Marking its 300th episode, long-running crypto podcast Epicenter welcomed Erik Voorhees, CEO of ShapeShift onto the show. With ShapeShift itself celebrating its own fifth anniversary late in July, and coming off the back of major changes to its platform and core business model, he had plenty to say on the matters of regulation and the wider crypto ecosystem.
Voorhees admitted that the company’s decision to implement Know Your Customer (KYC) protocols on the New York-based crypto-trading platform he founded in 2014 has had a seriously detrimental effect on its bottom line so far.
Its trading volumes, down to around $200,000 per day at the moment, “have been pretty dismal” since the highly publicized rule changes ”essentially gutted the entire customer base that we’ve been building for several years”, but this is a “phase of rebuilding the new ShapeShift and then kind of rebuilding a whole new business on that new platform.”
Existential Crisis
As Voorhees made clear at the time, the decision to implement KYC was existentially troubling to the company, and “obviously not because we wanted to…”
“ShapeShift was built to protect customers,” he told host Sebastien Couture, “and in the beginning that meant two really important tenets to me: one was not having any custody at all, and allowing the user to hold their own keys, and the second was not having personal information of the user and allowing people to keep that to themselves.”
Despite his believe that holding personal details means you are “inevitably endangering” customers, because companies and governments large and small “have problems with these kind of hacks where millions of records get lost and stolen it’s a huge problem”, the company decided to implement the changes after research into the matter that began in 2017.
The company, Voorhees claims, invested “millions of dollars in further legal work to analyze every contour of these complicated financial regulations”, with the result being that it was found to be too risky to continue without KYC. Even though he describes it as “unethical to force people to give up their personal information when they don’t want to so.” The CEO added:
This was really like the most existential struggle I’ve ever dealt with in my life. This was dismal news for me, you know a dismal realization and conclusion to come to because we knew that it would be bad for our customers. We knew it would be bad for us as a business.
“Ultimately,” however, ShapeShift decided to “play the long game.”
If I’m going to fight for financial privacy, I need to be able to do it from a company that is big and powerful and strong and has that voice rather than trying to do it, you know shut down and thrown in a cage somewhere, whether that strategy is the right one or not we will see.
The Shape of ShapeShift 2.0
The new KYC rules, and low volumes, however, do not essentially affect the customer experience of ShapeShift though, Voorhees maintains. That’s partly due to its role as market maker in all of the trades on the site. In effect, buying crypto through the service involves buying directly from the company itself. Which monitors other exchanges to set prices, and spreads out order to avoid slippage on low-liquidity coins.
“We watch all the order books of five different exchanges right now,” he explains. “Let’s say someone is trying to sell $20,000 dollars of Bitcoin into Dogecoin, on any specific exchange there’s going to be an order book that might you know, the price may move by X percent on order that size. But if you spread that order out across all the exchanges the price would move less than that and so because we can theoretically do that by being the market maker ourselves we can give better pricing to users than they would get on any particular exchange and they never have to worry about the custody.”
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It’s a system that the new-look ShapeShift will continue with, despite its CEO’s admission that some canny traders have found ways to game the inherent latency, which brings with it risk. The business model for the company will continue to see it take a cut of every sale it makes – around 0.5% – and, make money trading behind the scenes to facilitate those deals. It will also look to expand on its role as a front end for hardware storage devices like its own KeepKey wallet, and Trezor devices.
The Future of Decentralization
“So basically it’s meant to be a self custody alternative to something like Coinbase, a really simple and good UX that normal people can use to interact with crypto technologies, but done without us having control of users keys.”
Vorhees concludes that he thinks that “if the crypto revolution happens and it just ends up with a bunch of custodians new custodians, you know, the Coinbases instead of PayPal’s and banks before it then not really much has changed at all”
He goes on to add that crypto users have abided with centralized exchange model out of pure convenience so far, saying “they leave their assets at these exchanges because it’s convenient and ultimately because they get decent pricing on the trades.”
However, he believes that if ShapeShift “can make it as convenient to self-custody, and if we can get relatively competitive on the pricing, not only can we grow our business to be a huge size but we also will do a big service to the industry by pulling custody away from centralized places.”
ShapeShift, however, decided against full decentralization of its systems – a concept that, Vorhees says, “exists on a gradient.”
“It’s not a binary thing where you’re either decentralized or not,” he argues. “There are degrees of decentralization [and] ShapeShift is more decentralized than something like Coinbase, but it’s less decentralized than a true DEX.”
That’s one of the strengths of the crypto industries that people can try every model from the Coinbase model all the way to the most decentralized thing like a like a Bitcoin itself and everything in between. That’s what makes this so strong is that there’s no single model, no single weakness because it’s diverse.
Chiming with the fiercely libertarian rhetoric he brings to his social media presence, in closing Voorhees got in the jab that “Fiat money is a scam.” Per his words it’s the greatest scam ever perpetrated on mankind, the sooner people abandon it and moved to private market-based money the better. Bitcoin obviously kicked off a phenomenon that I think is unstoppable at this point.”
He added that it’s a phenomenon that’s “well suited for something like money that needs to be global and which no one should have the power to control.” While he doesn’t know if it’ll take five or fifty years for the crypto revolution to play out, he noted he thinks it’s “inevitable.”
Featured image via Marco Verch, Flickr, CC by 2.0