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Stablecoin Basis is closing down (cryptonews.com)
138 points by leppr 3 months ago | hide | past | web | favorite | 112 comments



Basis was something special. Its algorithm was such that if it ever stopped growing at a sufficient rate, it would explode to zero. And this would remain true no matter how much Basis had previously grown.

Every gain against a dollar by Basis was erased, either by paying off previous bets, or by paying “dividends”, and would not count for future price resiliency. If the market cap was 3 trillion and basis was used by 500 million people, and it needed to issue “bonds” to hold the peg, then the doom clock would start ticking again afresh.

In order for Basis to hold the price, you placed bets, not only that that the price would go back, but that the market cap would grow enough beyond a parity price to pay off every bet ahead of you in line. If the price just returned to parity, you still got nothing. So the more outstanding bets, the bigger the risk of placing a new bet. And this risk grew at a power ratio the farther behind the currency got.

Basis could do nothing but explode.


Don’t even get me started on the whitepaper...

“The critical insight is that as long as traders expect Basis price to correct [and grow] in the long-term...” which makes a prerequisite out of what they need to demonstrate.

And then there’s the part where they prove that their algorithm works by pretending that their currency behaves like USD does. Of course if your currency behaves like one of the most successful fiat currencies of all time, backed by the most powerful government in the world, then everything will be okay. If my hypothetical elderly Chihuahua dog had the driving ability and limbs of Micheal Schumacher in his prime, then my Chihuahua could turn in some nice lap times at the Nurburgring.

Whitepaper is still up for now. Enjoy. https://www.basis.io/basis_whitepaper_en.pdf


I think you're being unfair with your quotation there. The point they were making was that their system works over time, so whilst there can be temporary disjunctions on the long term the mechanism works, and therefore it's reasonable to expect parity to return which will help in the short term. If Basis were 95% of nominal value and you know that the algorithm ensures a return to 100% then actually you're incentivized to buy in, in the knowldge you can make profit lending liquidity. This may not be how it worked, but the idea that the predictable long term mechanism incentivizing short term behaviour isn't without merit.


Crypto futures gambling with a near guarantee you’ll lose your money?


It is the embodiment of the slot machine with a 93% payout.


> it would explode to zero

How is that a "stable" coin then?


that sounds like a bucket shop....


What they’re calling “bonds” are actually callable binary futures.

They either pay you 1 basis when called or they expire worthless, if Basis economy will stagnate/contract for 5 years in the row.

Additionally they rely on unregulated crypto “exchanges” to make secondary markets in these futures.

I think the reason they’re calling them “bonds” is because binary futures and prediction markets are illegal in US (falling under CFTC jurisdiction).

Similar problem will apply if they were real bonds - then they're falling under the jurisdiction of the SEC and will have to be registered with them or get an exemption from registration.

EDIT:

For those who think that MakerDAO is better than Basis protocol, it's not that Maker got CFTC license to operate a Swap Execution Facility (SEF)[1].

1. https://en.wikipedia.org/wiki/Swap_Execution_Facility


People are struggling to understand even Bitcoins.


Not sure why this is getting downvoted. Parent is right, most folks don't get it, even technical ones. Most people aren't in STEM, aren't making north of six-figures doing tech, and aren't super literate when it comes to even basic technology, like their car or IR TV remote.

This Christmas, buy everyone in your family and all of your friends $100 worth of BTC. I'd bet my hat that you'd have to explain how it works, in a practical-how-to-trade-this sense, to virtually all of them, save for those in STEM. And even if they learned how it works, what's your aunt going to spent the BTC on? Can't take it to Applebee's, or Wal-Mart, or Bed Bath & Beyond, or pay a mortgage or a parking fine.


By the time you explained it to them they would only have $50 worth of Bitcoin.


Or $200.


They are calling it bonds because they are literally bonds https://en.wikipedia.org/wiki/United_States_Treasury_securit...


