Basis — the well-known stablecoin startup that raised $133 million earlier this year — is reportedly shutting down following regulatory complexities. The startup will return nearly all of the $133 million to its investors in an unprecedented move in the cryptocurrency realm.
The Block reported that a Basis investor claims the startup was legally obligated to store the vast majority of the investment until the launch of the product. With most of the investment in cash rather than crypto, investors are set to receive their investments back almost in full.
Stablecoin Market and Regulatory Pressures
Basis entered the scene with a high-profile $133 million funding round and the promise of a novel algorithmic model for maintaining a stable value using Basecoin, base bonds, and base shares. The model is complex and is why regulatory pressure has come down hard on the stablecoin.
Nader Al Naji, the Basis Founder, provided some insight today in a blog post:
“As regulatory guidance started to trickle out over time, our lawyers came to a consensus that there would be no way to avoid securities status for bond and share tokens (though Basis would likely be free of this characterization).”
The problem seems to be circumventing the classification of their base bonds and base shares as securities under federal regulations. Such regulations would require strict KYC/AML processes and a centralized registry of investors as well as transfer restrictions.
The limits on how they could launch their stablecoin made them realize that their project would not sufficiently attract enough interest as it would not be fully decentralized, mirroring similar stablecoins that have flooded the market recently.
Stablecoins have emerged as a popular model in recent months, with several — including Paxos, USDC, and Gemini Dollars — all appearing under strict regulations. Basis realized that the market opportunity was not what it had been and that regulations would handcuff the flexibility of their design.
Regulations — particularly KYC/AML processes — are viewed through primarily two prisms in crypto communities.
- They are great for onboarding institutional investors, mainstream adoption, and transparency.
- They are stifling innovation and a burden that demonstrate the coercive power over third-parties by regulatory institutions.
Core cryptocurrency proponents fall into the latter category, which is why several classes of developments (i.e., P2P marketplaces and anonymity coins) that circumvent regulators have garnered more support recently. Conversely, the increasing prevalence of stablecoins demonstrates the effort by exchanges and regulators to work on providing a new framework with more government oversight.
Regardless, the fall of Basis highlights how an unfavorable regulatory landscape can derail hopes for specific projects. A silver lining is that at least traditional investment structures allowed the backers to receive their funding back, contrary to ICOs.