Not even three Princeton honors students and $133 million could save the Basis cryptocurrency from the scrap bin of SEC rejects.
After raising capital from the likes of Google Ventures, Andreessen Horowitz, Bain Capital and others, the company behind the cryptocurrency, Intangible Labs, today announced the project was being killed and all the funds returned.
For a startup that captured widespread attention for its promise to launch a new cryptocurrency designed from the ground up to serve anyone around the world with unreliable central banks, the decision marks a surprising end.
But Nader Al-Naji, Intangible Labs' CEO, hasn't totally given up. In an interview with Forbes, Al-Naji explained what went wrong and how similar companies in the future could avoid his fate.
“We met with the SEC to clarify a lot of our thinking,” said Al Naji, who previously worked at Google after graduating with honors from Princeton University. “The SEC generally avoids saying that something will definitely be one way or the other. But from that meeting we got the impression that we would not be able to avoid securities classification.”
Sadly, Al Naji tells Forbes the Basis technology was nearly complete, and his company was mostly just waiting for a final green light from regulators before unleashing it into the world. Forbes named Al Naji to its 2019 30 Under 30 list of young entrepreneurs out to change the world.
Instead, Intangible Labs, relying on what Al Naji calls a “return capital clause” in the white paper that first described the Basis technology, will return the venture capital to investors now that the regulatory climate has evolved against the company’s favor.
When Intangible Labs first published its white paper in June 2017, the company described Basis as an “algorithmic central bank” that would give users a stable currency with which to conduct financial transactions around the world, similar to bitcoin but without the wild price swings experienced by other cryptocurrencies.
By automatically buying back Basis tokens when their price dropped and minting new tokens when the price increased, the New Jersey startup believed it could create a new global currency. Specifically, on-chain auctions of "bond" and "share" tokens would be used to adjust the supply. This is different from most other stablecoins launched this year, which achieve stability by being backed by the U.S. dollar or another fiat currency.
The company’s lawyers explained that the tokens would likely be deemed unregistered securities. Because of that, Intangible Labs would be responsible for limiting token ownership to accredited investors in the United States for the first year after issuance and for backgrounding international users. While many of the regulatory requirements would lapse after one year, a centralized "white list" would be required indefinitely.
“I’ve very disappointed,” said Al Naji. “Returning capital is something I never wanted to have to do, and had the regulatory climate loosened rather than tightened it would have been amazing for our technology, and also for the people who would use it.”
This is not the first time Intangible Labs was forced to change its plans due to regulatory requirements. Shortly after launching, the company moved from New York City to New Jersey, where Wall Street was still visible on the other side of the Hudson River but the company was at least technically out of reach of the state of New York’s burdensome BitLicense requirements.
Ironically, the failure of such a promising young startup seeking regulatory permission comes only six months after an SEC director publicly stated that another high-profile cryptocurrency, ether, was likely an unregistered security when it launched but had evolved to be not a security. Bitcoin, the cryptocurrency that started it all, was launched without permission by an anonymous creator ten years ago.
Ether serves as a fuel of sorts that powers the Ethereum network of decentralized applications, and other cryptocurrencies like filecoin are designed to compensate users for leasing out unused computing space. Meanwhile, Basis has no intrinsic utility and is a pure-play replacement for currency, according to Al-Naji.
“Fundamentally, that lack of utility puts us on a different ground than ethereum or filecoin,” said Al Naji. “That puts us at a disadvantage in the existing regulatory framework.”
While the total market value of bitcoin, ether, and all other major cryptocurrencies has taken a pummeling over the past year, falling about 80%, the fact that they exist at all is of note given what the end of Basis reveals about the strictness of the current regulatory climate.
Going forward, Al Naji says that other entrepreneurs working to build a stable alternative to hyper-inflated fiat currencies should not found their companies in the United States, not raise money from U.S. investors, and ensure “that the token has some kind of consumable utility, which our token didn’t have.”
For now, though, the Intangible Labs cofounder says existing stablecoins that rely on fiat backing but still give the speed and borderlessness of crypto “will actually do very well,” adding: “But it’s a disappointment that we can’t offer an alternative that doesn’t rely on trusting a centralized authority.”