After six months of thinking through issues surrounding data transparency and disclosure standards in crypto, I’ve arrived at a counter-intuitive conclusion:

Self-regulating the token economy may require…a token.

If you’ve read anything I’ve ever written about ICOs, I don’t blame you for being incredulous at the mere statement. But believe it or not, a token curated registry — populated by crypto-asset projects that operate with certain minimal transparency standards, and managed by a diverse mix of the major global crypto stakeholders — may offer the best chance we have at creating a self-regulatory organization for the industry.

To understand why, you first need to understand the history of SROs, and the mechanics of one particular new innovation, the token-curated registry.

Self-Regulatory Organizations (SROs)

For the past several months, many of the saner heads in the cryptoasset industry (myself included) have been banging the drum on the need for better self-regulation.

ICOs are booming, and regulators are now studying the market closely. So far, we’ve been lucky — their approach has been to take a light touch so as not to stifle innovation. Most seem to recognize the practical limitations of applying a patchwork of local regulations to a globally traded asset class.

Yet while we’re fortunate the regulators have been so permissive to date, the window of opportunity to self-police and set standards ourselves is small and closing rapidly.

After months of piecemeal warnings, regulators have gotten particularly vocal recently regarding the acute need for self-regulatory efforts in crypto. The SEC Chairman continues to state publicly that most token sales look like securities offerings, and even fired a shot across the bow to the lawyers who are advising teams on their new offerings. The message: do your jobs.

Two weeks ago, a sitting CFTC commissioner explicitly called on the crypto community to create a self-regulatory body, having recognized that the industry may have the collective will and creativity to propose its own solutions if given the mandate.

The question is, who provides the mandate?

Consider two entities that have been called out as examples to the crypto community in recent weeks: the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA).

FINRA oversees 4,000+ broker-dealers and 630,000+ securities professionals market in the U.S. Its purpose is to stamp out fraud and protect investors by credentialing the firms and professionals who sell securities products, and by regulating how securities are marketed. FINRA was formed in 2007 as a not-for-profit successor to the National Association of Securities Dealers, an organization whose roots stretch all the way back to 1939 when the SEC gave its blessing for the securities industry to form a self-regulatory body as part of the early amendments to the Securities Exchange Act of 1934.

FINRA is now one of the largest independent regulators in the world with an annual operating budget of nearly $1bn and a 3,500-person staff. And it is self-sustaining and 100% self-funded — through assessment fees (mostly taxes on member firms based on size and trading volumes), user fees (primarily from credentialing securities professionals, and serving as an arbitrator for member disputes), contract services fees that are charged to exchanges like the NASDAQ and NYSE for various regulatory services (surveillance, investigations, examinations and disciplinary work), and fines.

Still, FINRA is tiny compared to the massive U.S. securities market.

Similarly, NFA is an SRO for the U.S. derivatives industry, which oversees futures trading (forex, swaps, and other derivatives) for some 4,000 firms and 55,000 associates. Like FINRA, membership in NFA is mandatory if you want to work in derivatives markets domestically. The organization was granted a formal designation as a “registered futures association” by the CFTC in 1981, seven years after Congress established the CFTC and gave the new regulator the authority to bless a complementary self-regulatory organization. NFA is also self-sustaining, and like FINRA, earns fees from assessments, user fees, and contract services, albeit at about a tenth of the rate ($90mm/year).

You can see why the regulators like these entities, and would like to see crypto adopt its own. They require no taxpayer-funding while reducing administrative headache for the regulators themselves. At the same time, both FINRA and the NFA have operated for decades with Congressional authorization and mandates from the SEC and CFTC.

Here’s the thing. It now appears obvious — to the crypto industry stakeholders and the powers at be — that the problem with regulating crypto is primarily one of jurisdiction.

Which regulatory bodies could even give a crypto SRO its critical mandate? What good is an SRO with a mandate from just one regulator in the U.S. or U.K. or Japan if the underlying assets trade globally?

Who bears the costs of this regulation, anyway? The exchanges? The advisors? The projects themselves?

Without jurisdictional clarity, a crypto SRO would lack the enforcement teeth to levy fees on its regulated targets, making it significantly tougher to sufficiently cover overhead and earn the resources required to effectively carry out its mission.

