, or were you asking about ah Mika? I just wanted to make sure that i that we're answering your question. Yes, of course, Chris. No, I meant more like on these on your project, on these disclosure guidelines. Yeah, so blockchain native assets. And just now that we're on that topic, um here it all explains a big part is also knowing what are the different types of tokens because I think that's something that we repeat over and over. And at this point, we're like a broken record that tokens are not one homogeneous asset class. And it's I think that's pretty much one of the main driving forces of the messaging that we put out. And now that we've gone over what these disclosures are and what they aim to achieve, another part that we'd like to do around here is myth busting, clarifying what something is and what it's actually not. So what are some misconceptions about
00:17:31
Speaker
this project and about token disclosures that you hope to to clear up. For me personally, one of the things that I've really enjoyed, and this comes from like years of testifying or in Congress and talking to people, is that you know um when you do something on a blockchain, it really makes something like Disclosures, which is like the the definition of back end boring, compliancy kind of stuff. It makes it super cool and it's very, very, very interesting kinds of work because you know when you're working on ah on ah on a blockchain,
00:18:02
Speaker
um ah Number one, as a lawyer, it it forces you to rethink all kinds of ideas, right? So generally, there's this question or assumption that, ah yeah you know, important information that you can't access, you know, ah has to be disclosed. But, you know, like, well, what does that mean when many of the important aspects are actually on chain and and and and quite visible? You know, um so, ah you know, what do we mean by being able to sort of access that information? And there are all kinds of nerdy examples that for a lawyer you kind of have to re re rethink.
00:18:38
Speaker
But I think that the other sort of misconception, or I shouldn't say the the other really neat thing about it is that disclosure doesn't necessarily have to be um sort of a backend compliance function. It really does shed light on how disclosure can help an industry grow. And I think that that's what's really kind of exciting because again, when you start to standardize things, whether or not it's mandated by regulators or whether it's like more of a voluntary kind of standard setting project like this one, which offers help um to both regulators and to market participants. it it It allows people to kind of agree a little bit faster because they're they're speaking ah the same language.
00:19:23
Speaker
And um again, when you think about what that means in the context of ah cryptocurrency or digital assets, you start to you know really become quite ambitious about what does it mean to not just create disclosures, but to use those disclosures as building blocks within financial systems, um you know to to not just be like a cost center, but to be something you actually work with and and and and build on top of.
00:19:50
Speaker
And I think that that those kinds of things in my own communications with my own engineering team, when I talk to other engineers and and you know now law school students of mine who have themselves ah before coming to law school created their own crypto projects and decided to go to law school to learn a little bit more about the legal side of things, you know they're super excited about this kind of stuff. And I think that um the more um The industry grows and is mainstream and obviously the more that um you know Triad fly gets into crypto and the more crypto learns a little bit more about what it what it takes to kind of scale and and and what unlocks ah Liquidity the more these kinds of issues that right now where we're just starting to sort of think about they're going to become very very core and very very basic and so it's a super super interesting space with lots of um interesting opportunities to to to build and And I think that that's, ah I think one of those things that is, I guess, a misconception, if not a misconception, it's like people just, you know, you you hear it and you're thinking about what what it means in trad fly world. And it's it's not quite the same thing as to sort of what it means or what it can mean when you get to a crypto world. So i think I think that's what I would say.
00:21:06
Speaker
and I would also add in terms of my ah myth that I think with respect to these disclosures is that is that generally I think projects in this space think if we provide disclosures, there must be some information that we have access to that others do not. And so that may make us more responsible. That may make our asset security when otherwise it would not be a security. And that's not the intent behind these proposed disclosures and framework. Really, a lot of information that's in this framework could already be publicly available. um It's in the public domain. It may be in white papers. It might be in GitHub. It might be on certain websites.
00:21:42
Speaker
What this framework really does is allows users to, if the information is disclosed in a consistent manner across different native DLT projects, to be able to have access to this information in one central source or allow a broader audience to have easier access to compare across different native DLTs. So I would say don't be scared to provide the disclosure because it could even though it's already out there, it just may not be out there for for all users to be able to access in one place.
00:22:11
Speaker
Yes, and and that's a a great one because information is, it is out there. And I think all of that sounds really interesting. And you also kind of got into into my next question, Chris, because we obviously have come a long way, but still have ah a
Political and Industry Efforts for Adoption
00:22:22
Speaker
lot of ground to cover. So what other steps do you think are necessary for for these guidelines to be widely adopted, you know, as we enter that implementation phase even more?