Nothing in this Wikipedia article talks about government defaulting on bonds (or they expiring worthless) if the economy enters into 5 year long recession.

Default should be an unusual or unexpected outcome, not part of the contract. You don't take a loan from somebody and then saying them: "you know what, if I will not return you money in 5 years, even if my company still operating - write it off."

If the expiration is part of the contract, then it's a derivative contract. In this case you have only 2 outcomes: either you get paid 1 basiscoin, or your "bond" expires worthless after 5 years and you get nothing. That's why it's a binary future. Binary futures/options and prediction markets are illegal in US since they resemble gambling.


> If the expiration is part of the contract, then it's a derivative contract. In this case you have only 2 outcomes: either you get paid 1 basiscoin, or your "bond" expires worthless after 5 years and you get nothing. That's why it's a binary future. Binary futures/options and prediction markets are illegal in US since they resemble gambling.

Sounds like credit default swaps ... you pay a premium until expiration (you get nothing) or some credit event happens (e.g. default; you get a payout). Difference seems to be the conditions for a payout.


yes, but the problem is that there is no credit event happens, it just the way they structured the contract, b/c otherwise their simulation shown the price stability will not work. There is no credit event, because they can always print new basiscoins, they just just arbitrary choose not to (probably overfitted for 5 years expiration).

Even if basis "bonds" were credit default swaps, and then listed on crypto "exchanges", they're still falling under the regulation of CFTC. Those exchanges need to be licensed as Swap Execution Facilities (SEFs). And if basis doing on the protocol level like MakerDAO - they need to get SEF license by themselves.


Whenever your network promises to maintain a peg to some other currency, you are opening yourself to arbitrage by others taking advantage of your guarantees, knowing you’re committed to certain actions.

That’s why a peg is never 100% certain.

That’s how George Soros broke the bank of England. But unlike England, an autonomous network would simply continue to lose money and go bankrupt. Right? Any ways around it?

https://www.investopedia.com/ask/answers/08/george-soros-ban...


One possibility is to hard fork the chain and convince everybody that the forked version is the real version, including the users and exchanges. (Something like the "fix" for "The DAO" in Etherum.) In the hard fork you can change slightly the algorithm, or make a haircut (like the usual solutions of countries in these situations).

The old unforked version of the coin will continue to drop to 0, and will try algorithmically desperately to sell worthless bonds to try to raise the price, but nobody sane would buy them.

I'm not sure if this is legal or moral, but I would not be surprised if something similar appears in the future.


You are absolutely right. There are countries that have pegged their currency to the US dollar. Like you said, it is not sustainable. The only solution is to do what it is conjectured Tether did and that is just print more and more to hold the peg but obviously that has other issues.


I guess the important thing is that now we have one data point.


> Basis is designed to keep prices stable by algorithmically adjusting supply. When demand is rising, the blockchain will create more Basis. The expanded supply is designed to bring the Basis price back down. When demand is falling, the blockchain will buy back Basis.

So exactly how counties do/did with their foreign currency reserves. Hint - it can and did end up blowing up in spectacular way.


Out of interest, what do they use to "buy back Basis"?


They auction off a sort of binary future that either converts to Basis in a future event when they're increasing the supply, or expires worthless if no such event occurs in a set amount of time (5 years, I think).


Bonds are auctioned off that can be converted 1:1 to coins the next time the supply increases.


> Hint - it can and did end up blowing up in spectacular way.

Very true. See George Soros and the Bank of England for a famous example.



There's also a statement up on their site:

"Unfortunately, having to apply US securities regulation to the system had a serious negative impact on our ability to launch Basis."

https://www.basis.io/


"And we would have gotten away with it, too, if it weren't for those meddling kids at the SEC"


They provide a point by point explanation of why this would make it difficult:

* 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.

Your snarky comment adds nothing constructive to this discussion, and lowers the quality of discussion on hackernews.


Dunno I thought the comment was funny. Humour has value sometimes.


