Why crypto exchange company ShapeShift is decentralizing itself

Crypto exchange company ShapeShift is dismantling its corporate structure and will decentralize governance to its customers amid the pandemic. Erik Voorhees, ShapeShift CEO, joins Yahoo Finance Live to weigh in.

Video Transcript

ZACK GUZMAN: Well, some big news in the cryptocurrency space. One of the original venues to swap cryptocurrencies just announced it's going to be shutting down as a centralized business to become a decentralized entity without employees, a CEO, or a board, and completely opensourced and run by its own community. That would be ShapeShift, which, earlier this week, distributed tokens to customers and community members in what's being called the largest AirDrop in history. Full disclosure-- about $200 worth of FOX Tokens wound up in my wallet through all that.

And for more on the move, happy to bring on the CEO of ShapeShift here with us. Crypto pioneer Erik Voorhees joins us right now. And Erik, I mean, just for background, for people who might not know ShapeShift, you know, one of those original places you could swap, you had to implement know your customer rules and anti-money laundering rules, and you lost almost all your customers. And recently, you've been using DeFi platforms to kind of make it work on the backend without having to deal with all of that. So why choose right now to go the full decentralization route?

ERIK VOORHEES: Yeah, well, we built ShapeShift to make it safe and easy for people to trade digital assets. That's always been our goal. And in 2018, we came to the conclusion that we would probably be treated as a financial institution. And that meant we would have to follow all the regulations that financial institutions do. And we would essentially have to act like a bank. And we are ethically opposed to that. We don't believe people should be spied on just for interacting with financial applications.

But we have to follow the law. We are a established business. And we're not anonymous. So we have to follow the rules. And so we went through a couple of very dark years where all of our customers just left for places that could actually still respect their privacy. And what we have realized over the last year is we can achieve our vision better by decentralizing the company, which means we dismantle the entire corporate structure. We opensource all of the software. And we let the community itself govern and build ShapeShift, instead of a normal centralized company doing that.

So it's definitely, like, an unorthodox move. It would be impossible without decentralized systems, like cryptocurrencies and a lot of the DeFi tooling that's gotten established. But we believe this is the right move for us. It's definitely the right move for our customers. And so now we have invited the whole world to help us build an opensource crypto platform that everyone in the world can use, which respects their privacy and which brings the properties of immutability and borderlessness to the application.

ZACK GUZMAN: Yeah, and now, I mean, I guess, some people might be listening and say, "Oh, FOX Token sounds like just shares in the company," but you're not going to necessarily have you being the CEO running the ship anymore. People with the tokens can vote on governance issues here.

And it was interesting to see you kind of lay all this out in a post, highlighting that, you know, this might not work for all businesses. But increasingly, the old way of doing things with corporate structures and centralized structures might not work for a crypto business. So talk to me about what you might see and why you think that you guys are just going to be the first example in this shift away from the old model and why it's necessary.

ERIK VOORHEES: Yeah, I think if you zoom out and you look at the arc of history, you know, the establishment of C corps and LLCs was an important development that society had in how to orient and organize economic relationships. And it was very important. Every company is that today. But I think in a digital age, as we are into the 21st century and as more and more organizations are global, a new form is actually appropriate to look at.

And this form needs to be something that is highly adaptable, borderless, non-jurisdictional, and which can still govern itself effectively, and which can still accrue value in an organized and orderly way to those who are participating in that system.

So certainly tokens are a great tool for that. Decentralized systems are a great tool for that. Opensource software is a great tool for that. And we are just combining a lot of these things into transforming ShapeShift from a traditional-- we're a Swiss C Corp, essentially, an AG in Switzerland-- transforming from that into a decentralized opensource, community-based, and community-governed project. So we will see how it goes.

AKIKO FUJITA: And Erik, I wonder if you can apply this model that you've set for ShapeShift to some of your other competitors and other platforms. As you pointed out, the law is the way it is right now. And so you've sort of made the decision to say we don't necessarily agree with that. We're not going to go with that. And I wonder what that says about how decentralized some of these other platforms your competitors truly are.

ERIK VOORHEES: Yeah, well, we are fortunate in that we are non-custodial. So we do not hold any customer funds ever. We never have, never will. If you are a company that is custodial and you hold funds for customers, there is no way that you can decentralize. So it's a nonstarter. So I certainly don't think every crypto business should try to decentralize. It doesn't make sense for many, and many cannot do it. But certainly for some, it is a better path. And we want to help, you know, pioneer that.

ZACK GUZMAN: Yeah, and I mean, you've been pretty active in talking about what you love about DeFi and some of these platforms. We've had Thorchain on the show in the past. I know you work with them on kind of the backend to make a lot of this work.

When it comes to maybe regulating those, it's been interesting because I don't even know what it would look like to shut some of those down or the way that regulators would even look at that that's maybe trying to do that. But I mean, what are some of the risks that you see shaping up now maybe in DeFi or cryptocurrencies writ large that might still be overlooked when we talk about the growth of the space and how it's taken off?

ERIK VOORHEES: Yeah, I think the entire growth and development of the crypto industry has been one that has been hand in hand dealing with uncertain regulations and certain regulations which are unethical or obtrusive to customers. So it has been a struggle because now you have immutable, stateless money that anyone in the world can use and send to each other, like mathematics or language, where no one controls it. And yet you have an entire regulatory apparatus that has grown up around trying to control that very thing.

So what happens in that regard? I mean, it is an interesting social question of how this unfolds. I think what's very important for people to understand is that cryptocurrency and blockchains regulate themselves through mathematics. They regulate themselves through open, transparent rules that everyone can see and anyone can participate involuntarily. I think that is a more just system, a more fair system. And hopefully, a lot of the goals of the regulators around transparency and soundness will actually be best expressed by a lot of these technologies.

ZACK GUZMAN: It's an interesting time for sure and interesting to see a CEO come out and go full decentralization here and taking himself out of the rankings and pushing it onto the community. But very interesting to see what happens. Erik Voorhees, appreciate you coming on here to chat with us, the CEO of ShapeShift. Congrats on the moves, man. And we'll be in touch.