SEC Settles Charges Against ShapeShift AG for Failure to Register as Dealer of Crypto-Asset Securities | Practical Law

SEC Settles Charges Against ShapeShift AG for Failure to Register as Dealer of Crypto-Asset Securities | Practical Law

The SEC settled charges against ShapeShift AG for acting as an unregistered dealer of crypto-asset securities in violation of Section 15(a) of the Exchange Act.

SEC Settles Charges Against ShapeShift AG for Failure to Register as Dealer of Crypto-Asset Securities

by Practical Law Finance
Published on 13 Mar 2024USA (National/Federal)
The SEC settled charges against ShapeShift AG for acting as an unregistered dealer of crypto-asset securities in violation of Section 15(a) of the Exchange Act.
On March 5, 2024, the SEC filed a cease-and-desist order settling charges against cryptocurrency platform ShapeShift AG, a private company incorporated in Switzerland, which operated out of Denver, Colorado, for acting as an unregistered dealer of crypto-asset securities in violation of Section 15(a) of the Exchange Act.
According to the order, ShapeShift sold crypto-asset securities through ShapeShift.io, an online platform, which gave users an opportunity to trade certain crypto assets for other crypto assets owned by ShapeShift from August 2014 until January 2021, in violation of the Exchange Act. In July 2021, ShapeShift announced it was winding down its operations; the SEC's order only applies to ShapeShift's conduct prior to early 2021.
ShapeShift functioned as the customer's counterparty in each transaction, buying crypto assets from the customer and selling crypto assets to the customer. ShapeShift's revenue came from charging customers more for the crypto assets than ShapeShift paid to acquire them.
The SEC found that ShapeShift:
Without admitting or denying the allegations and to settle the SEC charges, ShapeShift agreed to pay a $275,000 civil penalty to the SEC.

Revised SEC "Dealer" Rules Include Crypto

Note that, on February 6, 2024, the SEC adopted final rules expanding the definition of "dealer" under Section 3(a)(5) of the Exchange Act (see Legal Update, SEC Adopts Rules to Expand Definitions of Dealer and Government Securities Dealer), which did not incorporate:
  • An exclusion for crypto-asset securities.
  • Exclusions and carve-outs requested by market participants for crypto-asset securities.
The SEC also clarified in the revised dealer rules that individuals can be deemed to be engaged in liquidity-providing activities "as a part of a regular business" for purposes of determining dealer status when they earn revenue primarily from capturing bid-ask spreads. Going forward, companies operating similar to ShapeShift should be aware of the expanded "dealer" definition and register with the SEC.
The revised dealer rules will become effective April 29, 2024, with a compliance date of April 29, 2025.

Dissenting Statement of Commissioners Peirce and Uyeda

SEC Commissioners Hester Peirce and Mark Uyeda issued a strongly worded dissenting statement in ShapeShift, noting that:
  • The order fails to identify which crypto assets were investment contracts and provides no explanation for its conclusion. Nearly ten years after ShapeShift’s platform started trading and more than three years after it changed its business model, the SEC now contends that "some unidentified number of the 79 crypto assets it traded between 2014 and 2021 were investment contracts without explaining why."
  • The SEC does not allege any harm – the order nowhere alleges that ShapeShift defrauded its customers.
  • The environment the SEC has created for the crypto asset markets, especially as it relates to secondary trading, is "untenable because it exposes well-meaning entrepreneurs to a regulatory sword of Damocles." The statement asserts further that "cases like this do not protect investors; they intimidate innovators and entrepreneurs."
  • In adopting the expanded dealer rules, the SEC acknowledged that the new category of dealers might include certain crypto market participants. These market participants, the dissent asserts, "are trying to figure out whether they have to register as dealers and, if so, which assets they can handle in the registered entity. To do so, they need to understand whether the assets for which they provide liquidity are securities. The fiction that this has been done is undermined by the SEC's failure to state which specific assets in ShapeShift are securities."