It’s a tragedy of the commons. Most people agree that self-regulation in crypto would be a good thing, but no one wants to incur those costs.

I’m confident we could get a decent amount of the way towards self-regulation based on social pressure and the goodwill of many of the industry’s top teams, and written about how it here and here. But until recently, I didn’t really think there were good enforcement mechanisms or financial incentives to make any self-regulatory efforts reliable.

Enter token-curated registries.

Token-curated registries

I first wrote about TCR’s a few weeks ago. Don’t worry if you haven’t heard of them yet; they are new even by crypto standards.

But you should take the time to read up on them, because the TCR concept is a simple, elegant, enabling technology that will open up new information services business models. They tokenize inherently valuable information signals, and put a price on the “social scalability” of a given curated list.

The high-level concept of a token-curated registry is this: there’s a list you want to be on and you think you deserve to be on the list. You are then willing to pay an application fee in an effort to make that list — either on a one time basis or via recurring credentialing “dues” — because there is intrinsic value to inclusion. You can think of a TCR like a cooperative, where existing members vote to include new participants and share in the costs, and rewards, of running the community.

Say you apply to be on a well-publicized list of the top crypto funds because you see other top names listed there. It would certainly be a valuable signaling tool to great entrepreneurs if you were added to the list! And you could probably form interesting syndicates more easily out of such a group. Entrepreneurs might even look at the TCR to organize a more logical and less political/relationship-intensive group during a fundraise.

But, here’s the catch: the list only retains its value if it is perceived as high-quality. a16z and USV and BlueYard and FBG Capital won’t drop off the list if crypto funds like Polychain and MetaStable are their counterparts, but including Pump-n-Dump Capital or CryptoKidz Moon Fund would certainly undermine the quality, and thus the value for others to apply to the list. If you asked the current listees to pay annual dues, it would make it likely that the top investors would proactively delist themselves if the quality degraded.

Start letting anyone into the club, and the A-listers won’t go there any more.

This type of social status tiering is common in many groups with capped membership: schools, country clubs, exclusive events, and even donations, where there is intrinsic value to donors in being recognized as a benefactor of a certain tier.

Mike Goldin from ConsenSys, who co-led the AdChain project (first to use the TCR design) elaborates on the general TCR concept eloquently:

“A token-curated registry uses an intrinsic token to assign curation rights proportional to the relative token weight of entities holding the token. So long as there are parties which would desire to be curated into a given list, a market can exist in which the incentives of rational, self-interested token holders are aligned towards curating a list of high quality. Token-curated registries are decentrally-curated lists with intrinsic economic incentives for token holders to curate the list’s contents judiciously.”

Goldin and the adChain team started with the $175bn digital advertising market. Members of their adChain Registry have their domain names accredited by ADT holders, who can vote their tokens to determine whether a publisher domain is fraudulent or non-fraudulent. Like Verisign for meting out ad fraud in online publishing.

Simple. Black and white. Narrow in utility, but extremely valuable at scale depending on the application and end market size.

You could see hundreds of these things popping up in the coming years, but the central question (to me) becomes which registries will make the most sense early on?

Here are the questions I would ask teams who are evaluating the TCR model:

1) How easily can the TCR-issuer penetrate its target market? This depends on how much stakeholder education is required, and how acute the problem is that the TCR aims to solve, more than it depends on the price of the service.

2) Can the TCR command a sufficiently high price per applicant to ensure a vibrant decentralized curation process grows organically, and bad apples don’t sneak through?

3) Can the TCR grow sustainably? Token-holders need to expect growth in order to justify their investments. That means that the cost to sit on the registry must increase over time or new members to the registry must be added — without reducing the quality of the list.

4) How do you keep a highly engaged, and high-quality stakeholder base? Just as top tier VCs can help to signal a startup’s quality and offer market credibility, attract customers and talent, and help to intelligently steer a project, a good TCR will place a premium on high-quality early supporters.

I think we’ve arrived at good initial answers to these questions at Messari.

After studying the TCR model, I would argue a crypto SRO could be one of the first killer apps the TCR “cryptoeconomic primitive” produces at scale.

