SEC settles with Erik Voorhees’ ShapeShift over unregistered security sales

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Erik Voorhees the founder of ShapeShift exchange has reached a settlement with U.S. regulators for selling digital assets that were unregistered securities.

On March 5, the Securities and Exchange Commission (SEC) issued an order instituting cease-and-desist proceedings against ShapeShift AG, operator of the ShapeShift.io exchange. The order follows the Swiss-incorporated ShapeShift’s submission of an offer of settlement to the SEC, including a $275,000 penalty, which the SEC has accepted.

The headline takeaway from this settlement is the order’s claim that the digital assets that ShapeShift offered to the public “included those that were offered and sold as investment contracts and, therefore, securities” under the conditions of the Howey Test.

The order relates to ShapeShift’s former digital asset exchange business, which operated from August 2014 to early 2021. The SEC notes that for much of this period, ShapeShift operated out of a Denver, Colorado office and that ShapeShift was dealing in securities despite having “never registered as a dealer with the Commission or operated pursuant to any exception or exemption from registration.”

ShapeShift’s exchange operations weren’t the traditional set-up, as it didn’t deal in fiat currency or act as a middleman for peer-to-peer trading. Instead, customers traded directly with ShapeShift, exchanging one token for another, provided the other token was part of ShapeShift’s inventory. ShapeShift referred to itself as a digital asset “vending machine.”

Customers were offered a rate of exchange based on which tokens they wanted to sell and which tokens they wanted to buy. ShapeShift generated revenue from the spread it offered to customers on these trades, which totaled 20,000 per day at the exchange’s peak.

At the time, ShapeShift lacked any ‘know your customer’ (KYC) or anti-money laundering (AML) programs whatsoever, based in part on Voorhees’ rigid libertarian beliefs. But following a 2018 Wall Street Journal report detailing the “parade of suspected criminals” using ShapeShift to launder their ill-gotten gains, Voorhees begrudgingly began imposing new KYC/AML demands on ShapeShift customers.

In January 2021, ShapeShift announced that it would no longer serve as a direct counterparty for its customers. The site completed its ‘evolution’ into a decentralized autonomous organization (DAO) the following year.

Two SEC commissioners—Hester’ Crypto Mom’ Peirce and Mark Uyeda—issued a statement criticizing the ShapeShift settlement as “the latest installment in the serial drama of the Commission’s poorly conceived crypto policy.” The pair note that the SEC’s order “does not allege any harm,” nor does it claim that “ShapeShift defrauded its customers.”

The phrase’ money laundering’ appears nowhere in this statement, apparently due to the pair’s belief that providing a service that makes it easier for thieves to launder stolen cash is laudatory. Honestly, what’s next? The Department of Justice arresting someone just because they drove a bank robber’s getaway car? Outrageous!

US authorities may not be done with ShapeShift

Voorhees signaled his disdain for the SEC settlement by tweeting a quote from James Madison’s Federalist Paper No. 51, in which the author discusses the need for checks and balances on government power. We’re hoping SEC Chair Gary Gensler claps back by quoting from Realist Paper No. 411, in which the author declares it “sucks to be you.”

ShapeShift may have agreed to the cease-and-desist order “without admitting or denying the SEC’s findings,” but the company’s consenting to the entry of the order nonetheless adds another notch to the SEC’s ‘tokens are securities’ bedpost.

The ShapeShift settlement comes shortly after the SEC was granted a default judgment
against a member of the trio charged with insider trading on advanced knowledge of token listings on the Coinbase (NASDAQ: COIN) exchange.

The March 1 judgment by U.S. District Judge Tana Lin agreed with the SEC’s position that the nine different tokens traded by the criminal trio met the Howey Test criteria regardless of whether they were acquired directly from the token issuers “or from another investor, including on a crypto asset trading platform.”

The SEC was quick to alert the other federal judges handling its complaints against the Coinbase (NASDAQ: COIN) and Binance exchanges, each accused of offering unregistered securities to the public without securing the necessary authorization.

Voorhees may have transformed ShapeShift into a decentralized business model to minimize his personal exposure, but his intentions remain unabashedly anarchic. Just last month, Voorhees offered the following promo for ShapeShift: “No KYC. No account. No borders. No permission. No company. Enjoy.” The very next day, Voorhees tweeted a call for “preferably unorthodox” developers looking to assist him on a “stealth AI/crypto project.”

The thing is, both the SEC and the Commodity Futures Trading Commission (CFTC) have publicly stated their belief (and courts have agreed) that decentralized entities are in no way exempt from observing the law. The SEC has proposed expanding its definition of ‘exchange’ to include decentralized finance (DeFi) systems, while CFTC boss Rostin Behnam has compared DeFi platforms to “unlicensed physicians” and said the issue with DeFi is “who set up that entity, that code, to offer those products?”

We’ll go out on a limb and suggest the answer is ‘some unorthodox developer with an overly rigid libertarian streak’ and a long history of offering unregistered securities to the public.

You’re Putin me on

Recall that in April 2019, Voorhees directed ShapeShift to follow the lead of Binance
founder Changpeng ‘CZ’ Zhao, who launched the anti-competitive delisting of the BSV token. Voorhees, that unflinching advocate for freedom of choice, denied ShapeShift users the right to choose for themselves what technology to embrace. Such liberty. Much prerogative.

It’s not like Voorhees’ judgment has ever been called into question or anything. Particularly not that time just days before the FTX exchange went belly-up, taking billions in customer deposits with it when Voorhees tweeted that FTX founder Sam Bankman-Fried was “serving millions of happy customers” and “is absolutely a net good for crypto.” Such acumen. Much awareness.

A few years after the BSV delisting, Voorhees justified ShapeShift’s actions on the basis that “free association and ostracism are important tools to set and enforce standards of behavior.” Evidently, Voorhees was mortally offended by Bitcoin creator Dr. Craig Wright
choosing to defend himself against those who called him a fraud for claiming to be the real-world identity behind Satoshi Nakamoto, the pseudonymous author of the Bitcoin white paper.

A few years after that ‘ostracism’ comment, Voorhees was decrying “vilification, censorship, outrage” in response to those who felt Tucker Carlson shouldn’t have given Vladimir Putin a platform from which to spew his propaganda and disinformation.

So there you have it: a rival who threatens your ‘crypto’ business model? Despatch that infidel straight to hell! A tyrant who murders his critics and uses his own people as cannon fodder in unprovoked invasions of neighboring countries? Let’s hear what the man has to say!

There’s a saying that this site’s founder has about Wright’s critics, namely, that they all invariably end up “being proven a crook.” Much like Binance’s CZ, who is currently awaiting sentencing for allowing a wide variety of terrorists and other criminals to use his exchange to transfer funds. That would be the same Binance Voorhees proudly declared he was ‘standing with’ when it targeted BSV in a coordinated commercial delisting attack.

The way things are going, it will be standing room only in ‘crypto prison.’

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.