ShapeShift Shows A New Face: A Full, Non-Custodial Exchange
Erik Voorhees discusses regulation and the future of the non-custodial exchange.
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ShapeShift has had an interesting year. The last time Crypto Briefing covered them, the Denver-based company had tussled with the Wall Street Journal before introducing a soon-to-be mandatory membership program.
The non-custodial exchange had always prided itself for its anonymous peer-to-peer trading platform, but as of last October, users must now provide know your customer/anti-money laundering (KYC/AML) data.
But that doesn’t mean they’ve given up on their unique philosophy of decentralization. What’s been happening since the exchange was forced to bend the knee?
Like Coinbase, Without Custody
Erik Voorhees, CEO of ShapeShift, discussed some of the changes which are coming to the platform this year.
“The old ShapeShift was a tool to convert one asset to another,” Voorhees explained, whereas the new platform will come with expanded functions to store, buy, sell, trade, and track cryptocurrencies. “Basically,” he said “all the things you can do with something like Coinbase, but without custody.”
Since that conversation, the new ShapeShift Platform has gone live to the public, offering full exchange and trading functions without a trusted party. “Severed from our ability to protect users through privacy,” ShapeShift said, “we are doubling down on our ability to protect users through architecture — by building a service that is both beautiful and easy to use, without sacrificing that critical pillar of decentralized finance — controlling one’s own keys.”
This “new and improved” ShapeShift is still under development, as the company takes pains to comply with Federal regulations. However, these new compliance measures were not taken by choice – according to Voorhees, they were changes which ShapeShift “didn’t want to do, but had to do.”
Regulatory Compliance Killed the Anonymous Exchange
This isn’t the first time ShapeShift has had to pivot under regulatory pressure. In 2015, the State of New York established the BitLicense, a regulatory framework and business license for companies with virtual currency-related activities. But obtaining approval for a license proved to be cumbersome.
For example, Genesis Global Trading had a proven record of compliance as a registered broker-dealer but had to wait three years for approval to operate as a market-maker. Contrast this figure with tightly regulated Japan, which issued 16 similar licenses in the first half of 2018.
In 2015, ShapeShift ceased offering service to residents of New York, due to what Voorhees described as “Orwellian” customer data requirements.
Fast forward to 2018, and ShapeShift is still facing scrutiny from regulatory entities in the U.S. and abroad. In a January 2019 report, Pulling Back the Curtain, the exchange highlighted how it had assisted in 60 law enforcement inquiries – typically request for documents, materials, or other types of evidence – in the year prior. Of these inquiries, 18 were generated by U.S. regulatory agencies like the FBI and SEC.
Ultimately, the forced collection of customer information hurt ShapeShift’s bottom line.
Voorhees noted, “[the] imposition of KYC’d accounts, themselves the result of trying to be cautious in a challenging regulatory environment, caused many of our most valuable API partners to leave us for competitors.”
New Membership Model
In response to regulatory requirements and the 2018 bear market, ShapeShift is transitioning to what Voorhees calls a “much more comprehensive crypto-management platform.”
As opposed to a spending model (like Binance’s) or burning model (i.e., Switcheo Exchange), ShapeShift will incorporate a possession model for its FOX tokens. In this model, users will need to acquire FOX tokens to reach higher membership levels and access the associated benefits.
The ShapeShift Membership program offers five levels of membership, with benefits such as higher trading limits, rewards on trading volume, better pricing, private market and trade data, and early access to new coins, products, and services.
Membership levels are determined by the amount of FOX tokens held by the user account. FOX is an ERC-20 token, with a finite supply of 1,000,001,337 tokens.
Currently, new users who register for the new ShapeShift platform are eligible to receive 100 FOX tokens.
Two Months of the Beta Platform
Prior to opening to the public on July 8th, the ShapeShift platform has been in closed beta testing for the past two months. Through the platform, users can test two of ShapeShift’s other products, KeepKey, a hardware wallet, and CoinCap, a market cap price chart.
The new ShapeShift uses an OAuth registration method to make access as easy as possible. This is the same type of process that allows individuals to log-into a new service or platform using their Facebook or Google credentials.
Once in the exchange, users can interact with a web-based user interface (UI), meaning they don’t need to download any specific software. This UI looks less like the ShapeShift you remember, and more like other exchanges. Users can even purchase cryptocurrency from their bank accounts through the new ShapeShift Platform.
However, it’s still a non-custodial exchange, and users have to keep their private keys on a hardware wallet like KeepKey or Trezor (or Ledger after ShapeShift integrates support). ShapeShift’s KeepKey is able to natively support Bitcoin, Ethereum, Litecoin, and a handful of other projects and ERC-20 tokens.
But for those who haven’t had the chance to explore hardware wallets, fret not. “[F]or most things they’re doing, ” Voorhees said, “[users] don’t need the keys at all.”
Holding the Balance
In the current climate, exchanges operate on a spectrum between total centralization and total sovereignty over one’s funds.
On one side are centralized services that maintain custody of a user’s cryptocurrency, such as Coinbase or Binance. On the opposite end of the spectrum, decentralized exchanges appeal to users who are savvy enough to use hardware and private wallets to manage their assets (i.e., IDEX and Switcheo).
In the face of regulatory compliance, ShapeShift is attempting to pivot its narrative into a unique exchange solution. The new platform aims to offer a service with the security of a decentralized model but the mass appeal of a centralized, regulated exchange.
The only question is, can users adapt to the challenges and responsibilities of being their own banks?