00:22:31
Speaker
well Well, obviously we're talking you know on the eve of some pretty important elections, and and and I don't know if anyone's heard about them, but you know I think that having a bit of calm in the political space, you know, calm calm ah opens the space to smart regulation. Unfortunately, crisis usually opens the space to regulation, but you need some some kind of ah patience to deal with the nuance of a space to end end up with smart and good outcomes, right? um And that's a really hard thing to get. But it it does ah appear that in the United States,
00:23:18
Speaker
We are at least moving in the right direction of of getting to a sort of a more a more serious conversation and obviously once. um you you have that opportunity, that that political opportunity, having projects like these with really reputable ah people participating in them ah with you know histories of being good actors, it means a lot. And and and it really can move the dial because ah those little windows don't tend to last very long. And so you kind of have to move ah ah quickly to to take advantage of of those windows.
00:24:00
Speaker
um I think and you know that's not just responsibility of politicians, um although obviously when you mandate things and everybody kind of has to come along. But I do think that another key component is ensuring that those people who are experienced in both the financial and the engineering um you have both the financial and the legal and the engineering expertise continue to engage ah because the space is moving so quickly that even when opportunities arise, there will be an entirely new slate of financial products and services that would have sprung up.
00:24:49
Speaker
And so some kind of organized reliance on experts like Lillia and you know getting, I think, the right kinds of ah sort of industry players involved and around the table with the right kinds of regulators.
00:25:07
Speaker
like some kind of cadence is going to be required ah going forward to to make sure that the rules and that the practices and even the industry and the understandings of that it all keeps up. and i And I think that that is the really tricky thing. Yeah, I don't have much to add. I think chrisok curse cut Chris covered all the different ways that that we could move this forward.
00:25:30
Speaker
Great. that's That's, I think, a really good good recap. And we're almost at time, but as we wrap up, I'd like to know what's next after after the release of these proposed
Encouraging Industry Feedback
00:25:40
Speaker
guidelines. like We also mentioned that, and just as a reminder to our audience, that we're going to be linking these to our Spotify descriptions to the YOWL Explains website. So I just wanted to use this last space so that both of you could could share any concluding remarks you'd like to make. You know you you have the floor.
00:25:56
Speaker
Yeah, so I'll start. I think in terms of um receiving feedback, I think we're encouraging everyone in the industry, anyone reading this or hearing this, to provide feedback. There's a publicly available draft release from our May 3rd event, inks that include a lot of industry group supporters. There are a number of industry groups that have publicly supported this, so feel free to reach out in the industry group that you're part of to provide your individual feedback or anyone else who's an individual contributor to the disclosure.
00:26:24
Speaker
framework. um Also, Chris and I are part of the Global DCA Steering Committee, which is made up of leading law and finance scholars that have recently established a group to really review the guidelines ah that we released in May and propose improvements, incorporating feedback that we're receiving from the various industry groups.
00:26:43
Speaker
or individuals, and then also republish a revised version of this. So that's all in the works, extending one's feedback in in the meantime, encourage everyone to reach out to either someone that's steering committee or the industry groups, because we really want to hear from potential users, readers of of this framework. We want to make this as practical as possible.
00:27:03
Speaker
Yeah, just to follow up on that, you know um this is one of those spaces and something I tell my my my students, ah you know nobody knows everything all the time and and nobody has a monopoly on good or bad answers. and In order to to get this right, we need that ah input from people who ah want to make ah ah their own mark and and and want to lend their expertise and their thoughts and their experience. so um As Lillia said, I think the next step is just getting as much input as we can and making sure that we take those best insights and ah putting them into the final draft of the paper.
00:27:39
Speaker
Yes, and yes, I love that. And the doors are open to conversation, to feedback, to continue to to improve this. And just to finish off, I wanted to give a big thanks to both Lily, to Chris for sharing your expertise with us to tell us, to taking the time to tell us a bit more about your proposed US disclosure guidelines for tokens. And also a big thanks to our listeners for tuning in. We'll see you all next time. Thank you so much.
00:28:07
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening.
Conclusion and Additional Resources
00:28:10
Speaker
For more Hootful and hype-free resources, visit www.owlexplanes.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time!