LOL

I'm sorry we can't scam you, apparently there is a law against that.


Maker DAI is superior in every way to Basis, and it's been in production for over a year at this point...surviving all the wild price swings along the way.


Isn't most of DAI stability artificial through bots because it is just a cryptocurrency-collateralised derivative contract which uses ETH for the collateral?

It will eventually fail too. When ETH collapses they won't be able to hold the stability for long.


What do you mean by ETH collapsing? You mean going to 0? ETH has lost more than 90% of its value in 2018 but DAI remained at $1 which seems pretty stable


The only external input to Maker/DAI is a collection of ETH price feeds. The rest is an open market. I'm sure some market participants use bots, but that's true in every financial market these days.

I was skeptical of Maker at first, and they are backed by ETH, but they've stayed within 1% of their target price while ETH dropped 94%, so it seems to be working pretty well so far. They're working on a multi-collateral version.


>they've stayed within 1% of their target price

I'm not sure which charts you are following, but as recently as yesterday they were 5% off target: https://coinmarketcap.com/currencies/dai/#charts


Maker DAI is one of the asset backed stablecoins (in this case the asset is still in crypto - there are other stablecoins where the asset is outside of the crypto sphere). What made Basis really interesting is that it was purely algorithmic, i.e. it was entirely self contained with its own monetary policy issuing in effect both stocks and bonds.


DAI is purely algorithmic as well. It's all smart contract based issuance. But it is asset backed rather than some fiat system.


Are you saying Basis is fiat?

I don't think you can call DAI purely algorithmic because it needs oracles to work.


I think chrisco255 is saying Basis and DAI aren't one of the stablecoins backed by actual fiat. I believe there are 4 sorts of stablecoins:

- Ones backed by fiat, or allegedly backed by fiat[0].

- Ones backed by commodities, e.g. the organisation that issues the UK's coinage (The Royal Mint) was looking at issuing RMG tokens backed by their gold reserves[1] (they've since stopped work on this even though it is still listed on their web site).

- Ones backed by other crypto assets, e.g. Maker DAO's DAI depends on ETH as its collateral.

- Ones not backed by any external asset outside of its own system, e.g. Basis.

The algorithms for the last class are particularly interesting in that they essentially have to model what a central bank does. I'd be interested to find out why Basis has failed. Is it just that they were unable to comply with US regulations? Or is it that the algorithm itself wasn't viable?

[0] https://news.ycombinator.com/item?id=18493093

[1] https://www.royalmint.com/invest/bullion/digital-gold/


I would argue that it was a fiat system modeled somewhat closely to the U.S. monetary system.

Point is that DAI has economic incentives in code to keep its price in check.


DAI is backed by ETH. that's the critical difference here. You can't have a stable coin backed by itself, that's a perpetual motion machine


Do you know what the use case for holding stable coins is? I haven't figured out why anyone we ould need them.


Yeah, for transactional use cases. We could place stable DAI in a smart contract and be sure that it's value was going to not change (except minimally) against the dollar. We also get all the benefits of block chain infrastructure (borderless, cheap for even large amounts, etc). We can program DAI in a way that isn't possible with USD.


Most cryptocurrencies are used for speculation. If you want to sell high, buy low you need something to trade against.

Many exchanges, especially those that offer any type of contracts trading, are not under normal financial regulation and to the extent they even offer fiat denominated orderbooks there is a risk premium attached to it. When withdrawals are not guaranteed by by any type of regulatory body people could just as well trade pretend-dollars, and that's basically what stablecoins are.

Be cautious out there. At least these holders got their money back.


People who'd want to spend cryptocurrency might want cryptocurrency's advantages, without its volatility.

People who want to invest/speculate in cryptocurrency will often want some proportion of their portfolio value to be as stable as USD. But, actually holding true USD at exchanges/banks could be more complicated, requiring interfacing with legacy banking systems & regulations. A stablecoin allows USD value to be handled at exchanges (and transferred) in manners almost wholly analogous to other cryptocurrencies.


