Last week our theme was “The Action in China.”
Our theme for this week is “Basis shuts down. Will regulation kill crypto?“
Basis, a cryptocurrency stablecoin, is shutting down and returning the capital to its investors because of regulation challenges. Basis, raised some $135 million from top VCs, but decided to shut down because of concerns that regulators would view its tokens as securities.
Ventures capitalists that lend funds to Basis were one-time Federal Reserve governor Kevin Warsh, longtime hedge fund manager Stan Druckenmiller, Digital Currency Group, NFX Ventures, Valor Capital, Bain Capital Ventures, GV, WingVC, Ceyuan, Andreessen Horowitz,one-time Lightspeed Venture Partners, Zhenfund, Sky9 Capital, Foundation Capital, and others.
Basis had a specific contract with investors defining how the majority of capital raised was required to be held. Most of the money was legally required by contract to be held in the currency in which it was contributed and could not be touched by the company until Basis launched its stablecoin.
2018 has been the year of the stablecoin. According to a report from Blockchain.com, the amount of stablecoins skyrocketed in 2018.
What is a stablecoin? A stablecoin is a form of cryptocurrency that is pegged to other stable prices or assets. Some of main advantages of stablecoins are that they are global, have no affiliation to a central bank and rarely are prone to price volatility. But, one of biggest issues they face, is trying to establish if they are subject to national securities and money service laws.
One of the big themes at the recent G20 Summit in Buenos Aires was regulation:
“We will regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF [Financial Action Task Force] standards and we will consider other responses as needed.”
The summit also focused on taxation, mentioning that it is working on a “globally fair, sustainable and modern international tax system” based on tax treaties and transfer pricing rules.
The main issue governments have with crypto is that there are too many blind spots. No one can give a clear answer of what a cryptocurrency is. Is it an asset? How should it be taxed? How should it be monitored; How can we identify confidential transactions? Another big gray area, are ICO tokens.
For some time now, ICOs have been a headache for financial institutions. Initial Coin Offerings are a way for companies to raise money, by issuing tokens and selling them to the public for Bitcoin, Ethereum, other cryptocurrencies or fiat currency. In many cases, projects promise investors, not just the product they plan to develop, but speculative returns from the potential price of the token, when it lists on exchanges. But some companies that collected funds using an ICO, turn out to be scammers. The worse part is that they took the money and ran and never delivered the product.
The most infamous case is Tezos, that collected $230 million. A class-action lawsuit against the Tezos has been filed by a group of investors in the Supreme Court of San Francisco, accusing the the company of fraud and trade of unregistered securities. Tezos is not the only one facing a lawsuit, the list includes other high profile ICOs, like Paragon Coin, Cloud With Me and Latium Network.
Can governments protect investors from fraud?
The most fearsome of all regulators for the cryptocurrency world, is the U.S. Securities and Exchange Commission. The SEC is waging a war on ICOs and in recent months its been handing out fines like its candy. The SEC’s 2018 report already mentions dozens of ongoing investigations, so virtually any startup that recently had an ICO is probably being investigated by the SEC.
In Singapore and Switzerland, central banks have issued guidelines for conducting an ICO and described cases when tokens are be defined as securities and thus must fall within the scope of the law. The Chinese government went even further and completely banned Chinese companies to hold token sales or its citizens from participate in them.
In the short-term, stablecoins are undoubtedly the key to mass-implementation of cryptocurrencies in everyday life. But, scalability and trust will be the biggest issues in 2019 and regulation will play a important role in the adoption of cryptocurrencies. Considering how popular stablecoins have become and the fact that they are very closely linked to fiat, it’s clear that financial regulators, will try to find a legal framework for stablecoins, especially the ones pegged to the U.S. dollar.
People have different opinions if crypto should be regulated or not. Some crypto supporters argue that regulatory control contradicts the philosophy of cryptocurrencies. Others believe regulation is a sign that cryptocurrencies are already accepted by authorities and regulation can only help them grow.
The key to successful regulation of cryptocurrencies is to ensure that it does not stifle innovation.
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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.