Long-running cryptocurrency exchange ShapeShift has announced the integration of decentralized protocols in a fundamental shift to its business model.
The change allows the exchange to do away with the controversial Know-Your-Customer (KYC) checks added in 2018.
Under the previous model, ShapeShift itself was the counterparty to all trades. Advances in exchange protocols, like those underlying popular decentralized exchanges (DEXs), allow trading directly between platform users.
With ShapeShift integrating such protocols, it no longer needs to collect user data.
ShapeShift Reverts to Non-KYC Model
Earlier Wednesday, ShapeShift founder and CEO Erik Voorhees announced the radical shift. As detailed in a Medium post, the cryptocurrency exchange will no longer require users to submit personal information to trade on the platform.
Tomorrow is here https://t.co/4y1ril0ftc— Erik Voorhees (@ErikVoorhees) January 6, 2021
The post explains the founding of ShapeShift in the wake of the 2014 Mt. Gox hack. Its goal was to reduce counterparty risk for those trading digital assets.
ShapeShift’s model allowed users to trade directly from their own wallets. By contrast, centralized exchanges require traders to first deposit to the platform. This places their assets at the mercy of the trading venue’s own security.
In the years since ShapeShift’s founding, numerous security breaches at trading venues has put users’ assets and personal information at risk. Until 2018, ShapeShift neither custodied user assets or collected their data.
In Sept. 2018, ShapeShift announced the inclusion of KYC checks to its services. The company attracted immense criticism from cryptocurrency observers at the time:
Oh I agree, but then you still have the option to shut your business down (in jurisdictions where necessary) or become a KYC honeypot. I have no issue with exchanges doing KYC/AML. Shapeshift's business model was that it was free of that.— WhalePanda (@WhalePanda) September 5, 2018
In Wednesday’s post, Voorhees explained that this former business model had placed it under the purview of the Bank Secrecy Act, forcing it to collect user data.
ShapeShift CEO: KYC Dissolves the Privacy of All Individuals
Voorhees’ post suggests that the CEO is strongly opposed to the collection of user data. Describing such practices as “dangerous,” he cites the 20 million people that suffer from identity theft each year in the United States.
Indeed, leaked user data recently grabbed cryptocurrency headlines. As BeInCrypto previously reported, a 2020 security breach at the hardware wallet manufacturer Ledger resulted in victims receiving death threats over the Christmas holidays.
The post further explains that KYC data collection is “ineffective” and that he finds it “plainly unethical.” He writes:
“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.”
Shift Towards Decentralization Already Begun
As part of the announcement, Voorhees revealed that trading support for Ethereum and ERC-20 tokens under the new model was already live. He added that the company would extend the service to bitcoin and “several other leading chains” during Q1 2021.
Trading of non-ETH assets will continue for a period under the old model. However, users wishing to do so will still need to prove their identities.
Voorhees added that the company hadn’t given up in the fight against “bad guys” and “sinister activity.” ShapeShift will reportedly continue to collaborate with those in the industry monitoring for illicit activity but says KYC checks are an ineffective way to do so.
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.