There’s more than a little talk about the onerous nature of securities filings, especially for young companies, including firms involved in financial technology, that are just getting started with business.  The argument goes that making disclosure is expensive—and not infrequently, companies have to hire law firms and accountants in order to meet regulatory obligations and expectations.

But I think the rollout of Facebook’s Libra provides a strong counterargument as to just what kind of upside regulated disclosures have—and what kinds of incentives companies have to make disclosures where there is no clear mandate that they do so.

When Facebook’s White Paper was released to the general public it was…optimistic, to say the least. And vague. The paper touts ( my emphasis)—

“Through the process of evaluating existing options, we decided to build a new blockchainbased on these three requirements:

Able to scale to billions of accounts, which requires high transaction throughput, low latency, and an efficient, high-capacity storage system.

Highly secure, to ensure safety of funds and financial data.

Flexible, so it can power the Libra ecosystem’s governance as well as future innovation in financial services.

The Libra Blockchain is designed from the ground up to holistically address these requirements and build on the learnings from existing projects and research — a combination of innovative approaches and well- understood techniques.”

Notice the language here: the implication is that Libra is operationalizable, that has been fully designed, and built on “existing projects and research” evincing “well understood techniques.”

Now U.S. regulators had a pretty muted response to these and (many, many) other disclosures made in the White Paper. Part of this, I imagine, may be due to doubts as to whether or not securities laws would even apply.  If they don’t, then the feds don’t have any jurisdiction.  At most Facebook could face suite from private investors, but investors would face serious challenges coordinating collectively by dint of a class action.

Well, enter Facebook’s SEC’s recent filings.  Here, in contrast to the White Paper, there are no doubts:  as a public company, Facebook must complete quarterly disclosures, and do so in a way that is not materially misleading or contain a misleading omission.   If it doesn’t, it could face not only sanctions fro the SEC , but also private class action lawsuits.

And voila, Facebook’s language in its disclosure, looks quite different from that in the White Paper.

“Libra is based on relatively new and unproven technology, and the laws and regulations surrounding digital currency are uncertain and evolving.”

“In addition, market acceptance of such currency is subject to significant uncertainty. As such, there can be no assurance that Libra or our associated products and services will be made available in a timely manner, or at all. We do not have significant prior experience with digital currency or blockchain technology, which may adversely affect our ability to successfully develop and market these products and services. We will also incur increased costs in connection with our participation in the Libra Association and the development and marketing of associated products and services, and our investments may not be successful. Any of these events could adversely affect our business, reputation, or financial results.”

Pretty different disclosures as compared to the White Paper.  And why?  Because of clearer, and more onerous consequences if Facebook didn’t disclose some of the risks associated with its venture.  Libra’s White Paper, which wasn’t subject to securities laws, had lots of fluff.  Facebook’s filing, by contrast, was much more sober about Libra—and accurate.

Disclosure Can’t Be Overlooked

This doesn’t seem to be a good outcome for investors. My sense is that the reader of the White Paper deserved to have had the same kinds of sober disclosures alongside the flowery optimism that a Facebook investor enjoys. Certainly, here there is no cost issue, as is the case with many start ups trying to raise money on a shoe string: besides the fact that Facebook is one of the wealthiest firms in the world, the disclosures would have to be made at some point by Facebook, so it would have been minimal effort incorporating them into the white paper.

And the risks are virtual the same.  Facebook is trying to describe the risks to holders (and potential purchasers) of Facebook securities if Libra’s technology doesn’t pan out.  And, in theory, Libra holders have virtually identical risks—like the downside risks arising if there was no “market acceptance” of the the coin, and ability of any potential purchaser to liquidate her coin for a full refund was impaired.

In the end, I think this all suggests that as regulators begin to rethink what kinds of rules and expectations should apply to cryptoassets, disclosure should be the place to start.  It is, after all, the initial point of contact between promoters of digital assets and the wider financial community.  Furthermore, disclosure obligations probably shouldn’t begin or end with whether a financial product meets the technical definition of a security.  After all, Facebook’s Libra, despite all its securities-like features, may not meet all the requirements under law to be considered one.  A broader regulatory perimeter is likely needed to address digital assets. And even where digital assets are securities, the accompanying disclosure obligations should speak to the specific economic and investment features of cryptocurrencies and securities tokens.

I’ve noticed, however, that disclosure at times gets less attention than other important matters like anti-money laundering safeguards.  But it’s still critical, especially if cryptocurrencies become key elements of consumer- and financial services.

If overlooked by policymakers, the likelihood that purchasers of digital assets will ever have a clear idea of what they’re buying is dim.

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