Except these stable coins doesn't solve the core problem cryptocurrencies do: uncensorable transactions. Tether for example has the ability to freeze addresses. They can also freely manipulate the coin supply (a necessary feature for stable coins) which goes against the decentralized idea of cryptocurrencies.


AFAIK Basis and DAI are both trustless; not everything is as bad as Tether.


DAI has some sort of emergency provision for freezing the entire chain and returning stakes, controlled by MKR token holders, whoever they are.


It has a global settlement (which more or less liquidates all collateral). It doesn't freeze the ETH blockchain that DAI are traded on. DAI could be returned to the main contract for X amount of ETH based on the spot price of ETH when the global settlement is executed. But DAI could still be traded around independently of the global settlement. It's value might have slipped as a result, however, based on whatever ETH became worth following the settlement. The market would still determine that price, however.


Writing a contract in stable coin denomination fixes your crypto platform costs in non-crypto terms, and enables things like Ethereum contracts to transact in dollars.

This simplifies, eg, a dApp hiring staff: you hire them for stable coins, which they cash out at various certified brokers.


Anything other than speculation benefits from stable value.


In the idealistic sense a couple come to mind:

1. A base "asset" to hold with nearly instant ability to move, ideally without changing value relative to the reporting currency.

2. Moving assets around between exchanges/markets/wallets outside banking hours (9a-5p M-F).

3. Banking one-self (no intermediary ever required), the owner can determine the appropriate security procedures for their assets (granted this may well be not on target of the use-case...)


there's no reason to hold any stablecoin other than speculation (is it really really worth an equivalent fiat unit) or temporal liquidity. This whole concept of a stablecoin is fallacy unless you think it might serve some liquidity or velocity purpose.


What???? What if you want to have a product that normal people can use?


Use dollars



That link is a quite good explanation of the core arguments.


I've had an idea floating around to generate a stable coin for a while now and would love to get some feedback: The idea is simply that everyone can mine new "tokens" (for lack of a better word) by running a proof-of-work algorithm and broadcasting the solution to the network (just like the block mining in Bitcoin). In every new block all verified token generations are payed out to the respective addresses. In the long term the value of these tokens would be limited on the upside to the cost of the PoW algorithm. The difficulty of this PoW algorithm would remain constant - unlike the BTC PoW algorithm which adjusts with the hash rate.

Two issues: 1) This scheme would only work with a PoS algorithm for block creation, because in a PoW system the security depends on the block reward (which would be low in this system). 2) There's not really a lower bound for the price of this token - the intrinsic value depends on it's usability for payments.


There's nothing there that would make the coin stable in price versus a fiat currency; you just described the platonic ideal bitcoin type thing where the mining participation is particularly democratic.


> There's nothing there that would make the coin stable in price versus a fiat currency;

That's correct. The idea would be to make the supply stable wrt. to the hashing costs. Meaning supply would increase with increasing computational efficiency and stay constant relative to it (ie. the inflation of this currency would be tied to improvements in chips).


That puts an upper bound on the value but no lower bound.


Yep, but there's no lower bound on bitcoin's price either...


I’m not talking about Bitcoin, just addressing your description of this scheme as a “stable coin.”


Ok, I should elaborate some more: The initial demand for bitcoin was because of technical curiosity and a need to perform payments outside of traditional payment systems. This demand could be enough to create a lower bound here as well. And contrary to bitcoin a limited upper bound but no definite lower bound would incentivize spending rather than hoarding. Fiat money has effectively the same properties, because central banks will never allow strong deflation but a national currency can lose most of it's value when the economy crashes (see Venezuela).


Bitcoin was cleverly set up as an deflationary currency to attract early adopters. Now, you and I (in line with mainstream economics) may think that a deflationary currency is a bad idea for a state, but there are a lot of people who don't, and it's not actually being used as a state currency anyway, so maybe it's OK.

