Ilona Silberman - December 19, 2018
Basis, a stablecoin project promising to offer price stability by expanding and contracting supply of the token (Basis, formerly Basecoin) to keep its price at about a dollar per token, is shutting down. Basis published a letter for its community on December 13th informing them of the decision. The project has said it will return capital it got from its top venture capitalists, as it came under the scrutiny of regulators.
Eight months ago, Basis landed $133 million USD of capital from top venture capitalists such as one-time Federal Reserve governor Kevin Warsh, Lightspeed Venture Partners, Foundation Capital, Andreessen Horowitz, WingVC, NFX Ventures, Valor Capital, Zhenfund, Ceyuan, Sky9 Capital, Digital Currency Group and others. On December 13th, Basis published a letter announcing that the project is halting operations, due to an SEC guidance letter. Apparently, a SEC regulatory guidance defined the project as a security and this had a negative impact on its ability to launch.
If the SEC regulates a cryptocurrency as a security then exchanges would have to register with the SEC in order to enable trading involving the asset, at least in the US. Also, US investors will not be able to invest in a project that is deemed as a security in the US but is not properly registered as such. Projects face hundreds of thousands of dollars in fines if they don’t register with the SEC, but they conduct their business in the US or solicit US citizens or residents.
But why did the SEC want to regulate Basis as a security? Put simply, Basis was meant to be a bond and share token. The project was designed to use an algorithm to stabilize token prices, as opposed to collateralizing it or pegging it to a fiat currency like the US dollar. The system was planned to incentivize traders to buy and sell Basis in response to changes in demand. These incentives were set up through regular, on-chain auctions of “bond” and “share” tokens, which served to adjust Basis supply.
Due to their status as unregistered securities, bond and share tokens would be subject to transfer restrictions, with Intangible Labs, the team behind Basis, being responsible for limiting token ownership to accredited investors in the United States. The team would also have to perform eligibility checks on international users. Enforcing these transfer restrictions would require a centralized user white list, which went against the ethos of Basis as a decentralized cryptocurrency available to everyone. Complying with SEC regulations would have changed the entire product Basis offered.
Intangible Labs considered paths that would comply with SEC regulations while keeping their product compelling to users, such as launching offshore. Nevertheless, that would affect the project’s fund-raising efforts with qualified US investors. These investors were also not too keen on changing the product to comply with the SEC, which put the final nail in its coffin.
This only makes us stop and think about why the SEC would want to halt a promising project like Basis. Providing a stablecoin option that is not tethered to fiat currency could serve to increase the adoption of cryptocurrency. This kind of regulatory obstacles could hamper the growth of the space. If there had been tighter regulation at the dawn of the internet age, we wouldn’t have seen the development of the technology we use today. By forcing their regulations on Basis, the SEC is only stifling innovation. These projects are bound to migrate to friendlier jurisdictions.