Brown: Crypto Markets' Lack of Transparency Hurts Americans

Letter

Dear Secretary Yellen, Chair Gensler, and Chair Behnam:

I write to express my concern about the troubling lack of customer-facing disclosure in crypto
markets. Incomplete and inconsistent disclosures about digital asset tokens and related services
deny Americans critical information. As they examine crypto tokens, consumers and investors
need to be able to assess risks, avoid fraud, and understand conflicts of interest. The vacuum of
accurate, investment-useful information, however, has led to the proliferation of outright scams,
platforms vulnerable to manipulation by informed insiders, and hacks that drain customer
accounts. The damage is staggering: just last year, nearly $10 billion was lost to crypto scams or
stolen in hacks.1

We must do more to protect crypto users from this misconduct and begin to improve available
data and documentation so that Americans can evaluate tokens based upon reliable information.
Comprehensive and regular disclosures must be a cornerstone of any approach to digital assets.

1 The value of crypto scams totaled $5.9 billion in 2022, while $3.8 billion was stolen in hacks on digital asset firms that year. See CHAINALYSIS, THE 2023 CRYPTO CRIME REPORT 56, 86 (2023), https://go.chainalysis.com/rs/503-FAP074/images/Crypto_Crime_Report_2023.pdf.

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Inadequate disclosures remain a persistent problem even though crypto assets emerged more than
a decade ago. Yet even as the crypto industry purports to "mature," and following recent
catastrophic failures like FTX and Celsius, crypto firms have taken no meaningful steps to
improve their transparency, leaving customers vulnerable. We cannot settle for a status quo in
which Americans lack the basic, comprehensive transparency they would receive in any other
market in which they choose to invest.

Full and fair disclosure has been the foundation of our markets for generations. When the largest
well-known companies or innovative entrepreneurs offer investment opportunities to the public,
we insist on wide-ranging disclosures, from audited financial statements to detailed discussions
of a company's business plans. Though these requirements are rigorous, transparency allows
investors to channel capital to the most promising firms in our economy, while inhibiting fraud,
scams, and abuses that benefit insiders at Americans' expense. In fact, these requirements are
why our capital markets are the envy of the world.

But crypto companies flout the rules that would build transparency about their products. So
token issuers and trading platforms routinely provide minimal information about even the most
established assets or services they offer to the public--even as they often conduct in-depth
analysis of assets and crypto markets privately for their own businesses.

Too often, the available information focuses on day-to-day market gyrations or basic token
parameters, such as trading volume or supply. Such disclosures reveal little, if anything, about
the underlying crypto project or any related "use case" or application that could drive its value.
The result is an investing environment too often focused on hype and hoopla, not fundamentals.

Disclosures fall short even though the holders of crypto tokens want greater transparency.
According to industry research, more than half of all digital asset holders believe information
about a token's risk, security, and financial details are among the most important kinds of data to
analyze once they have acquired an asset.2 Though comparable data is a mainstay of securities
disclosures, it is at best infrequently available for crypto assets. Indeed, the disclosures users
need and want are precisely the disclosures that are most rarely available.

Americans also have little reason to trust the disclosures that crypto promoters and companies
publish. Research has documented how materials made available for token offerings are often
inadequate,3 are misleading about returns or guarantees, or refer to fabricated management
teams.4 At the same time, disclosures frequently are erroneous or fail to align with the software
code behind a token.5

2 BROADRIDGE, CRYPTO ASSET DISCLOSURE STUDY 10-11 (2023),
https://www.broadridge.com/_assets/pdf/broadridge-crypto-asset-disclosure-study-report.pdf.
3 See Dirk A. Zetzsche, Ross P. Buckley, Douglas W. Arner & Linus Föhr, The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge for Regulators, 60 HARV. INT'L L.J. 267 (2019).
4 Shane Shifflett & Coulter Jones, Buyer Beware: Hundreds of Bitcoin Wannabes Show Hallmarks of Fraud, WALL ST. J. (May 17, 2018), https://www.wsj.com/articles/buyer-beware-hundreds-of-bitcoin-wannabes-show-hallmarksof-fraud-1526573115.
5 See Chris Brummer, Disclosure, Dapps and DeFi, 5 STAN. J. BLOCKCHAIN L. & POL'Y 137, 152-53 (2022); INT'L MONETARY FUND, REGULATING THE CRYPTO ECOSYSTEM: THE CASE OF UNBACKED CRYPTO ASSETS 16 (2022), https://www.imf.org/en/Publications/fintech-notes/Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-Case-

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Without consistent, comprehensive, and accurate disclosures in crypto markets, users are left
vulnerable. When both legitimate and illegitimate market activities are opaque, consumers and
investors cannot readily distinguish fraud and scams from other token projects. The result is the
Wild West of investing--an ecosystem that invites and rewards both bad actors and shoddy
products. By contrast, mandatory, universal disclosures smoke out bad actors and shoddy
products alike.