Anyway, the point is that from the beginning bitcoin was set up to promise massive gains to early adopters, which helped gain traction. Your suggestion has nothing similar, so it's not clear why anyone would adopt it.

Really, it seems like you're promising hyper inflation (because of Moores law), which is something a lot of people flock to crypto to get away from, and nobody (even those who like a little inflation) thinks is a good idea.


Fiat money has properties which your proposed "stablecoin" doesn't, like a reason for people to wish to receive it as payment in the first place (people need to settle debts and tax payments denominated in that currency) and a central bank which acts to reduce the amount in circulation when inflation gets too high (Venezuela's central bank isn't doing that and you've noted the result...).

Incentivizing spending rather than hoarding just means you hit the lower bound (probably zero, unless receiving units of your coin is really, really technically interesting to some people) earlier...


Make sure you understand economics and scalability.

The general lack of awareness of how traditional currencies are established and maintained is just shocking.

Also, make sure you understand scalability. As much as the crypto community likes to poo poo the Visa network; the Visa network handles an order of magnitude more transactions per second than the current cryptocurrencies can handle.


> The general lack of awareness of how traditional currencies are established and maintained is just shocking.

It isn't shocking. The point of 99.9999% of all cryptocurrencies aren't to make anything useful. They exist to get the creators rich. All of the rubes that buy into these scams will simply be sending their former wealth through a massively inefficient rube goldberg contraption that lines the pockets of those at the top of the pyramid.

The creators don't need to understand monetary policy, economics or scalability. The creators just need to understand enough deceptive marketing to get some suckers lining up to buy. The smart ones also know just enough ways to pocket their newly acquired fiat wealth and escape without getting caught by jonny law.


If you are seriously comparing Visa network to protocol like Bitcoin, it is you who doesn't understand economics and scalability.

Visa network is centralized and owned a company. Bitcoin is a protocol with no central ownership. Additionally, visa network is currency-agnostic and enables payments in any currency they want to support. Centralized services like Visa can work with Bitcoin in various ways, for example the settlement transactions can be done with Bitcoin.

Additionally Bitcoin has been developed from the start with various centralized services built around it - without those services it wouldn't be popular at all. Any centralized service can scale as well as Visa. Though where Bitcoin provides value is not near retail payments, and while there have been bitcoin-reloadable visa cards I think that is not very interesting use-case.


>Though where Bitcoin provides value is not near retail payments

Where does it provide value? If it's bad as currency, what's the use case? It certainly fails store of value test (unstable, high volatility).


Sounds sort of similar to 0xbitcoin in that it's possible for anyone to mine tokens, but that project currently raises the difficulty (like Bitcoin). I'm assuming that a few changes to the difficulty scaling could make a proof-of-concept of sorts as a mineable ERC20 token. In this case, the security of the system relies on the security of the Ethereum network though, which shifts the concerns but also means that people still need gas to send transactions - which might be difficult for user adoption.


Yeah! We've actually talked about something similar on the 0xBitcoin discord! I'm @mikers on there if you'd like some help getting your "stable coin" off the ground.


If the value of the token ever gets far above the cost to mint, eventually more people will start creating it, and more will be produced, which, if demand stayed constant would result in the value diminishing. In practice, most tokens already do spend significant amounts of time paying out more than they cost to mine (which is why people mine them at all). Also, these effects take time to occur, so it is most likely that they would overshoot, crashing the value of the coin. Minting would then stop, but you already have a much greater supply than demand so there would be no incentive to mint more at all. You'd be stuck with the coins as worthless - you have no mechanism to make them increase in value.

Now, if instead of using some uninteresting hashing, you did genuinely useful work to create the coins, perhaps like gridcoin, then your system might make sense - since it's representative of an amount of computation performed.

Nobody in their right mind would hold it though - I presume you'd use it to pay for other computation, and there'd be a market of companies wanting to buy it in order to get their workloads computed.


