Erik Vorhees: No More KYC with ShapeShift
It’s Time to Fully Embrace Decentralized Protocols for the Protection and Dignity of Our Users.
January 6, 2021
Today, ShapeShift is announcing that it has integrated decentralized exchange protocols and is sunsetting its 6+ year business of trading with customers. Because of this fundamental change to our business model, ShapeShift’s users no longer need to provide personally identifying information to us.
But first, let’s remember what this is all about…
With Bitcoin’s genesis, economic interaction became possible upon three principles:
The advent of these sparked a renaissance, and now all finance is being reimagined. It is a global, community-led initiative: no leader sits at its helm, no city lays claim to its advancement, no nation holds its keys.
And the goal is simple: prosperity for all humans via an honest and neutral foundation of value.
For over six years ShapeShift has had the privilege of helping pioneer this renaissance of open, self-sovereign finance. In part a response to the MtGox catastrophe, ShapeShift began as a simple tool for people to safely and easily convert one digital asset into another — to exchange — without counterparty risk.
This was consumer protection on a level that no bank had ever attempted, let alone achieved. It was made possible only by decentralized technology. ShapeShift protected consumers’ wealth by not holding it, and protected their data by not taking it. Consumer protection by design.
Our original belief was that because we weren’t handling any form of regulated fiat currency and weren’t taking custody of user funds, ShapeShift was not legally required to collect private user information (“Know Your Customer,” or KYC).
This changed with new information in 2018. ShapeShift now had to KYC every customer and run an advanced surveillance and reporting apparatus.
And so, for the past two and a half years, we’ve been engaged in a practice that is not only ineffective, but that I and others find plainly unethical and dangerous: the warrantless collection and surveillance of personal, private information of innocent individuals.
In the US alone, every year roughly 20 million people suffer from identity theft due to the widespread transfer and storage of Personally Identifiable Information (PII). The Department of Justice estimates over $17 billion of annual losses for these individuals, greater than the losses from robbery, burglary, and auto theft combined.
But there is a more important legal and ethical principle at stake when it comes to KYC.
When an individual is accused of a criminal offense, it may be reasonable to dissolve their privacy to some degree in the search for truth about that offense.
However, KYC dissolves the privacy not of certain specific individuals accused of wrongdoing, but the privacy of all individuals, none of whom have been accused of anything.
We can do better than that as a society. Warrantless surveillance of all people cannot be our standard.
The Path of Decentralization
ShapeShift is an established corporation; we’re not trying to hide from anyone, and we must follow the law even as we advocate for its reform.
From ShapeShift’s beginning, our business model has been simple: we trade crypto assets with our users. We hold an inventory of Bitcoin, Ethereum, etc., and when a user wishes to sell a digital asset, we receive it from them and send them a different one. We’ve been the counterparty to each trade.
It is this model of trading with our customers — this specific commercial activity — that arguably places us under the purview of the Bank Secrecy Act and requires us to KYC our users. It is this model that we are now ending.
- Going forward, ShapeShift will not transact with customers.
- Instead, ShapeShift makes it seamless for customers to trade directly with decentralized protocols.
- Because we are ending all regulated activity, we will no longer require KYC.
- And for the protection and dignity of our customers, ShapeShift will integrate decentralized protocols wherever possible going forward.
By embracing the very principles that Bitcoin brought to the world: decentralization, openness, and immutability, we believe a superior legal and ethical course can be charted with this model.
Further, we believe that the industry will broadly move in this direction because it is better for customers. Open, decentralized finance is simply safer, more efficient, more transparent, and provides a better user experience. This is obvious to anyone who uses these systems and has witnessed the pace of their innovation and refinement.
Why didn’t ShapeShift do this in 2018? Decentralized trading protocols were not sufficiently viable two to three years ago. But, they are viable today. The rise of decentralized exchanges in particular this year has been truly inspiring. ShapeShift had been a business competitor to these venues, and yet an ally to their mission, and so instead of resisting such beautiful innovation, we will embrace it to better serve our customers.
With this fundamental change to our business, ShapeShift is no longer an exchange or intermediary in any form. We’re simply a software interface that makes it easy for people to hold and manage their digital assets (on their own keys, as always), and safely interact with decentralized finance technology.
We’re a tech company, not a financial institution.
And so, as we are no longer a counterparty to any part of customer transactions, we are comfortable making these changes while remaining in full compliance with the law.
A few important points:
- Today, the decentralized protocols we’ve integrated only support Ethereum and ERC20 assets. We expect native, non-wrapped Bitcoin and several other leading chains to be supported for decentralized trading in Q1 2021.
- Customers who wish to trade non-ETH assets today can still do so under our old model. This still requires KYC, as we remain the counterparty on these trades. Relatively soon, this service will be retired completely.
- The ShapeShift platform has integrations with partners that are still intermediaries, such as fiat onramps. Such partners still require KYC.
- Customers who have previously KYC’d with us: we are legally required to keep your information for a period of several years.
- Bad guys: we are not your friends. There are various ways of surveilling blockchain transactions that are far more effective than KYC. Not only will we continue to cooperate with authorities where required by law, but we actively collaborate with industry groups to monitor and root out sinister activity. We are here to protect good people, and as such, stand resolutely against evil.
Toward a More Open and Equitable Financial System
To the rest of the crypto industry, and to the thousands of independent developers working on decentralized technology, we are so grateful for your relentless innovation. We look forward to working together for the empowerment of open, self-sovereign finance and the protection of all people around the world.