Stablecoins

Stablecoin project Basis is shutting down and returning nearly all capital raised to investors

Quick Take

  • Basis, a well-known stablecoin project, is shutting down, according to multiple sources with direct knowledge 
  • Basis will return nearly all funds raised to investors, according to a large investor in the company
  • The firm ran into regulatory headwinds and decided to stop operating, according to sources
  • Basis had raised $133 million and was one of the most funded projects in the red hot stablecoin market

Basis, one of the most well-known stablecoin projects, is shutting down and returning nearly all capital raised to investors. 

According to a Basis investor, Basis had a specific contract with investors defining how the majority of capital raised was required to be held. Most of the money was legally required by contract to be held in the currency in which it was contributed and could not be touched by the company until Basis launched its stablecoin.

In the event that Basis failed to launch, the capital was required to be returned in the form in which it was escrowed. Since Basis contributions were made primarily in cash by investors, nearly the entire treasury of the company remains intact and will be returned to investors.

The firm, which raised $133 million in funding, ran into regulatory headwinds as it attempted to get its algorithmic stablecoin off the ground, said multiple people with direct knowledge of the situation. As a result, Basis is shutting down operations and returning the majority of capital raised to investors. Backers include Bain Capital Ventures, GV, Andreessen Horowitz, Lightspeed Ventures and a number of other firms.

It is not clear exactly what regulatory agency is putting pressure on Basis. Nor is it clear the exact reason why regulators have a problem with their business model or token project. Basis is communicating plans on the project shutdown later Wednesday evening, a person with direct knowledge of the situation told The Block.

Even as a bear market gripped the market for cryptocurrencies in 2018, so-called stablecoins — which aim to maintain a pegged value — have become a darling of the market this year. At the same time, the largest stablecoin, Tether, has drawn scrutiny from market participants for not actually being backed 1 for 1 by USD. Tether shares executive management with Bitfinex, the cryptocurrency exchange. In recent months, cryptocurrency exchange-operators Paxos, Circle, Gemini and others have launched their own stablecoins.

Writing for CoinDesk, Phillippe Bekhazi, CEO of XBTO Group, predicted 2019 would be the year of stable coins. “They can also be used as a mechanism to move value around in stable terms, and technically even for payments, although the speed of the underlying blockchain may be a limiting factor for time-sensitive transactions, for the time being.” 

Multiple sources tell The Block that the team is one of the most accomplished that they have worked with in their career, and that they would work with them again. One large Basis investor said “this is an extraordinarily talented team with an extremely ambitious vision tackling a very difficult problem. He would neither confirm nor deny the rumors of a Basis shutdown, but he continued “our respect for this team is as high as it has ever been.”

The Basis algorithmic model was complex. As described in coverage at its introduction:

To regulate the supply of its tokens, the basecoin protocol itself is made aware of the market capitalization of its cryptocurrency, the demand for the coin and the number of coins in circulation. Further – as the different tokens are used to offer different incentives – they seek to naturally create an equilibrium that keeps the price stable.

The first – basecoin – is the cryptocurrency that powers the system. Pegged 1-to-1 with the value of the U.S. dollar, it serves as the most user-facing of the three tokens, in that it’s the one exchange traders and other users would interact most directly with.

The second and third tokens, “base bonds” and “base shares,” are those that underpin basecoin. Base bonds are tokens to be auctioned off programmatically by the blockchain when supply needs to be reduced, and these will expire within a time frame to encourage redemption.

While hailed as revolutionary by a who’s who of top technology and cryptocurrency investors and experts, the algorithmic model proved impossible to implement within the context of the U.S. financial regulatory environment. In the case of Basis, what many viewed as some of the most innovative mathematics in the world applied to money was no match for the US government.

Update: This article has been updated to reflect new information about investor contributions to Basis and the amount of capital being returned to investors.