Virtual Currencies and Financial Disclosure. What’s the Point?

June 13, 2018 by Leticia Matlock

Image Credit: Title Stream

By Leticia Matlock

The recent hearings on data privacy and protection shine light on the importance of clarity in disclosure. What is the protocol for disclosure in the financial sector as it applies to Virtual Currencies (VC)? Are financial disclosures necessary and sufficient?

An important hearing was held on February 6, 2018 by the Senate Banking, Housing & Urban Affairs Committee on Virtual Currencies. The in-depth hearing gives insight as to how both our “two powerful regulatory bodies” Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) address this issue. Jay Clayton, SEC Chair and J. Christopher Giancarlo, CFTC Chair testified.

John Neely Kennedy (R-Louisiana) set the stage for what was to come with his astute question: “What’s the point of all this over-disclosure if nobody’s reading it…you can extend the disclosure we have now to Bitcoin and you haven’t done anything.”

Here’s part of the Q&A:

Sen. Kennedy– Chairman Giancarlo, when is the last time you bought a stock exchange, traded fund, mutual fund or a bond?
Giancarlo– I hold generally traded funds….Index funds mostly.
Kennedy– Index funds, ok. When you bought it did you sit down and read the prospectus for the index fund?
Giancarlo– Well, I say this as a lawyer, I’m not supposed to say that I probably didn’t read it cover to cover but I will confess that I didn’t read it cover to cover.
Kennedy– How many investors do you think did that, didn’t read it?
Giancarlo– I think most.
Kennedy– Ok, so what’s the point? I mean we’re talking about all the dangers and the risks of Cryptocurrency like Bitcoin. I’m putting aside the shyster fraud issue. I mean what’s the point of all this over-disclosure if nobody’s reading it? And why do we want to do the same thing with Bitcoin?
Giancarlo– Historically it’s been one of the foundational principals of our security’s laws the adequacy of disclosure. Full disclosure is one of the building blocks…

Indeed, we need to reexamine this historical disclosure that few read, including Chairman Giancarlo. In later testimony, Giancarlo suggested that “On the issue of disclosures, sometimes what we’re seeing is not a problem of absence of disclosure, its false disclosure.” Come again? Sir, this discovery only serves to further complicate the issue and confuse the public.

“Building Blocks” and Distributed Ledger Technology (DLT)

It’s interesting that Giancarlo brings up “building blocks” given that Distributed Ledger Technology (DLT) is one of the building blocks of Blockchain. In a paper from Harvard Business Review, Marco Iansiti and Karim R. Lakhani describe DLT as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”
Efficient and verifiable. Chairman Giancarlo, perhaps we could compare the CTFC’s “building blocks” of “full disclosure” with those of Blockchain, or Bitcoin for that matter?

Disclosure: A Lawyer’s Treasure is Another Person’s Trash

Sen. Kennedy marched forward unwavering, “I think it’s good for the lawyers and it’s good for the financial advisors but I think we over-disclose…. I mean what’s the point? How far do you think we ought to go here in terms of Cryptocurrency, I’m separating this from the Blockchain technology? I mean China outlawed it. So I think S. Korea is too. What are you suggesting? That we just go out to the shysters and fully disclose. I mean is that what you think we ought to do?”

Chairman Clayton offered his opinion, “I think that is exactly the question we are here to pose…what is the right way to deal with this new technology… disclosure can be improved.” Chairman Clayton and Chairman Giancarlo, the committee was under the impression that your presence here was to “educate the public and investors about potential associated risks,” not the other way around. To be fair, Chairman Clayton was recently “nominated to chair the U.S. Securities and Exchange Commission on January 20, 2017.” He is still learning. But, Chairman Giancarlo has been with the CFTC since 2014.

Sen. Kennedy concluded, “Let me make this suggestion…the disclosure, I mean you can extend the disclosure we have now to Bitcoin and you haven’t done anything… you’ve got to have disclosure that makes sense and helps people other than the lawyers.”

Clayton agreed. Five weeks later, “The House Financial Services Subcommittee on Capital Markets, Securities and Investment held a hearing to examine the growth of virtual currencies and the markets they are traded in. A panel of lawyers answered questions about the need for consumer protections, transparency, and federal oversight in their industry.” Unfortunately, little, if any, attention was given by the lawyers on “disclosure that makes sense.” It appears Chairman Clayton did not heed Sen. Kennedy’s suggestion. However, Peter Van Valkenburgh, Director of Research at Coin Center, shared Sen. Kennedy’s concern, “Mandating accurate risk disclosures and transparency…is critical for investor protection.”

Objection: How does one improve a “false disclosure?”

Going back to our questions: First, what is the protocol for disclosure in the financial sector as it applies to Virtual Currencies? It seems to me that SEC and CFTC did not make a clear and convincing argument on disclosure. According to the Chairmen, “disclosure can be improved” yet the problem is “false disclosure?” Gentlemen, it must be difficult to reconcile the need to “educate the public and investors about potential associated risks” with the financial industry’s need to provide complex legalize. Second, are financial disclosures necessary and sufficient? Yes and no, depending on where you sit in the money game: Either with Financial Advisors and Lawyers or with Bitcoin Users and Miners.

Return of Satoshi Nakamoto?

We are nearing the 10th Anniversary (November 1, 2008) of when a reportedly Satoshi Nakamoto “posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called bitcoin.” Does anyone else find intriguing the timing of this paper’s emergence? Was it by chance? Or, by design to address the 2007-8 global financial and economic crises and the lack of regulatory enforcement on banks? It seems apropos that the timing of Nakamoto’s paper was in Shimotsuki or “month of frost.” Perhaps his return will show some clarity in Minazuki, “month of water.” Recall, that Da Vinci is noted in saying that water acts as a “continuous quantity.”

I would venture to say that we will continue to see “frictions and a mismatch between new technologies and old regulatory structures.” Let’s hope Sen. Kennedy will be the one asking the questions.