HOBOKEN STARTUP BASIS, WHICH RAISED $133 MILLION, IS SHUTTING DOWN AND RETURNING INVESTOR MONEY
December 17, 2018
Esther Surden
Publisher & Editor,
NJTechWeekly.com
Basis, the Hoboken crypto startup founded by three Princeton alumni, is shutting down. The company, whose official name is “Intangible Labs,” had raised $133 million from prominent VCs. Cofounders Nader Al-Naji, Lawrence Diao and Josh Chen said that they would return the money they hadn’t used to their venture capital backers.
According to a note on the company’s website, “Eighteen months ago, we set out with the ambitious goal of creating a better monetary system: one that would be resistant to hyperinflation, free from centralized control, and more stable and robust than the monetary systems that came before it. This was a goal we felt could create tremendous value for society if achieved, and one we also felt well-positioned to take on.”
The idea was, according to TechCrunch, to create a “stable coin” called “Basis,” whose “elastic supply would ostensibly expand and contract to keep its value at about a dollar instead of all over the map. The company’s big idea: to develop a new token that people would actually use, instead of use to speculate.”
The project, as explained on the Basis website, would have been able to keep Basis stable using algorithms that would adjust supply. When demand was rising, the blockchain would have created more Basis, and the expanded supply would have brought the price of Basis back down. Similarly, when demand was falling, the blockchain would automatically buy more Basis, to contract supply and bring the price back up.
So what happened? The company ran into regulatory issues that were so daunting, it could not continue.
Said the cofounders, “having to apply U.S. securities regulation to the system had a serious negative impact on our ability to launch Basis.” Here are some of the specifics, in the words of the cofounders:
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).
Due to their status as unregistered securities, bond and share tokens would be subject to transfer restrictions, with Intangible Labs responsible for limiting token ownership to accredited investors in the US for the first year after issuance and for performing eligibility checks on international users.
Enforcing transfer restrictions would require a centralized whitelist, meaning our system would not only lose its censorship resistance, but also that on-chain auctions would have significantly less liquidity.
Having fewer participants in the on-chain auctions adversely affects the stability of Basis, making Basis intrinsically less attractive to users. Additionally, imposing transfer restrictions on bond and share token auctions materially hurts our ability to build the Basis ecosystem.
While transfer restrictions can generally lapse 12 months after a security is issued, because the auctions of bond and share tokens governed by our monetary policy would be continuously issued, transfer restrictions and a centralized white list would be required indefinitely.
The company knew at the start that the Basis project would depend on a favorable regulatory environment, the cofounders said, and that is why they included a return-of-capital clause in their token sale to begin with.
A partial list of VCs involved in the Basis financing rounds, according to TechCrunch, includes: Bain Capital Ventures, GV, long-time hedge fund manager Stanley Druckenmiller, former Federal Reserve governor Kevin Warsh, Lightspeed Venture Partners, Foundation Capital, Andreessen Horowitz, Wing Venture Capital, NFX, Valor Capital Group, ZhenFund, Ceyuan Ventures, Sky9 Capital and Digital Currency Group.
Esther Surden is Publisher and Editor of
NJTechWeekly, and a contributor to
Philly Tech News. This
article originally appeared in
NJTechWeekly, and is republished here with her permission.
