Basis, The $130 Million StableCoin, and the New York AG Sends a Letter to “Exchanges” — Distributed Counsel 10


In this week’s post, we take a look at the suspension of trading in Longfin, Coinbase’s purchase of Earn. com, the New York AG’s letter to exchanges, and the huge bet on Basis led by Bain.


Trading in Longfin (NASDAQ: LFIN) was halted on April 6 after the SEC unsealed a complaint and asked a federal judge in Manhatten to place an asset freeze on millions garnered from allegedly illegal sales of the company’s shares. The company went public in December under the relatively new reg A+ “mini-IPO” rules.  It opened at $5 but skyrocketed to $142 in three short days after announcing that it was acquiring a “blockchain-empowered solutions provider.” I’m just asking you to remember these numbers when people tell you cyryptomarkets are volatile.

Calling the Bottom

Bitcoin has had its best month in a very long time, and other major currencies like Ethereum, Ripple, Litecoin and Bitcoin Cash have all experienced rebounds, albeit smaller than the bounce Bitcoin received.  The prevailing “wisdom” attributes the rise to the end of tax selling and investor-extraoridnaire Tim Draper recently claimed that Bitcoin will be at $250,000 by 2020. Whether this bears out is of course unknowable, but what is certain is that sky-high projections will generate press.

Coinbase Buys

Coinbase has announced the acquihire/purchase of, at a frankly staggering valuation from this outsider’s perspective.  According to this report, the deal is worth more than $120 million. began as a mining operation that foundered, perhaps because it was too early.  It pivoted to a decentralized social platform that paid people to respond to emails (full disclosure: I have an account through which I receive unfettered ICO spam).  It is hard to imagine paying over $120 million for a nascent platform like and some miners. Surely the bulk of the value came in the form of talent, most notably Balaji Srinivasan, who is incredibly well-regarded in Silicon Valley. Make no mistake, Coinbase has the CTO of its dreams. Let’s see how they put him to work.

Eric Schneiderman Asks Some Pretty Tough Questions

The New York Attorney General has sent a letter to thirteen cryptocurrency exchanges seeking a bevy of information.  In the press release, the word “exchanges” is in scare quotes, which is not positive if you own one.  Then again, “crypto” is in quotes too, so this may just be stylistic.

The letter seeks information from the following exchanges (ignoring entity names here): Coinbase, Gemini, bitFlyer, Bitfinex, Bitstamp, Kraken, Bittrex, Poloniex, Binance, Tidex,, itBit, and Huobi.  The scope of the inquiry is broad, to say the least.

Kraken already has stated outright that it will not respond, and has alluded to the notion that it would prefer to geo-fence around New York rather than deal with New York regulators.  The question is, will this work? Will Kraken maintain its position? If so, it can expect a subpoena at a minimum.


I’ve saved the most interesting and incomprehensible news for last, and I don’t mean incomprehensible in the sense of “look at these idiots and their magic-fairy-dust-tokens.”  I mean that I probably don’t fully understand the words and concepts surrounding the idea. This has not stopped me before, so let’s dive in.

The Theory of the Stable Coin

A stablecoin is a coin that is pegged to something stable and acts basically like the dollar or another first world currency.  You can depend on its value to remain relatively consistent, and you can theoretically hold it to sit out the market. Or you may your services for it at set prices and know, generally speaking, how much value you will be receiving.  The most well-known stablecoin is Tether, which miraculously still works

There are two theories on stablecoins: (1) stablecoins are like pegged currencies which economics tells us always fail and thus the entire project of trying to create one is a fool’s errand; and (2) they can be done, they will be done, and the winner will control commerce by being the internet’s central bank.

The best articulation of theory 1 that I have seen has been authored by Preston Byrne.  Bryne addresses the folly of the idea, and the history of stablecoins, which looks a lot like the history of the Detroit Lions. I can do no better and I won’t try.

The best articulation of theory 2 has come in the form of nearly $133 million, according to CNBC.  That is the amount being invested in Basis through a private placement led by Bain.  Basis will use an algorithm to determine supply, which (some believe) will smooth out volatility.  CNBC writes:

Formerly known as Basecoin, Basis is developing a cryptocurrency whose supply is controlled by an algorithm rather than a central bank. In contrast, bitcoin and most major cryptocurrencies have a fixed supply. Changes in demand can then send prices in wild swings.

Basis’ developers say such volatility has prevented mainstream adoption of cryptocurrencies and they want to create a digital coin whose availability is tied to a measure such as the U.S. dollar or consumer price index.

New Horizons

The CNBC article also quotes Kevin Warsh, who very nearly became the Chair of the Federal Reserve, as saying “a new generation of cryptocurrencies is on the horizon, some of which might possess more of the attributes of money, better satisfying Bitcoin’s founding purpose.”  The assumption is that volatility inhibits adoption, and that Basis will solve this by having an algorithm stabilize day to day value, through control of supply.  The question, of course, is whether this is correct.  On the one hand, this seems to make a lot of sense. There can be no question that a stable currency is a virtue, indeed almost a modern necessity.  But I have a bunch of questions:

  • What makes a currency desirable?  Is it stability or resistence to inflation (notwithstanding near-term volatility)?  
  • Stability and inflation resistance are probably not the same thing.  Is Basis anticipating this by floating the possibility of tethering (forgive the pun) a currency to CPI rather than the dollar?  
  • How does one tether a currency to the measure of inflation (CPI) rather than the underlying unit of account?

As I noted at the outset, I don’t have great answers to these questions.  Byrne makes great points.  Tether endures.  Let’s just say the jury is still out.

I will end this post with an observation–isn’t this all very interesting?  I mean that genuinely.  One of the many virtues of this new technology is its uncanny tendency to walk worn paths with new shortcuts.  Distributed ledgers since inception have challenged the law on fundamental levels where the law usually thinks it has answers–questions about jurisdiction, legal personhood, or the concept of equity are raised again in new colors.  Sometimes we find insight in old chestnuts like Howey, and sometimes we find the law wanting.  For a lawyer with some interest in history and a lot of interest in technology, this is thrilling if uncertain.

But we hardy solicitors are not alone.  Economists too must find themselves revisiting old ideas.  Yes, there is the nature of money but that debate predates Bitcoin has always been there.  Basis is about the creation of a new monetary system entirely. A private one that may be more trusted than the Fed.  Not only is it really, really unclear whether they will be able to pull this off, it is not clear that the idea is even theoretically valid over a sufficiently long timeline.  Investors have bet many millions that (i) it is, and (ii) they’ve found the team to do it.  It is bold and the market is huge. Let’s see what happens.

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