ShapeShift and Tokens as Securities
The diversity of tokens coming into existence has been bewildering; emblematic of the awesome power of open, global blockchains. This innovation has been fast-paced, and many tokens do not fit into traditional definitions.
At their most fundamental level, tokens (a colloquial term for blockchain ledger entries) are speech: they are inscriptions of meaningful information into a communal record.
How specific ledger entries become defined by various parties beyond that, and how those definitions are reconciled within legacy systems, remains to be seen. We expect new definitions will emerge as society comes to understand the power and diversity of this technology.
Recently, the Securities and Exchange Commission (SEC), a US-based financial regulator, has taken the position that a specific type of blockchain ledger entry, the Ethereum-based token known as The DAO Token (defunct since a code exploit was discovered over a year ago), would have been considered a security – specifically an investment contract, as contemplated under the U.S. Securities Act of 1933. SEC also emphasized that it may consider other tokens to be securities, based on their specific properties.
ShapeShift, from its beginning, has been built to be the safest, fastest digital asset exchange on Earth. We don’t just take consumer protection seriously: we created an entirely new model that doesn’t endanger users in the first place. ShapeShift was the first exchange to build this kind of technology.
In light of the SEC’s statements, we will need to adapt our service offering to ensure it’s not mischaracterized as a “securities exchange.” To err on the side of caution, we may need to halt our inscriptions to certain blockchains. This means that we may need to delist some types of tokens from the platform, which is unfortunate for our users who have enjoyed the ability to participate in these experimental and innovative technologies.
We have thus instructed our counsel to examine the tokens available on ShapeShift, especially through the lens of the Howey Test, which is the test the SEC applies to determine the presence of a security.
As that analysis is done, certain tokens may be removed from the service for individuals within the United States, who will then no longer be able to interact with these technologies safely or transparently through the ShapeShift platform. Additionally, we will consider the application of the Howey test to all new tokens we list.
As an organization trying to advance this technology for an open and honest financial system, we believe that individuals, regardless of race, gender, and geographic location, should have the right to make decisions with their own finances.
SEC announcements regarding securities and tokens: