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[MUSIC PLAYING] Welcome to Balancing The Ledger, where tech and finance intersect. I'm Robert Hackett-- I'm Jeff Roberts. --and we're here today with Salil Deshpande, managing director at Bain Capital Ventures. Thanks so much for being on the show, Salil. Thanks for having me. So we're going to get into your thoughts on the crypto market downturn and into your various investments you've made. But, first, I want to kick things off and talk about Basis, the stable coin project, that just this week announced that they are giving back all of their money to the investors. Bain Capital Ventures is one of the big investors in Basis. Maybe can tell us what happened. What went wrong and where they going from here? So nothing went wrong. Basis was an ambitious project and it was trying to create a purely decentralized, non-collateralized algorithmic stable coin. And that's different from a centralized, collateralized stable coin like Tether, or True, or Circle, or Gemini. And it's different from a decentralized, collateralized stable coin like Maker. So a decentralized, non-collateralized stable coin is the hardest kind to create. It's the holy grail of stable coins. The team's been great throughout all of this, by the way. They've been working with regulators. And, over the last few months, it became clear that there was really no way around the bond tokens and share tokens in Basis being securities. And, with them being securities, they would have transfer restrictions and the Basis team would have to do KYC, maintain an accredited investor list, have a centralized whitelist of entities that are allowed to own the shared tokens and the shared bonds which is all doable-- it's a pain, but it's all doable-- but the bond and the share tokens were an important part of contributing stability to the system. And it is what-- it had the economic incentives that allowed participants in the system to help the system maintain the peg to the dollar. So with all these restrictions liquidity would be reduced and the reduction of liquidity would result in the reduction of stability so the basis team explored a whole bunch of alternatives for what to do about this and there were a lot of discussions about, well, maybe we change this little part or that little part. But, to make an analogy, if you're playing tennis and you decide instead of tennis rackets you want to start using tiny little paddles, and instead of a tennis ball you want to use a small plastic ball, and then you want to play on a table instead of a tennis court-- at some point along that way it stops being tennis and starts becoming ping pong. So if you change enough things it became like the other stable coins of which there are a couple of dozen. So it didn't seem like a big contribution to the world if we did that. I'm just going to push a little bit, Salil. I mean, there's some skeptics out there who said this was a silly idea in the first place in that, for a stable coin, the other ones are backed one for one by US dollars and Basis had this ambition plan ambitious plan where if it rises above the value of a dollar, they'll issue more-- makes sense, it'll buy and it'll be equivalent again. And if it went below, you'd issue these bond tokens. Then people would rush in to buy these bonds hoping that the bond coupon would somehow pay off and offset the risk of this thing falling below $1. And that-- I think some people are saying, wait a minute, this is just too complicated. Was this even possible in the first place? It was certainly complicated and it was ambitious. And you could argue that if something is complicated enough and ambitious enough, then it's silly. So, in that sense, I don't-- it's a pointless debate. But a lot of venture investments are silly or seem silly. They have less than 10% chance of working. But when they work, they really work. And all of the one-- all of the investments that I've made that have worked had many of those characteristics. We actually had Naughter on the show very early on when we first launched the show. And his team is full-- it was stacked with top technical talent, very impressive. But-- so I want to drill down just a little bit more and understand exactly what happened. It seems like there wasn't the foresight to see that the regulat-- the regulatory regime would not allow for this to occur is that right? There was some hope and some assumptions that the regulatory environment would be a little more favorable to the bond tokens and share tokens than it actually was. Yeah, I'm little skeptical of that too. Not to be negative Nellie on the show, but the official explanation was regulatory headwinds. But, I mean, an outfit like that has got very good lawyers and they-- I think they raised a proposition not so long ago. I mean, it was it was surely their legal counsel was saying be careful, guys, or did they just get blindsided by the SEC? Oh, no, the whole construction of this was-- first of all, they raised the money on a SAFT, a Simple Agreement for Future Tokens, which laid out very clearly that the token may not launch. And if the token does not launch, then everyone gets their money back. So this was a very well-anticipated possibility and the whole last year was to make sure that whatever was built was sound and compliant. And this is why they took the time and the-- their conclusions were a result of many, many conversations with regulators while they were building the system. They certainly didn't want to build the system, and launch it, and then start having conversations with regulators. Basis is just one of the many investments that you've made in the crypto space. Maybe we can talk about Bain Capital Ventures take on cryptocurrency and the broader ecosystem. What are you investing in, what's interesting, what's catching your eye? So Bain Capital has about $100 billion under management across many different business units-- a public equity, private equity, venture, debt, real estate, and double impact. In venture we raise about $1 billion every three years or so to invest across B2B, software infrastructure, and crypto. And crypto is just one of the many things we do. Within crypto, I arbitrarily divide the world into four categories-- centralized infrastructure for crypto assets, decentralized infrastructure for crypto assets, crypto assets themselves, and enterprise