Transparency Framework for the Encryption Industry: Addressing Structural Issues in the Token Market

The cryptocurrency industry has a history of over a decade and is at an important turning point. Although crypto companies are going public, the transparency issues in the Token market hinder the industry's development. Tokens are seen as the direction of future forms of capital, but if the transparency issues are not resolved, it will be difficult to move forward.

The token market is currently facing the "lemon market" problem. The lack of standardized transparent disclosure mechanisms makes it difficult for investors to assess the quality of projects. As a result, quality projects are unwilling to issue tokens, while speculative projects are rampant, leading to a decline in the overall quality of the market.

In the Token market, investors face many issues that equity investors do not have to worry about:

• Insufficient legal protection: Token holders have far less legal protection than equity holders.
• Multi-token issues: The team often issues a second Token for new business lines, harming the interests of early investors.
• Parasitic equity issue: Token holders are uncertain whether cash flow will go to tokens or equity.
• Founder behavior: The founder may abandon the project after selling a large amount of tokens through OTC during a bull market.
• Foundation Abuse: The team may cash out the project's cash flow after transferring it to the foundation under various pretexts.

These structural issues have led to a token risk premium of up to 20%, far higher than the 5% for stocks. According to capital market pricing logic, this high premium results in the token valuation being discounted by about 80%.

One reason for this situation is the "everything bubble" period from 2020 to 2021. During that time, global interest rates were almost zero, and large-scale monetary expansion and fiscal stimulus led to the rise in Token prices without fundamental support. After the bubble burst, market participants have been waiting for the next "big cycle." However, over time, people gradually realized that they needed to provide investors with something substantial for them to buy Tokens.

In response to these issues, there have been some positive changes in the industry and regulatory aspects. For example, Morpho Labs recently announced that it will become a wholly-owned subsidiary of the non-shareholder entity Morpho Association, ensuring that value flows to the Token. SEC Commissioner Hester Peirce proposed the "Safe Harbor 2.0" initiative, providing a grace period and guidance for projects transitioning from centralized entities to decentralized networks.

However, there are still many irregularities in the industry. Some project teams will detach the IP from the Token, keeping the cash flow entirely for themselves. Other projects are discussing issuing new Tokens for new business lines, raising concerns among investors. Some projects may be profitable, but Token holders do not receive any earnings.

Some of these problems stem from the founder's "wrongdoing", while others are structural issues arising from regulatory gaps. The current structure makes the Token extremely unattractive to institutional investors.

To address these issues, the industry has introduced a Token Transparency Framework, which is an open, standardized self-disclosure template. Project teams only need to fill out this form to clearly communicate their structural information to the market. The framework contains about 20 questions covering business descriptions, supply timelines, and agreements with exchanges, and requires the provision of relevant proof materials.

This framework adopts a bottom-up approach to promote and encourage projects to actively disclose information. It prioritizes linking on-chain data and relies on the projects to self-report for unverifiable parts. In the long run, the reputation mechanism will drive projects to disclose honestly.

Teams that are expected to participate and receive reasonable ratings may see their tokens gain a premium in the long term due to transparency. This change may not be immediately apparent, but the increase in transparency will attract more attention from liquidity token funds. If this framework is widely adopted by the market, it could drive more institutional capital into the liquidity token market.

In the short term, projects with good fundamentals that are overlooked due to market noise will become the main beneficiaries of the new framework. On the other hand, projects that treat tokens as arbitrage tools, lack real products, or abuse market structures will be marginalized due to a lack of transparency. The emergence of the framework will help end the overvaluation of "fraudulent tokens," allowing resources to flow more effectively to projects that truly have product-market fit.