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ShapeShift Settles SEC Charges Over Illegal Offering of Securities

In its Monday update, the US Securities and Exchange Commission (SEC) closed a settlement agreement with the Swiss-based crypto firm ShapeShift.

After a lengthy investigation to examine whether ShapeShift violated the securities laws, the regulators noted that the company operated as an unregistered dealer offering some crypto assets grouped as securities. The SEC issued a cease and desist order instructing ShapeShift to wind down operations in 2021. 

SEC Charges ShapeShift for Violation of Securities Laws

A review of the SEC report demonstrated that ShapeShift has been in operation since 2014. The troubled crypto firm offered diverse crypto assets that blended with the customers’ needs.

However, of the numerous services and products issued by the firm, the SEC observed that at least 79 crypto assets under the investment contract were not classified as securities. 

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The market regulators noted that ShapeShift did not complete the registration requirements to operate as a regulated dealer offering crypto assets. Guided by the existing laws, the ShapeShift agreed to settle a $275,000 penalty and vowed not to breach the Securities Exchange Act.

According to the SEC, ShapeShift was once a key player in the crypto sector before its closure. To gain dominance, ShapeShift took advantage of its unique investment portfolio to offer the customers 79 crypto assets that yielded considerable returns. 

At that time, ShapeShift was labeled as a market marker offering unique crypto assets. The report indicates that ShapeShift branded itself as a vending machine serving as a counterparty in every transaction.

ShapeShift Agrees to Settle $275,000 Fine

Beyond this, the regulators noted that the ShapeShift team had streamlined the buying and selling process by eliminating tedious requirements. The SEC noted that the ShapeShift users were not required to create an account to proceed with any crypto activities.

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Unlike other exchanges, ShapeShift did not require the customers to complete the Know Your Customers (KYC) standard processes. In 2018, the market regulators claimed that ShapeShift lacked adequate measures to address money laundering and illicit activities. 

In an earlier report, the Wall Street Journal claimed that criminals had channeled over $9 million using the ShapeShift exchange. The WSJ report indicated that the criminals had used the ShapeShift platform for nearly two years to transfer illicit funds.

Shortly after, the regulators filed charges against ShapeShift, the exchange took decisive actions to comply with the law. Firstly, the exchange delisted the renown privacy coins, including Monero, Zcash, and Dash on its trading platform.

Regulators Questions Legality of ShapeShift Offering

The delisting of these tokens came at a tumultuous time for ShapeShift, which primarily focused on upholding its compliance with the law. Afterward, the exchange invested in migrating from a corporate structure to a decentralized platform.

The transition to a decentralized ecosystem aimed at enabling ShapeShift to operate as an open-source platform offering exclusive crypto custodial and multi-chain services. In an earlier interview, the chief executive of ShapeShift, Erik Voorhees, explained that the transition to the DeFi sector aimed at enabling the exchange to become a compliant firm. 

Previously, the exchange allowed customers to make direct swaps while buying and selling crypto assets. The CEO admitted that ShapeShift was among the top market markers in the crypto sector, boasting of a sustainable customer base.

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The impressive performance of ShapeShift attracted international regulators’ attention to probe the firm’s compliance. 

In their observation, the regulators grouped the ShapeShift as a financial institution offering world-class crypto services. The regulators noted that ShapeShift failed to shield customers’ privacy and security matters as defined by the law. 

US Regulators Seek to Tighten Crypto Regulations

The CEO recalls that on July 14, 2021, the heightened regulatory pressure forced the ShapeShift team to dissolve the company. The indefinite dissolution of ShapeShift impacted massive layoffs and cut off the company’s revenue streams. 

Since then, the exchange has occasionally been used as a point of reference while drafting regulations for digital assets. In 2023, Massachusetts Senator Elizabeth Warren mentioned ShapeShift while presenting the Digital Asset Anti-Money Laundering Act of 2023 (DAAMLA). 

Warren criticized other regulators who argued that the anti-money laundering rules were only practical if they exempted decentralized platforms. She claimed that ShapeShift transitioned to the DeFi industry to facilitate the laundering of funds and terrorism financing.


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Kimberly Crain

Kimberly Crain is a seasoned crypto trader and writer, offering valuable insights into the digital asset market. With expertise in trading strategies and a passion for blockchain technology, her concise and informative articles empower readers to navigate the evolving world of cryptocurrencies.

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