A token-based SRO

We bucket our work at Messari into three phases that are fairly easy to explain to a lay person: a) How to do we create a cryptoasset Crunchbase, b) How do we create a cryptoasset EDGAR, and c) How do we build a system that makes financial information move as quickly as cryptocurrencies themselves?

I’ve written about (a) a bit, and how we’re assembling a volunteer army to curate “project 101” information on the thousands of tokens that are hitting the market in the coming months. We have already seen 100+ volunteer applicants, and have accepted ~30. (If you’d also like to be part of our Apprentice:Crypto competition, check out this post and drop us a line!) In the coming weeks, we’ll introduce the research and policy leads we’ve hired to help manage what’s shaping up to be an incredible contributor base.

We’ll focus on (c) at a later date and time. That is, how do we build the organization we really want to build long-term, which helps cryptoasset information move as quickly and transparently as possible and ultimately subsumes most global token and securities reporting/regulation?

For now, though, let’s talk about the second phase (b), and how a token-curated registry could help us build a better version of EDGAR’s securities reporting archive.

At a high-level, we would propose building a system where token issuers pay to apply to and remain on the Messari registry, much like public companies pay fees to file with EDGAR.

Token-holders, who would ideally be comprised of top crypto exchanges, funds, and advisory firms could then either vote on the admission of new applicants or delegate their vote to a professional proxy.

As the central regulatory choke points of the cryptoasset economy, there is intrinsic value to these entities owning tokens and judiciously curating such a list. At the same time, the fees earned from applicants to the TCR would create the extrinsic value that ensured a healthy, competitive market of professional curators arose.

To illustrate the intrinsic value of such a TCR to the token-holders, look no further than recent rumors of subpoenas and even indictments of some of the faster and looser choke points.

If you’re the SEC and you deem a given token to be a security, you could go after the issuer for an improper offering. But that merely cuts one head off of a global, thousand-headed hydra.

If you really want to force the industry to self-police, you would instead go after the lawyer who helped prepare the token offering, the professional fund manager who knew he could be reselling a quasi-security to retail investors, and the exchange who facilitated the liquidity.

If this plays out the way we think it could, major non-issuer token economy stakeholders will absolutely need to self-organize to carefully create a token “white list” and keep the regulators off of their backs.

We have argued before that the 1.0 Messari product will not be a fully baked set of filing standards, but rather an initial commitment to basic and common-sense disclosures. More robust standards will emerge organically over time, and we envision a healthy ecosystem of “automated compliance” software developing in response to the most pressing self-regulatory needs. Much of this will and should be informed by the regulate-able token stakeholders.

How well would this work in practice?

Working off of my four-point TCR questionnaire, let’s see how this vision for a Messari TCR holds up and helps incentivize projects to abide by certain data transparency and disclosures standards.

1) How easily can the TCR-issuer penetrate its target market?

We believe there is latent demand for a self-regulatory project that tackles the data standardization problem for investors, exchanges and token issuers themselves. We also believe there is a large contingent of the crypto OG crowd that would like to will a libertarian, capitalist, and laissez-faire/ transparency-centric alternative to the SEC into existence.

So the nice part about selling the idea of a TCR that tracks transparent token projects is that it takes relatively little to educate the crypto investors and projects on the system’s mechanics.

On the other hand, the acuteness of the need will depend on how potential Messari token-holders respond to our proposal to charge annual dues to the issuers themselves. If we have broad enthusiasm and early buy-in, the implied message from token-holders to issuers should be:

“You’re either on the Messari registry or we’re not doing business. Because even lemonade stands need to answer the question ‘How are funds managed?’”

In fact, a quick skim of our five point token disclosure document shows how focused we are on getting token issuers to disclose their vesting schedules, and treasury policies. This is truly remedial stuff, and we think the industry stakeholders should demand compliance via their pocketbooks.

At the same time, we don’t think a one size fits all fee is appropriate long-term, and would envision a system where token projects are assessed fees on a sliding scale based on the size of their token coffers. Our hope is that this will be embraced as a worthwhile industry reinvestment mechanism that is offset (by orders of magnitude) by the improved access to capital these projects have enjoyed for pursuing token funding models.