blockchain. Again that may seem arbitrary, but that's how I divide up the world. And I'm excited about the first three and not as excited right now about the last one. So what are you most excited about right now? A lot of talk of crypto winter, but I think a lot of people know crypto think this is just a phase and we're going to see a blossoming again before long. What do you think is going to be the next thing to take off in crypto? Well, we could go through and talk about all our investments in those four categories, but, more broadly, we like the beta of crypto. And the beta of crypto might outperform the alpha of non-crypto. And just to use Bitcoin as a proxy for all the other liquid crypto, if you look at the use case it's serving, which is a store of value use case, I like to think about what percent of that use case it has addressed so far. Of the seven billion people on earth, two billion of them own gold and only 25 million own Bitcoin. So if you divide 25 million by two billion, you get 1/80. So you could say that 1/80 of that use case-- of the store value use case has been addressed by Bitcoin. And once the bit-- the use cases address fully by Bitcoin, each bitcoin should be worth $400,000 or so. So you divide $400,000 by 80 and you get $5,000. Now you could argue that not all of the 25 million people who own Bitcoin are actually doing it for the store of value use case. There are a lot of traders and speculators. And so you could say only 1/10 of them are using it for that use case. In which case, according to this formula, the price of Bitcoin should be $500. So it's very approximate and imprecise, but we know it's somewhere between $500 and $5,000 if you have conviction that it does address that use case. And I believe it does. And we know that more of the use case will be addressed in the future, we just have no idea what the appropriate value today is. And so how do you invest in something like that? You dollar cost average. So if you bought some at $4,000, hopefully you can buy some more at $3,000, and some more at $2,000, and $1,000, and $250. You mentioned earlier that you're bearish on enterprise blockchains. Tell us a bit more about that. Why is that? So for most enterprise use cases you're not trying to solve the decentralized trust problem. Or, if there is a problem similar to that, it can be solved in other ways than with a blockchain. And so blockchains, in those scenarios, often end up just being slow databases. And if you're going to use a database, why not use a fast database rather than a slow database. And we've invested in several. Cassandra data stacks is the company behind that or Redis. Redis Labs is the company behind that. They make distributed, fast, NoSQL databases. So all these fancy stories have track in global shipping or food supply chains from China that you're always hearing about is this of killer use case for blockchain, you think just keep using regular, old databases? For a lot of those use cases regular, old distributed databases would do fine. But blockchains do fine as well. A lot of them actually don't require speed. So, in that case, it doesn't matter that you're using a slow database as long as you're using a database, which is why we're not as excited about that space. I think enterprise-- more enterprise use cases that require the decentralized trust problem to be solved will emerge, but, for now, we're less excited about that category. So you've got a price target in mind for this. It's based on the value of gold-- the global market for gold. What is your timeline? What do you think this is going to-- how long you think it's going to take for that to be realized? Well, gold took several years to address the store of value use case. So it's going to exceed our lifetimes? And it didn't-- well, everything happens 10 times as fast in crypto, so it's not going to be several hundred years. In the case of gold, it did take decrees from kings for it to start addressing that use case. And, in our case, the kings are Zuckerberg, Larry and Sergey, the-- some regulators. So we don't know what the tipping point will be, but it shouldn't be several hundred years. It should be tens of years. Mm-hmm. And do you think it will be Bitcoin? Or, would you call yourself a Bitcoin maximalist? I do think it will be Bitcoin because I don't-- well, today I think it will be Bitcoin because I don't see any other blockchain that is addressing the store of value use case like Bitcoin does. And it's a funny analysis because a lot of it has to do with confidence and faith and Bitcoin is the oldest blockchain. And people have faith in gold because people have faith in gold. It's a little bit circular. And faith is believing something when there's insufficient evidence to do so. So I think all of that is still working for Bitcoin and I don't see another candidate. But if another candidate emerges, we have to be on the lookout for that-- and another one emerges, then we shouldn't be bullish on Bitcoin. Let's look to the new year and what should we expect to happen in 2019? It's futile to make predictions. Let's try this another way. What will the price of bitcoin be at the end of 2019? I think people should go back to thinking about which use case does each coin satisfy and what percent of the use case-- is it real-- is it a real use case? For example, with Bitcoin, is the store value a real use case? Do we really need something like that? So question one is do-- is it a real use case? What percent of the use case is being addressed today? Will the coin address more of the use case in the future. And I don't think it's useful to try to predict what the price will be in 2019. It's more useful to say, OK, all of-- I believe in all of those things, now I want to buy in at a very good price. The dollar cost averaging when people panic is really useful. The volatility is also very useful. Because while you're building your position, you can trade the technicals, and take profits, and lower your average cost as long as you're going to hold the larger position for a long period of time. All right, well, that's all we have time for. We'll be making our own crypto resolutions over the holidays for the new year. Thanks so much for being on the show, Salil. Thanks for having me. I'm Robert Hackett-- And I'm Jeff Roberts. For more Balancing The Ledger, please go to Fortune.com. See you next year. [MUSIC PLAYING] 