What I don't get with PoW, why would you want people to convert electricity into your coin? You're enriching an entity (the power company) that is not involved in your economy. They aren't going to use the money you give them to provide liquidity to the holders.


It's not even "converting" the electricity into a coin because the amount of energy burned has no relationship to the amount of transactions processed or "coins" generated.


How do you create something digital that cannot be forged or stolen and also has proven rarity? PoW is one way. I think the other methods such as proof of stake havent really been proven yet.


This is Bitcoin et al but without the Ponzi structure. So speculators would be unlikely to buy it over Bitcoin, and without those what would be the source of activity?


[Initially] probably only those without other means of payment. You can convert electricity + computing power into a currency (and compared to btc you don't need to join a pool to have a realistic chance at receiving the tokens).


There are thousands of small coins for which this is true. Therefore the reward would likely be less than the energy consumption costs... You need a reason for adoption.


There's a real fundamental problem with stablecoins: any system that effectively allows decentralized peer-to-peer transmission of money is going to fail one or more anti-money-laundering laws. Stablecoins are fundamentally illegal operations under US law.


Calling bullshit on this. First, there's the US law and the SEC. Those are two things. The SEC doesn't produce laws; it merely follows and interprets them. Most laws that it interprets predate most blockchains. There is not much the US government has actually agreed on in terms of financial legislation recently other than to deregulate a lot of things.

It's true that the SEC is very strict on regulating securities (especially given recent history with e.g. mortage companies, enron, and other financial scandals). This has made the crypto ecosystem hard to navigate for people operating outside of the traditional financial system. This has not been helped by them evolving their interpretations and thinking over time. Call it progressive learning. So, it's hard but not impossible, and certainly not illegal.

This is why some of crypto companies with unicorn style valuations are operating in the US with money from US investors. I'm talking about companies like Coinbase and Stellar.

Stellar is a blockchain platform backed by US companies like IBM. The main use case for that platform seems to be stable coins. There are actually several companies offering USD backed stable coins. The point of these coins is not speculative trading as a security but value exchange via p2p transactions between trusted parties on the network. This is also the main use case for Ripple.

So, stable coins are very much legal and practical; and somewhat of an early success story for utility tokens. If you don't believe me, the top trading compant on stellarx.com (today) is a token by a company called stronghold.co: a USD stablecoin. There are five such coins on stellar currently. Stronghold.co are hiring in SFO and presumably operating there under US law and working within the rules set by the SEC.

The reason that Stellar is popular for this stuff is that the people behind it designed it such that it supports the use case well. E.g. it has a lot of built in stuff for dealing with AML that companies like stronghold.co can use to clear transactions or that others can use to clear transactions with them. AML is indeed not optional.


When the law says regulations made by X must be followed those regulations have the force of law.

Also, the Securities Exchange Act of 1934 covers selling stuff. Using a computer to sell stuff does not matter.

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."


Yep, mostly these things get decided in a court where the regulations get interpreted by expert witnesses, scrutinized by lawyers, prosecutors, judges, etc. Those interpretations can change over time, can be challenged in supreme courts, are clarified, etc.

In this case you are interpreting the text of the law against a changed context (computers now exist) and making a judgement that "using a computer to sell stuff does not matter". There are a lot of not quite experts making similar value judgments about crypto stuff lately.

So, this stuff is anything but black and white. Hence there are perfectly legal business operating in the US doing stuff with blockchains, crypto currencies, etc. that are so far not ending up in trouble over what they are doing and seemingly complying with however today's SEC chooses to interpret what they are doing. They might change their mind of course over time.

If you are running a business doing this kind of stuff, the SEC is just one of many authorities you have to deal with. We've had some fun navigating the legal jungle that is the EU where each state has its own regulatory bodies, rules, practices, and politicians. The thinking on how to apply their laws is highly fluid. Right now, if you talk to two lawyers about anything crypto, you can get two completely different interpretations. Mostly they have a hard time understanding this stuff period.


I am not sure how else you can interpret ‘by any means’.

