Blog Digital Currency Perspectives December 18, 2018

Basis Stablecoin Shuts Down Due To What it Deems A “Serious Negative Impact” of U.S. Securities Regulations

Basis, one of the most well-funded crypto-startups, had plans to create an algorithmic central bank that aimed to create a price-stable cryptocurrency within a decentralized monetary system. In its April 2018 fundraising efforts, Basis had secured $133 million in funding from large institutional investors.  However, citing regulatory constraints, Basis announced in a blog post dated December 13, 2018, that it was shutting down its business operations.

As noted in its post, Basis intended to create a “stable, decentralized cryptocurrency.” Although several crypto-startups have endeavored to create a stablecoin, Basis’ system was unique in that it was to create a complex algorithm to maintain its 1-to-1 correlation with USD. Basis aimed to “remain stable by incentivizing traders to buy and sell Basis in response to changes in demand.” When demand increased, the blockchain would create more Basis and the increase in supply would stabilize the price. In announcing its decision, Basis stated “unfortunately, having to apply US securities regulation to the system had a serious negative impact on our ability to launch Basis.” Although the nature of its discussions with the U.S. Securities and Exchange Commission (the “SEC”) is unknown, Basis stated that the “bond” and “share” tokens–which would be used to expand the supply of Basis to maintain the price peg–would be considered unregistered securities and as such, be subject to transfer restrictions and limited to accredited investors.

Pursuant to Rule 144 of the Securities Act of 1933, as amended (the “Act”), restricted securities (i.e., unregistered securities) of a privately-held company cannot be sold in a public marketplace unless the securities have been held for at least twelve months from the date the securities are acquired or registered with the SEC.  The sale of restricted securities is also generally limited to accredited investors under Regulation D of the Act.

Basis attributed the U.S. securities regulations as impeding its ability to build the ecosystem it had envisioned, claiming that imposing transfer restrictions and limiting the ecosystem to fewer participants “adversely affects the stability of Basis” and makes it “less attractive.”  Even though it reported considering many different paths, Basis felt that the regulatory constraints were far too unfavorable and “did not think any of the paths [it] considered are compelling enough…to justify moving forward.”  Basis plans to return its remaining funds back to its investors.