Balancing the Ledger: Bain Capital Ventures Managing Director Salil Deshpande

Finance

Deshpande dishes on the Basis shutdown, discusses the future of Bitcoin, and talks about why he's bearish on enterprise blockchain.

[ MUSIC ] Basis, the stablecoin project, that just this week announced that they are giving back of all of their money to the investors. Bain Capital Ventures is one of the big investors in basis. Maybe you can tell us what happened, what went wrong, and where are they going from here? So nothing went wrong. Basis was an ambitious project and it was trying to create a purely decentralized, non- collateralized, algorithmic stable coin. And that's different from a centralized collateralized stable coin, like Tether or True or Circle or Gemini. And it's different from a decentralized collateralized Stablecoin like Maker. So a decentralized non- collateralized Stablecoin is the hardest kind to create. It's the holy grail of Stablecoins. The things went great throughout all of this, by the way. They've been working with regulators And over the last few months it became clear that there was really no way around the bond tokens and share tokens in Basis being securities. And with them being securities, they would have transfer restrictions. And the basis team would have to do KYC, maintain an an accredited investor list, have a centralized white list of entities that are allowed to own the share tokens and the share bonds. Which is all; doable, it's a pain but it's all doable. But The bond and the share tokens were an important part of contributing stability to the system. And it had the economic incentives that allowed participants in the system to help the system maintain the peg to the dollar. So with all these restrictions, liquidity would be reduced, and the reduction of liquidity would result in the Productional stability. So the Basis team explored a whole bunch of alternatives for what to do about this. And there are a lot of discussions, well, maybe we change this little part, or that little part. But [ LAUGH ] to make an analogy, if you're playing tennis And you decide instead of tennis rackets, you wanna start using tiny little paddles and instead of a tennis ball, you want to use a small plastic ball. And then you wanna play on a table instead of a tennis court. At some point along that way, it stops being tennis and starts becoming ping- pong. So If you change enough things, it became like the other stable. Of which there are a couple dozen. So it didn't seem like a big contribution to the world if we did that. I've just a question a little bit, Salil. There's some skeptics out there who said this was sort of a silly idea in the first place. In that, for a stable coin, the others ones are backed one for one by U. S. dollars. And Basis had this ambitious plan, where if it Rises above the value of a dollar, they'll issue more. Makes sense, it'll buy and it'll be equivalent again. And if it went below, you'd issue these bond tokens and people would rush in to buy these bonds hoping that the bond coupon would somehow pay off and offset the risk of this thing. Falling below a buck. And I think some people are sorta saying, wait a minute, this is just too complicated. Was this even possible in the first place? It was certainly complicated and it was ambitious. And you could argue that if something is complicated enough and ambitious enough, then it's silly. So in that sense, it's sort of a pointless debate. But a lot of venture investments are silly or seem silly. They have Less than 10 % chance of working, but when they work they really work. And all of the investments that I've made that have worked had many of those characteristics. We actually [ UNKNOWN ] on the show very early on when we first launched this show. And his team is packed with top technical talent, very impressive So I wanna drill down just a little bit more in understanding exactly what happened. It seems like there wasn't the foresight tos see that the regulatory regime would not allow for this to occur. Is that right? There was some hope and some assumptions that the regulatory environment would be a little more Favorable to the bond tokens and share tokens then it actually was. Yeah, I'm a little skeptical of that too. Not to be a negative nelly on this show but the official explanation was regulatory headwinds. But I mean an outfit like that has got very good lawyers. And I think they raised a proposition not so long ago. I mean, it was surely, their legal counsel was saying be careful guys, or did they just kind of get blindsided by the SEC? No the whole construction of this was. First of all, they raised the money on a SAFT, a simple agreement for future tokens which laid out very clearly that The token may not launch. And if the token does not launch, then everyone gets their money back. So this was a very well- anticipated possibility and the whole last year was to make sure that whatever was built was sound And compliant, and this is why they took the time. And their conclusions were result of many, many conversations with regulators while they were building the system. They certainly didn't want to build the system. Launch it and then start having conversations with regulators. [ MUSIC ]

Bain Capital Managing Director on Why Basis Shutdown

The company was a big investor in the cryptocurrency.

Bain Capital Explains Basis Stable Coin Meltdown

Bain & Co.

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