The reason I’m excited about crypto is its potential to improve individual freedoms and access. But the design of crypto networks are constrained by the tools available to them. Identity verification is one of those missing tools, and without it, many important mechanisms are impossible to design. This is the subject of this week’s update, and I suspect many more in the future.
On to the update.
Shapeshift, a service that let users exchange cryptocurrencies without revealing their identity, recently announced mandatory user accounts.
To some who have followed our history, it may seem a curious development; ShapeShift is known as “the exchange without accounts,” a model we pioneered in order to reduce friction and protect customers. Membership is account-based, so why are we departing from that lineage?
3) The practice of requiring customers to hand over personal private information is one we’ve struggled with since inception. To the extent that digital asset technology remains a legal grey area, we need to be prudent and thoughtful in our approach as we navigate the regulatory environment.
Unsurprisingly, the community reacted poorly to the news, with some flinging ad hominem attacks at the founder, Erik Vorhees1.
Why the strong reaction? A system that verifies the identities of its users places the power back in the hands of the legacy financial system. Now, Shapeshift is able to comply with authoritarian requests to deny service to an individual, or reveal the identity of a user. For many–particularly those that lean towards crypto anarchy–such a requirement is a non-starter.
This got me thinking about identity for crypto use-cases.
Use cases for identity
In some cases, like an exchange, you don’t need to be able to verify the identity of users, but it can be useful. Any exchange with meaningful volume needs market makers, and market makers tend to be institutional investors that are regulated to some extent. To attract those market makers and comply with regulations, the exchange would need not only verifiable identity, but KYC (“Know Your Customer”) verification of state issued documents (like a passport).
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If you aren’t already familiar with my work, I write long-form analyses on building and investing in crypto, and the impact of crypto on society.
My readers include investors at Union Square Ventures, a16z, Village Global, Multicoin Capital, Scalar Capital, and Polychain and builders of Bitcoin, Ethereum, Zcash, EOS, Tezos, 0x, and Coinbase.
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