The Transparency Crisis in the Encryption Industry and the Path to Bail-in

The cryptocurrency industry has gone through more than a decade of development and is at a critical turning point. While some crypto companies are beginning to move towards IPOs, the token market still faces significant issues: a lack of transparency. This severely hinders the development of the industry.

Many liquidity token investors are concerned that the token market is becoming a "lemon market." Due to a lack of effective mechanisms to distinguish between high-quality and low-quality projects, the market may ultimately be left with only low-quality projects. Token market investors face many issues that equity investors do not have to worry about, such as insufficient legal protection, multi-token issues, parasitic equity issues, founder misconduct, and foundation abuse.

These structural issues have led to a risk premium of up to 20% for tokens, significantly higher than the 5% for stocks. According to capital market pricing logic, this high premium results in token valuations being discounted by about 80%. With such a large valuation discrepancy, outstanding founders may choose to issue equity instead of tokens, creating a vicious cycle.

Industry experts believe that the core structural issue in the current token market is the ambiguous relationship between equity and tokens. The majority of the profits from many projects flow to equity holders, while the value of the tokens themselves tends to approach zero. Token holders are unclear about their own rights and do not know the rights of equity holders, leading to potential conflicts of interest.

The "everything bubble" period from 2020 to 2021 exacerbated the problems. At that time, token prices rose without fundamental support, and the industry learned the wrong lessons from it. After the bubble burst, market participants have been waiting for the next "big cycle," only now beginning to confront substantial issues such as revenue and fundamentals.

Positive changes are taking place in response to these issues. For example, emerging legal frameworks such as DUNAs and BORGs are designed to address the needs of off-chain entities engaging in commercial activities. On the regulatory front, a member of the US SEC has proposed the "safe harbor 2.0" initiative, providing a grace period for projects transitioning from centralized to decentralized.

However, the chaos in the industry remains widespread. Some projects separate the IP from the tokens, leaving the cash flow entirely to the core team. Other projects are exploring the issuance of new tokens for new business lines, raising concerns among investors. Certain teams excessively cash out in advance, leading to project failures, or pay high "consulting fees" to the core team through foundations.

To address the serious issue of insufficient information disclosure, industry experts have introduced a token transparency framework, which is an open and standardized self-disclosure template. This framework requires project parties to answer about 20 questions, covering content such as business description, supply timeline, etc., and provide supporting materials. The scoring mechanism assigns different weights based on the importance of the questions, ultimately generating a simple and understandable grade.

It is expected that this framework will have a significant impact on the token market. Projects that participate and receive reasonable ratings may see their tokens gain a premium due to increased transparency. This will attract more liquidity token funds, driving institutional capital inflow. In the short term, projects with good fundamentals that are overlooked by the market will become the main beneficiaries.

On the contrary, projects that view tokens as arbitrage tools, lack real products, or abuse market structures will be marginalized due to a lack of transparency. The emergence of a framework is expected to end the overvaluation of "fraudulent tokens," allowing resources to flow more effectively to projects that truly have product-market fit.