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SEC Targets Crypto and DeFi Platforms with New Rules and an Enforcement Action
Wednesday, March 6, 2024

The US Securities and Exchange Commission ("SEC") recently published an enforcement action against the crypto platform ShapeShift and found that ShapeShift acted as an unregistered securities “dealer.” The action coincides with the SEC’s recent adoption of new rules for “dealer” registration

These rules are specifically designed to scope certain crypto companies, including decentralized finance or “DeFi” exchanges and their users, into the “dealer” definition.

For those seeking a deeper understanding of the regulatory issues at play, and what future SEC enforcement actions based on the new rules may look like, the ShapeShift action and a dissent from two SEC commissioners are informative.

In their dissent, SEC Commissioner Hester Peirce and SEC Commissioner Mark Uyeda highlight the ongoing challenges and ambiguities faced by innovators in the crypto and DeFi space, including:

  • Regulatory Challenges – ShapeShift, an early pioneer in crypto asset trading, found itself in the SEC’s crosshairs for failing to register as a securities dealer after operating for almost a decade before the action. This retrospective approach to crypto regulation continues to dissuade many crypto companies from trying to innovate in the US or offer their innovations in the US market.
  • Regulatory Ambiguity –The case underscores the confusion surrounding which crypto assets are considered securities. This ambiguity not only affected ShapeShift prior to its closure, but also poses broader questions for the crypto industry and creates a challenging environment for entrepreneurs who are trying to innovate in a vacuum of clear SEC guidance.

The results of these challenges and ambiguity are perfectly captured in a hypothetical dialogue between ShapeShift and the SEC found in the dissent (excerpt below).

The dialogue is both comical and disappointing. It also encapsulates the frustration innovators feel about the SEC’s current approach to crypto and underscores the urgent need for more transparent and actionable crypto regulatory standards.

Future ShapeShift (“FSS”): Hello, I would like to register as a dealer. 

SEC: Why? 

FSS: Because I think some of the assets that I plan to deal might be deemed at some point by the SEC to be securities . . . 

SEC: Well, if you don’t know whether you’re dealing in securities, you can’t register. . . if some of the assets you’re dealing in are not securities, you also can’t register. . . . We suggest that you read the 2017 DAO report, and it will all be clear to you. You can also look at our enforcement actions . . . 

FSS: I still have questions. 

SEC: Hire a lawyer. 

FSS: I did, and the lawyer has even more questions. 

SEC: Sorry, we cannot help any more than we already have. We don’t give legal advice.

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