Why Did Basis Shut Down?

When it was launched last year, Basis (then known as Basecoin) was heralded as an “elegant system” and was lauded for pursuing the “crypto holy grail” of implementing monetary policy through an algorithmic central bank. Bankrolled by the crème de la crème of venture investing, the startup had plans to become a “digital dollar” and medium of exchange for daily transactions in international markets. 

Eighteen months later, however, reality seems to have caught up with the startup’s lofty ambitions. After the publication of a report in online publication The Block last evening, Basis announced its shutdown due to an unfavorable regulatory landscape in a post on its website this morning. 

What Went Wrong for Basis? 

In the absence of regulatory clarity from federal agencies regarding the status of ICO tokens, most crypto startups hedge their risks by declaring themselves as security tokens or raising funds from private investors instead of public ones. 

Basis raised $125 million from investors using SAFT (Simple Agreement for Future Tokens). SAFT enables startups to raise money from venture investors without offering tokens. (In typical ICOs, investors can get discounted prices on tokens, which are subsequently sold for a profit when the token is listed on an exchange). The future tokens promised in SAFT are utility tokens, which do not fall under the SEC’s purview.

According to Nader Al-Naji, Basis CEO, Basis failed to convince the SEC that its tokens were not securities.   “Although this isn’t the outcome any of us wanted, we knew going into this that we were fundamentally making a binary bet on a favorable regulatory landscape,” he wrote in a post. 

The Basis system consists of Basecoin, Base shares, and Base bonds. The supply of Basecoin, which was to be used for daily transactions, was controlled algorithmically. Base shares were to be given out to early investors in Basecoin while Base bonds were futures instruments which would be issued whenever Basecoin lost its peg with a fiat currency or index or any other basket of goods. Within the Basis ecosystem, Basecoin’s function was that of money or currency. Just like money, Basecoin had no utility apart from being a medium for exchange of value. 

According to Forbes, Basis’s lawyers said that Basecoin would be “deemed” an unregistered security. “Fundamentally, that lack of utility puts us on a different ground than Ethereum or Filecoin,” Al-Naji told Forbes.

Ethereum’s ether is used as “gas” for smart contract transactions within its ecosystem. Earlier this year, an SEC commissioner also clarified that ethereum’s blockchain was sufficiently decentralized such that an appreciation in ether’s price did not translate into profits for a select group of individuals. (Expectation of profit is one of the criteria in the Howey test, which the SEC uses to determine whether a given token is a security). Filecoin’s token is also used as a medium of exchange. However, the tokens are mined and their use is restricted to the Filecoin ecosystem.

A security status for Basecoin was accompanied by additional complications. It meant that the startup would be restricted to raising capital from accredited investors in the US and finding out background information about international investors. The startup would also have to maintain a centralized “whitelist” of its investors indefinitely. 

Basis has returned the remaining capital from its fundraise back to investors. In his interview, Al-Naji counseled cryptocurrency startups to start their company and fund it outside the United States. He also said that the token should have some kind of consumable utility.