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Basis stablecoin shuts down, being unable to avoid security status

Posted: 14 December 2018 1:40 pm News

One of the most hotly-anticipated third generation stablecoin projects is bowing out.

Basis was perhaps the best-funded stablecoin venture in cryptocurrency history. Created by Google alumni and backed by Google Ventures and others, it raised $133 million for its vision of a stable global cryptocurrency focused on developing countries.

Now it's returning almost all of the funds raised and calling it a day.



Regulatory pressure

Appropriately for a project focused on sustainable and stable currency, Basis raised most of its funds through cold, hard fiat and under the fundraising terms agreed to keep it in the currency in which it was raised, untouchable until the launch of the coin, The Block reports.

This turned out to be a clear blessing given the state of the crypto markets over the last year, and will allow almost all the funds raised to be returned, intact, to donors.

The reason for the shutdown, explained Basis founder Nader Al-Naji to Forbes, was that it became clear that Basis would not be able to escape classification as a security.

"We met with the SEC to clarify a lot of our thinking," said Al-Naji. "The SEC generally avoids saying that something will definitely be one way or the other. But from that meeting we got the impression that we would not be able to avoid securities classification."

This might be in part due to Basis' unique balancing system, which consists of Share and Bond tokens which are bought and sold to balance the system, and the price-stable Basis token itself.

Security or usability?

The names of the Bond and Share tokens might have hinted that it would go this way. In this tri-token system:

  • Basis: The stablecoin itself, pegged to US$1.
  • Bond tokens: These tokens would have been purchased in a system-wide auction at prices below $US1, and then bought with Basis at above the initial purchase price if the system needed to expand. They were essentially a way of investing in the expectation of a growing Basis ecosystem.
  • Share tokens: There would have been a set amount of Share tokens in circulation. If the Basis circulation needed to increase, and all outstanding Bonds were purchased, new Basis tokens would have been distributed to Share holders proportionate to their holdings.

As a security, Basis would have been obligated to restrict Bond and Share token ownership to accredited investors in the United States for the first year after issuance and for checking the background of international users. And even after the first year it would have still been obligated to maintain a central white list of holders indefinitely.

The team at Basis determined this to be a deal-breaker because it would mean the on-chain Bond token auction system would have significantly less liquidity, which would significantly harm the stability of Basis. It would also cost the system its censorship resistance, and generally require an incompatible amount of overheads and friction in token administration.

The stickler, Al-Naji said, might be that the Basis ecosystem tokens were all pure currency or investment tokens, rather than utility tokens.

"Fundamentally, that lack of utility puts us on a different ground than Ethereum," said Al-Naji.

Ethereum was in the spotlight for a while, as the ICO might have technically qualified as an unregistered securities sale, and at the time of the ICO, ETH might have been a security. But later, the SEC clarified that ETH had successfully navigated the transition to a utility token, and would not be considered a security.

Later arrivals such as Basis wouldn't have that kind of luxury.

What can you do?

In hindsight, Al-Naji suggested that other entrepreneurs who want to avoid the same regulatory pitfall while building a similar system might consider founding their companies outside the United States and not raising money from US investors, while making sure "the token has some kind of consumable utility, which our token didn't have".

juicy crypto wordsArbitrarily twisting design principles to accommodate specific regulatory obligations, such as by building in unnecessary and unwanted utility functionality, naturally won't be ideal.

The team considered a few of these routes, Al-Naji said, but "we don’t think any of the paths we considered are compelling enough for our users or our investors, or consistent enough with our vision to justify moving forward".

This might be one of the clearer examples of how regulatory clarity, which has been largely welcomed by the cryptocurrency industry, is still chafing in some places.

But what can you do?

Bailing out of the US market might be the most popular option. It's one that many other cryptocurrency projects have already taken, and one that Basis also experienced to a certain extent, having previously moved from New York City to New Jersey, to avoid the onerous pains of the New York BitLicense.

"I'm very disappointed. Returning capital is something I never wanted to have to do, and had the regulatory climate loosened rather than tightened it would have been amazing for our technology, and also for the people who would use it," Al-Naji said.

As one of the best-funded and most highly regarded cryptocurrencies in the highly concentrated field of third generation "seigniorage shares" type stablecoins, Basis' fading out might be a significant blow to the nascent area.

The regulatory headaches, Al-Naji suggests, will see centralised, collateralised stablecoins remaining in vogue in the near future. They "will actually do very well," he said. "But it's a disappointment that we can't offer an alternative that doesn't rely on trusting a centralized authority."

Basis isn't the first cryptocurrency to fall down after being unable to avoid classification as a security. But it might be one of relatively few to actually do the right thing by calling it a day and refunding its investors, rather than pushing out a subpar alternative while pocketing as much money as it can.

KodakCoin, for example, ran into a similar problem. But rather than close up shop on the realisation that it would be creating an unworkable product, it just ended up with a cryptocurrency that was meant to function purely as a currency, but it was also a security – a combination which renders it almost entirely unusable. Things at KodakCoin are now going about as well as one would expect.

Over and out, Basis says.


Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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