Why aren’t we talking about crypto white papers?

Written by Tiana Whitehouse, Co-Founder & Managing Director of SWOT Team Consulting.

As the name would suggest, financial technology (FinTech) companies inhabit two worlds, each with their own unique customs and language. The first is the infamous tech start-up world born in Silicon Valley decades ago, and the second is the complex and highly regulated world of financial services.

Our role as consultants is to help FinTech clients make the difficult transition from tech start-ups to regulated financial services businesses. Having worked with numerous clients on this journey, we have observed that certain entrenched business practices from the start-up world often cause regulatory issues and other unintended consequences for crypto firms. One such practice is the prolific use of the ‘white paper’ as a marketing strategy.

Evolution of the White Paper

Initially coined as a term by British policymakers, the white paper has been a staple in the tech industry since the early 1990s. The purpose of the white paper is to provide detailed information to potential investors about the company’s products and services. Although white papers were initially circulated solely to other businesses or wealthy investors as part of venture capital funding rounds, they are now self-published on crypto firm websites and readily available to the retail public.

White papers are lengthy documents and tend to follow the general formatting of an academic research paper, including footnotes and detailed infographics. Firms spend significant sums of money on designers and marketing experts to ensure that their white papers look professional and give legitimacy to the project.

The key components to a typical white paper include:

> An overview of the company’s background, key founders, and investment partners.

> Detailed technical descriptions of any proprietary software and integration plans for third-party platforms, exchanges, products, etc.

> Products and services that are under development.

> Competitor analysis and go-to-market strategies.

> Regulatory timelines (for businesses that require a licence or authorisation to operate).

> Timelines for completion of various project phases and funding rounds.

> Financial projections.

Despite their appearance as factual reports supported by evidence and solid accounting principles, many white papers are completely aspirational in nature. This is particularly relevant to crypto companies in the very early start-up stage who do not yet have the infrastructure or funding to carry out the business plans or product development as described in the white paper.

Blurred Lines

The very act of having published a white paper can be enough to make a crypto project seem like a viable investment. Indeed, bogus white papers are often used to give legitimacy to crypto scams such as rug pulls and pump and dump schemes. Perhaps it is the rapid proliferation of such fraudulent activities that has allowed the white paper in its current form to exist in the realm of regulated token sales.

Our observations confirm that the white paper’s veneer of legitimacy also extends to regulators themselves. We have seen many examples of a crypto firm’s self-published white paper being referred to in licensing application queries, information requests, and introductory meetings as part of an authorisation process. However, the widening of the white paper’s intended audience (i.e., retail investors) and its increased popularity as marketing tool for crypto firms should raise significant concerns.

Unlike institutional investors such as VC funds, retail investors do not have access to the right information to determine the feasibility of a start-up company’s financial and growth projections. Many crypto firms deliberately target young investors through social media channels and other digital forums using commercial marketing techniques that would likely be deemed predatory in the context of financial products.

We have noticed that some regulators seem wholly unaware of the extent to which many white papers are drafted and project-managed by external marketing agencies with only superficial involvement from the crypto firm’s executive team. There is a whole niche industry of marketing agencies who can generate a professional looking white paper in a matter of days despite never having set eyes on the firm’s business plan or product specifications. This is particularly concerning where financial projections are published without having been stress tested or otherwise confirmed by an independent third-party.

Even where regulators are aware of the dubious nature of many crypto white papers, they often lack the legal authority to act until investor harm has already occurred. This stems from the fact that some regimes do not yet regulate crypto marketing while others have not taken the step of including white papers under the existing promotional rules for financial products.

What Next?

In the last month there have been a multitude of new regulatory efforts to better control crypto advertising and limit investor participation in line with other high-risk financial products. The current regulatory focus seems to be on greatly limiting the percentage of the crypto population who are allowed to publish promotional materials without defining what that means in practice. It is interesting that no specific references have yet been made to white papers and their prominent role in crypto promotional activities.

Based on the EU’s plans for MicA, in which EU crypto firms will have to submit white papers for review and approval by the relevant regulator prior to distribution, we can assume that the regime will evolve in line with the existing mandatory disclosure regime for other high-risk regulated financial products. This approach differs from the UK’s stated intentions to extend the reach of existing legal requirements for advertising and promotional materials to crypto promotions (including token sales) and limit publication of promotions to authorised firms who are permitted to do so.

Whatever the outcome, regulators must balance their duty to protect retail investors with their legislative mandates to support innovation in financial markets. Taking an overly restrictive approach to the content and distribution of crypto white papers could lead to a chilling effect on innovation and reduce legitimate opportunities for retail investors to take part in early-stage funding rounds.

Our Tips for Crypto Firms

We know that developing a white paper for publication is an important investment in a crypto firm’s future. To ensure that your white paper will remain fit for purpose in the face of constant regulatory change, we recommend that founders keep the following tips in mind:

Take care in how white papers are drafted, approved, and distributed.
Ensure that there is version control and that editing history is retained for each draft of the white paper. All approvals and distribution decisions should be formally recorded in the Board minutes.

Seek independent expertise on areas that could later be scrutinised by regulators (e.g., tokenomics, financial projections, go-to-market strategies, etc.).
You will eventually be caught out if your executive team cannot explain complicated concepts from your white paper to an investor or regulator. Similarly, wildly optimistic financial projections or marketing strategies that target certain demographics could get you into hot water with the regulator. If you are backing a novel or innovative strategy that radically diverges from competitor businesses, obtain independent advice that supports your findings and keep this on file.

Be honest if something is still in development.
It is crucial that crypto firms do not mislead potential investors. Where products have not yet been developed and/or key partnerships are not confirmed, be sure to note this in the assumptions underlying the project timelines and financial projections. This transparency should further extend to any investor outreach activities and marketing materials.

Consider limiting the distribution of your white paper.
If you are facing significant regulatory uncertainty about the type of retail investor(s) who are eligible to receive crypto promotions, proactively develop a strategy to mitigate your risk. For example, you could require prospective investors to complete some filtering questions or certify that they are experienced in crypto products before they can view the white paper.

Need help writing a white paper for your business? Write to us here.