We've seen repeatedly how weak disclosures facilitate scams, fraud, and insider self-dealing. For
instance, in ubiquitous "rug pulls," scammers whip up interest in an asset that they claim has real
functionality and value, only to vanish with the funds they collect from investors.6
Insiders can manipulate platforms' governance structures for their own benefit, or simply misappropriate funds to support their lavish lifestyles.7 The multi-billion-dollar Celsius fraud was just a culmination of these long-running dynamics, with the company allegedly misrepresenting
everything from the success of its fundraising to the number of its users.

While fraud occurs in traditional markets, deceptions as damaging and extensive as those in
crypto are greatly facilitated by the lack of regular, consistent, and comprehensive disclosures
that the market can scrutinize. And even where promoters have no malign intent, weak
disclosures about protocol security can leave Americans vulnerable to the hacks that siphon off
billions of dollars of crypto assets every year.8

Crucially, opacity creates risks not only with specific crypto assets, but also with the platforms
that structure token markets. Exchanges or other intermediaries can obscure, or even hide,
conflicts of interest or favorable treatment for their affiliates or executives. The major exchange
Crypto.com, for example, manages proprietary trading and market making teams that trade
against the exchange's own customers--a fact only known due to press reports
9--creating a scenario where "the house always wins," to customers' detriment. Platforms can likewise fail to clearly disclose fees, spreads, or other costs associated with trading, leaving users facing steep expenses just to cash out their crypto assets.10

Ultimately, inadequate disclosures persist because opacity serves sponsors, executives, and other
crypto industry insiders. It is far easier to profit when customers are left in the dark. That's why

of-Unbacked-Crypto-Assets-523715; Shaanan Cohney, David Hoffman, Jeremy Sklaroff & David Wishnick, CoinOperated Capitalism, 119 COLUM. L. REV. 591, 597-98 (2019).
6 For just one recent example, see SlowMist, Beware of Covert Rug Pulls, Exit Scams Driven by Contract Storage Manipulation (Jul. 26, 2023), https://slowmist.medium.com/beware-of-covert-rug-pulls-exit-scams-driven-bycontract-storage-manipulation-3631c8cbe1a. In recent years, consumers have lost billions of dollars to these schemes. CHAINALYSIS, The Biggest Threat to Trust in Cryptocurrency: Rug Pulls Put 2021 Cryptocurrency Scam Revenue Close to All-Time Highs (Dec. 16, 2021), https://blog.chainalysis.com/reports/2021-crypto-scam-revenues/.
7 For recent allegations of misappropriation, see Complaint, SEC v. Richard J. Schueler, No. 1:23-cv-5749 (E.D.N.Y. July 31, 2023).
8 See CHAINALYSIS, THE 2023 CRYPTO CRIME REPORT at 56.
9 Nikou Asgari, Trading Teams at Crypto.com Exchange Raise Conflict Questions, FIN. TIMES (Jun. 19, 2023), https://www.ft.com/content/b5d2bf4b-225c-4f30-9f1c-cbe8dc762fa8.
10 See CONSUMER FIN. PROTECTION BUREAU, COMPLAINT BULLETIN: AN ANALYSIS OF CONSUMER COMPLAINTS RELATED TO CRYPTO ASSETS 21-23 (2022), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_complaint-bulletin_crypto-assets_2022-11.pdf.

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the crypto companies resist real transparency and try to force Americans to accept the paltry,
self-serving disclosures endemic to the industry.

Some of my colleagues in Congress have proposed merely applying limited disclosure
requirements to digital asset tokens. This would be a profound mistake. We cannot water down
the high standards that have protected investors and supported businesses for decades. We have
the strongest, most successful markets in the world because of our bedrock, unwavering
commitment to full transparency--not because we compromise on disclosure to accommodate
specific industries.

The same principle must guide our approach to disclosure in crypto markets. Alongside steps to
prevent conflicts of interest, protect consumer funds, and curtail illicit finance, we must do all we
can to advance genuine transparency. That is the only path forward that upholds the basic
integrity of our financial system, protecting the savers and entrepreneurs that rely on it.

As Congress reviews crypto legislation, I ask that your agencies assess their authorities and
evaluate how we can build on our existing disclosure guardrails to effectively target the
deficiencies we have observed in digital asset tokens and digital asset platforms. Where
additional tools would facilitate addressing these issues, Congress can work to provide
Americans with the information they need. Finally, I urge you to use existing tools to strengthen
transparency and hold bad actors accountable.

Americans deserve complete and genuine disclosures that protect them and reflect the
longstanding principles of transparency that make our markets work.

Sincerely,

Source