But, sure that is just the common interpretation of those words and could in theory change. Though, good luck convincing a judge of such.


> any system that effectively allows decentralized peer-to-peer transmission of money is going to fail one or more anti-money-laundering laws

I think you just proved that cash is illegal


Anonymous transactions with large quantities of cash are illegal in most first world countries - there are exceptions for small amounts of cash, but in general, doing the same things as with Bitcoin with cash would also violate anti-money-laundering laws.


They're not illegal in the US, although legality is much less relevant now with civil forfeiture laws, which do a run-around on due process.


In US, if you receive large quantities of cash in some transaction, you're generally required to report the identity of the counterparty (e.g. form 8300 https://www.irs.gov/pub/irs-pdf/f8300.pdf or others depending on line of business). Keeping that cash deal anonymous would be illegal.


That would be true of any cryptocurrency, not just stablecoins. There are money transmitter laws in the US and elsewhere. I think under $10K you don’t need to do KYC.


> Cash is perfectly legal and so is any cash like instrument

With Bitcoin, you can squish around as to whether it’s a commodity or currency and argue as to the actual dollar amount transmitted. With a stable coin, you’re explicitly transmitting U.S. dollars in kind. That’s the AML difference


The existence of volatility around an exact dollar amount does not make it not transmitting money, does it?


It’s marketed as a 1:1 equivalent for the regulated hard currency. It may be doing a bad job at that, but it’s essentially a bearer security for U.S. dollars. This case law has been long decided in respect of far cleverer schemes.


I asked about Bitcoin!


> I asked about Bitcoin!

My bad! It depends:

"An administrator or exchanger of convertible virtual currencies that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency in exchange for currency of legal tender or another convertible virtual currency for any reason (including when intermediating between a user and a seller of goods or services the user is purchasing on the user’s behalf) is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person.

...

To the extent that a user mines Bitcoin and uses the Bitcoin solely for the user’s own purposes and not for the benefit of another, the user is not an MSB under FinCEN’s regulations, because these activities involve neither 'acceptance' nor 'transmission' of the convertible virtual currency and are not the transmission of funds within the meaning of the Rule" [1].

TL; DR Because "virtual currency does not have legal tender status in any jurisdiction," FinCEN does not consider it a "real currency" for purposes of its money transmission rules. Volatility is not taken into account in their analyses.

[1] https://www.fincen.gov/resources/statutes-regulations/admini...

Disclaimer: I am not a lawyer. This is not legal advice. Consult with legal counsel before engaging in money transmission services.


> any system that effectively allows decentralized peer-to-peer transmission of money

Congratulations! You've just described cash.


If cash was invented today it would be illegal. It's grandfathered in for now, but new cash-like instruments aren't going to get the same treatment.

(Also, cryptocurrency is more powerful and thus more dangerous than cash because it can be transmitted electronically and it has no volume or mass. These differences are relevant if you consider that organized crime incurs nontrivial costs in handling large amounts of cash.)


this is obviously nonsense. you are confusing transactions, versus operating money services businesses. Cash is perfectly legal and so is any cash like instrument. It's when you start operating a business that is involved in money transmission, cash or not, that you need to register.


> Cash is perfectly legal and so is any cash like instrument

See what happened to bearer bonds.

Stablecoins are inherently doomed. First, they’re trying to solve the impossible trinity. And second, their untraceabiliry and explicit hard currency link makes them non-compliant AML-wise.


Even if you can make an AML compliant stablecoin, you're going to wind up with low marketshare as you have no competitive edge against over both actual banking and the cryptocurrencies getting used for money laundering. Like, by the time you centralize operations enough to comply with AML laws, you want to be using a database and an API with access tokens and resource identifiers that you hand out to approved participants. At which point you're a fancy bank, pretty much.


If cash gets the axe, these systems will be even more in demand, and the best thing is that they are open source software. Hopefully for those that live in a country where they still can enjoy their democratic freedoms and retain the right to some privacy.


