0/ A few thoughts on @ShapeShift_io's decision to start collecting users' personal information through a mandatory membership program.
In short, this is how regulators silently invade crypto.
Thread.
In short, this is how regulators silently invade crypto.
Thread.
1/ Historically, ShapeShift has enabled users to convert between a variety of digital assets with total anonymity.
The service reflected the principles of its CEO, @ErikVoorhees, a true bitcoiner who speaks passionately about financial privacy & separating money from state.
The service reflected the principles of its CEO, @ErikVoorhees, a true bitcoiner who speaks passionately about financial privacy & separating money from state.
2/ The thing is, the US government doesn't exactly agree with Erik's point of view.
Modern enforcement agencies rely heavily on financial surveillance. The concept of anonymous crypto exchanges & transactions is a genuine nightmare for regulators & investigators.
Modern enforcement agencies rely heavily on financial surveillance. The concept of anonymous crypto exchanges & transactions is a genuine nightmare for regulators & investigators.
3/ Our financial system is expressly designed to give the government maximum insight into our financial behavior.
To that end, most financial institutions have to perform customer due diligence and share information with regulators. We call this "know your customer" (KYC).
To that end, most financial institutions have to perform customer due diligence and share information with regulators. We call this "know your customer" (KYC).
4/ The government views KYC as essential for preventing & detecting:
- money laundering
- terrorist financing
- tax evasion
- sanctions evasion
Law enforcement agencies also use KYC in criminal investigations to identify financial crimes & track the flow of illicit profits.
- money laundering
- terrorist financing
- tax evasion
- sanctions evasion
Law enforcement agencies also use KYC in criminal investigations to identify financial crimes & track the flow of illicit profits.
5/ The most important KYC law for a company like ShapeShift is probably the Bank Secrecy Act, which requires "money services businesses" to implement anti-money laundering compliance programs including KYC.
This law is enforced by FinCEN, a bureau of the US Treasury Department.
This law is enforced by FinCEN, a bureau of the US Treasury Department.
6/ In 2013, FinCEN issued guidance saying that all the regulations governing money services businesses apply in full to crypto companies.
Since then, FinCEN has said that everyone from custodial exchanges to ICOs are required to comply with its anti-money laundering regulations.
Since then, FinCEN has said that everyone from custodial exchanges to ICOs are required to comply with its anti-money laundering regulations.
7/ Now, I'm *not* saying that I think ShapeShift qualifies as a money services business or that it's legally obligated to perform KYC.
But, I *am* guessing that FinCEN (or another agency) has threatened ShapeShift with an enforcement action if it doesn't start to comply.
But, I *am* guessing that FinCEN (or another agency) has threatened ShapeShift with an enforcement action if it doesn't start to comply.
8/ Unfortunately, this is how regulation often gets done here in DC.
Regulators accuse a company of violations based on a weak-but-plausible theory that might fail in court, but would be too expensive/risky/damaging for the company to fight in public, so the company cooperates.
Regulators accuse a company of violations based on a weak-but-plausible theory that might fail in court, but would be too expensive/risky/damaging for the company to fight in public, so the company cooperates.
9/ This may sound like coercion, but it's how *most* regulatory issues are resolved. Very few are openly litigated.
Sometimes it's worth fighting to the bitter end, especially if the government's case is particularly weak or compliance is financially/practically impossible.
Sometimes it's worth fighting to the bitter end, especially if the government's case is particularly weak or compliance is financially/practically impossible.
10/ Other times, it's better to play along & live to fight another day. That's what I think ShapeShift is doing here.
After all, as Erik wrote, he "would prefer if the collection of personal information was not a mandatory element."
He clearly doesn't want to do this.
After all, as Erik wrote, he "would prefer if the collection of personal information was not a mandatory element."
He clearly doesn't want to do this.
11/ In fact, Erik talked about this a few months ago during an interview with Peter McCormack (@whatbitcoindid). At 37:08, he explained:
"Whether [accounts] would become mandatory or not is an open question. I don't...I would never want that to happen."
whatbitcoindid.com/podcast/2018/0…
"Whether [accounts] would become mandatory or not is an open question. I don't...I would never want that to happen."
whatbitcoindid.com/podcast/2018/0…
12/ "[But] if the regulatory risk got so high that I felt like it was the only path that would protect the company, and indeed the users of the company, then I might have to take that path.
But it would suck. I mean, accounts should be optional."
But it would suck. I mean, accounts should be optional."
13/ "So if it ever happened, I mean, it would be under duress.
It would basically be us saying, we were forced by these guys with guns to do something that our customers don't want, that we don't want, and that we think is unethical. But, that's kind of par for the course."
It would basically be us saying, we were forced by these guys with guns to do something that our customers don't want, that we don't want, and that we think is unethical. But, that's kind of par for the course."
14/ Point is, if you viewed ShapeShift's announcement as a sign that Erik sold out, I think you've got it wrong.
Sure, no government agencies have made official statements about ShapeShift, but their fingerprints are all over this decision.
This is just how regulation works.
Sure, no government agencies have made official statements about ShapeShift, but their fingerprints are all over this decision.
This is just how regulation works.
15/ Check out @katherineykwu's thread for more details on FinCEN & the Bank Secrecy Act.
I'm not so quick to concede jurisdiction (I'm a defense attorney after all) and I'd put less emphasis on the civil/criminal distinction, but otherwise kwu nails it.
I'm not so quick to concede jurisdiction (I'm a defense attorney after all) and I'd put less emphasis on the civil/criminal distinction, but otherwise kwu nails it.
16/ I express no opinion on whether ShapeShift should close rather than comply; that's an ideological issue beyond the scope of this legal background.
That said, shutting down during a gov't inquiry can pose its own problems. For one, it may encourage the gov't to file charges.
That said, shutting down during a gov't inquiry can pose its own problems. For one, it may encourage the gov't to file charges.
17/ From a business perspective, this likely also means terminating employees, defaulting on debts, & injuring investors, shareholders, and others.
Breaches of fiduciary duty abound. In the inevitable lawsuits that follow, it won't be too effective to argue "doing KYC is worse."
Breaches of fiduciary duty abound. In the inevitable lawsuits that follow, it won't be too effective to argue "doing KYC is worse."