Can the free market do a better job than the nanny state?

It’s put up or shut up time for the libertarian crowd, because the current ICO status quo is f*cked.

2) Can the TCR command a sufficiently high price per applicant to ensure a vibrant decentralized admissions process grows organically?

We have to strike a balance between overplaying our hand, and charging enough per application to ensure there are adequate network fees to foster a healthy ecosystem of curators. Absent a legal mandate, we won’t have pricing power or even a “social” mandate for quite some time. This risk can be mitigated perhaps if we propose reasonable fees and can get the highest profile crypto projects as our initial applicants.

If 1,000 projects eventually applied to list on Messari at an average of $25k / application, that would be pool of ~$25m annually to spur the ecosystem into action, about a fourth of the NFA’s annual budget.

Perhaps token teams with billion dollar balance sheets would pay much more than that. Or buy into the system themselves.

Ostensibly projects like Filecoin, Civic, and Blockstack that are ahead of the curve in terms of token economics disclosures would want to ensure they have a say in who makes the cut after them (assuming they participate).

3) Can the TCR grow sustainably?

Token-holders must expect growth and gradual improvements in list quality in order to justify their investments. That means either prices need to increase over time, and we must continue to add new members to the registry even as the standards for listing get more rigorous.

Getting that growth-integrity balance right may be the single greatest challenge with TCRs.

With Messari, we think we mitigate this challenge given that our mission is not to make judgment calls on the merits of a given cryptoasset project, but to admit projects that have objectively demonstrated transparency and common-sense best practices in their disclosures.

We won’t know what the target admissions rate should be until we go out to market. Perhaps we will be overwhelmed with high-quality submissions and it makes sense to admit hundreds of projects in the first year. Perhaps we will be inundated with crap, and we’ll need to hone our intake processes.

The devil is in the details, which we are committed to getting right. Only time will tell if we live up to our expectations as curators and system designers.

4) How do you keep a highly engaged, high-quality stakeholder base?

You don’t want unhelpful or unsophisticated investors, much less malicious ones. Another major challenge of TCRs is how to avoid hostile takeovers.

Broad Messari token buy-in from top-flight investors and listing platforms would go a long way towards creating the “aura of inevitability” that is required for a cryptoasset SRO in the absence of a legitimate regulatory stick.

If we’re correct about the intrinsic value of a high-quality self-regulatory TCR to token stakeholders, then the value of the TCR should grow with the broader market, and you should be able to fairly “price” the system like an insurance product where “x” investment is less than or equal to “y” cost of penalties for non-compliance (fines, legal, brand damage, etc) times the probability you’ll get dinged by someone. Even if that someone is merely the broader crypto community’s opinion.

Tying it all together: a call to action

We are open to feedback, criticisms and new ideas, and are actively looking for collaborators on this project.

If we get the answers to the above questions right, we think we’ll create a compelling flywheel:

There will be high intrinsic value for token issuers to list on the Messari registry, as it will send a strong social signal to investors and potential business partners that theirs is a reputable project.

The intrinsic value of the TCR to token-holders will also be high as it will spawn a vibrant and competitive ecosystem of proxy services, where token-holders can throw their weight behind the most judicious curators.

The curators will be incentivized to create tools that streamline issuer reporting, and increase application throughput without admitting projects that fail certain compliance tests.

The value of listing on the Messari TCR will grow even as the number of admitted projects grows because application costs will decrease over time and/or more robust filing requirements will be automated.

This would almost certainly be an upgrade over the status quo for the global cryptoasset community today, but that might sell the potential here short.

Someday, a well designed, transparency-first TCR could conceivably replace some of the SEC’s core functions around the registration process for bona fide securities. Maybe this technology could help reignite the IPO markets as well.

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We’ll have some exciting announcements to share in early March.

If you’re a developer working on token-curated registries, self-regulation and/or token sale design and would like to work with us on the Messari token, please get in touch at ryan@messari.io.

Or just interested in following the project?

Sign-up for our mailing list and follow us on twitter @messaricrypto.

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Disclaimers and Notes