First and foremost I want to say that we have a ton of respect for the Basis team. We’ve always viewed them as one of the more intellectually impressive and credentialed teams in the stablecoin space and they have done more than most other groups to drive the conversation forward and advance the crypto industry as a whole.
All this being said, while we understand that Basis felt that outside regulatory agencies made their plan untenable and less promising to investors than they originally intended, we feel that there are lessons to be learned and we are certainly trying hard to absorb them. We also understand how they might have came to the conclusion that they needed to fold up shop, but we disagree that the SEC’s guidance was somehow a “surprise”.
As a company we have made many contrarian choices. One of the most difficult choices was to not pursue a token sale last spring. (We have actually spent a fair amount of time trying to figure out how Basis was navigating securities laws). While we are committed to eventually going algorithmic if the market will eventually support that, we weren’t comfortable with how vulnerable any non fiat-collateralized system at this point in time or their ability to effectively compete for liquidity.
On a very high level for Basis’s system to remain robust, Baseshares needs to trade at a very healthy price. The system’s ability to survive drops in demands correlates to the liquidity of the bond market. The bonds would never be traded at a premium over shares as shares have no upside cap (there is a scenario in which the payout order on the bonds could command a premium but this would only happen when the system was exposed to existential risk). The pricing of Baseshares depends entirely on aggregated expected demand for the stablecoin discounted based on both system confidence and capital lock up costs. Consequentially the systems robustness was tied directly to the pricing of Baseshares. The the lower the price, the higher the probability of total collapse.
Having close a billion dollar valuation likely would have lead to a substantial sell off on launch which would have further reduced partner and investor confidence. Most investors are chosen based off their ability to support projects and poor performance on launch would significantly reduce supporters willingness to help drive adoption. Like most networks, the challenge is getting it to scale. Being dubbed a security, having credible competitors, and the market contraction substantially increase the risk of the system failing to achieve enough scale to become robust. Basis failed at least in part because of their inability to effectively navigate evolving market conditions.
We laud the humility demonstrated by the Basis team through their decision to return investor funds. We strongly encourage other projects in the space that raised with tokens to assess the viability of their respective visions, and, if it makes sense, follow in Basis’s footsteps. We fully expect the SEC to continue to pursue groups that sold unregistered securities and believe good faith actions on the behalf of projects is the best way to navigate this risk.