The US Securities and Exchange Commission (“SEC”) recently published an enforcement action against the crypto platform ShapeShift AG 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 crypto and DeFi, 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, 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.