I have indeed described cash. If you are in a set of businesses that includes banks, credit unions, currency exchangers, pawnbrokers, insurance companies, car dealerships, or any other business designated by the Secretary of the Treasury that has cash transactions with a high degree of usefulness in criminal matters, your use of cash is highly regulated. You are legally required to file reports with the Secretary of the Treasury (or their designee) whenever you make certain transactions. Failure to do so is a crime with a $250,000 fine and a five-year jail term. This is doubled if it is part of a pattern of illegal activity involving $100k or more.


Sure, businesses that use stable-coins with "high degree of usefulness in criminal matters" can register and file reports who whoever they need to, just like their cash counterparts - I don't see a problem with that.

My main gripe with today's electronic transactions is that they are not private and too much information is shared between people who I don't know and don't need to know (banks, marketers, hackers). The government doesn't need to know that I bought a car brand y for x, they just need to know that the funds were clean, the bank doesn't need to know any of this info, just that the funds are clean, how much, the 'to' and 'from', that's all. So there's a lot of room for improvement in the existing system.

In the future, crypto-currency stable-coins will offer both privacy and also the ability to prove that the funds are clean, without exposing private details, maybe using things like zero-knowledge proofs.


>The government doesn't need to know that I bought a car brand y for x

What, you're making no sense, the government absolutely needs to know the make, model, and purchase price of any vehicle you buy. This is a standard part of various title and registration forms.

>Sure, businesses that use stable-coins with "high degree of usefulness in criminal matters" can register and file reports who whoever they need to, just like their cash counterparts - I don't see a problem with that.

One of these reports is a written plan that documents the efforts you're going through to prevent money laundering. If this plan isn't good enough, surprise, you get shut down.


You didn't understand me. Yes, the info is demanded by the government (or whatever authority), the purpose is to ensure that the funds were clean & that the car complies with whatever regulation. What I'm saying is that there is technology available to both prove that the funds are clean and regulations are met without revealing the details that should only be between the buyer and seller.


> any system that effectively allows decentralized peer-to-peer transmission of money is going to fail one or more anti-money-laundering laws

Is cash against the law now?


I'm extraordinarily confused as to how this was not an issue handled before Basis got to this point. It's not a secret that regulators would like to have purview over these types of assets, and that regulators have in fact successfully pursued those involved in other cryptocurrencies that turned out to be fraudulent. Of all the risks the Basis founders had to confront -- building a new technology, proving out a new algorithm, getting interest from others, etc. -- understanding at least the threat of regulation seems like among the simplest.

What am I missing?


The issue was handled in their SAFT with a provision that states they would return the funds if they failed to deliver a product. Regulations on new technologies aren't a fixed thing, they were optimistic (someone has to be).

Another theory could be that the regulation issue is a pretext. Those big investors that bet heavily on crypto and are now in the red could have insisted to get their money back. Given how low the sentiment about crypto presently is, these investors are in a far better position to make lucrative plays now, than keeping their money in a project that raised near the top of the bubble.


I'm more inclined to the latter. Sure, they hedged their bets in their SAFT, but to say "our plan involves not being regulated, and we give up if we are" strikes me as silly.

But you're right, maybe they expected a different level of regulation than they were ultimately going to be subjected to, and maybe they just didn't communicate that.

Come to think of it, if I were a big bank, skilled in handling regulation, I might absolutely give a bunch of $ to a startup in this space, knowing I'd, at worst, own a big chunk of them, and, at best, prove out the market with someone else's time, then get to launch myself, with my own giant regulations team behind everything.

But that's probably paranoid.


Neither the article nor the Basis site answers the important question: do coin buyers get their money back, and if so, how?


This is ultimate proof that so called "smart money" is often lazy and dumb.

Plowing $133m into a bad idea based off a white paper, when anybody could have told you it'd inevitably implode based on common logic outlined by others in the comments here....


In other words, really smart people can make really dumb investments.




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