SEC Commissioner Peirce Highlights Securities Law Considerations for Crypto Vaults and Onchain Lending

SEC Commissioner Hester M. Peirce cautioned that the structure and activities of crypto vaults and onchain lending strategies may implicate the federal securities laws, emphasizing that the analysis depends on the specific facts and circumstances of each product.

On July 22, US Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce issued a statement addressing how the federal securities laws may apply to crypto vaults[1] and onchain lending strategies (Statement). The Statement does not establish categorical treatment for these products.

Instead, Commissioner Peirce explained that the analysis depends on the particular facts and circumstances of the vault or lending strategy product, including its structure, the assets or investments involved, the terms of any lending arrangement, and the functions performed by participants within the product stack. The Statement builds on Commissioner Peirce’s prior observation that tokenized securities are still securities subject to the federal securities laws.[2]

It applies a broader principle to vaults and onchain lending activities, emphasizing that moving an activity onchain generally does not alter its treatment under the federal securities laws.[3] For market participants engaged in vault or onchain lending activities, the key takeaway is that the product, the assets and transactions involved, and the activities of those managing or facilitating the product may each implicate the federal securities laws.

VAULT CONSIDERATIONS

A crypto vault is an onchain structure that uses smart contracts to allocate crypto assets deposited by users to yield-generating activities, including staking and lending. Commissioner Peirce noted that vaults vary from programmatic allocations determined solely by immutable smart contracts to arrangements in which a person, entity, or group exercises discretion over allocations.

Commissioner Peirce identified several ways that vaults may implicate the federal securities laws, depending on their structure:

• A vault could constitute an “investment contract,” and therefore a “security” under the Securities Act of 1933 (1933 Act), if it is a common enterprise in which users invest assets with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of the vault deployer or curator.[4]
• A vault that holds securities or allocates assets to investments in securities may enter “investment company territory” and potentially fall within the definition of an “investment company” under the Investment Company Act of 1940 (1940 Act). Commissioner Peirce noted that while some vaults may function similarly to unit investment trusts that hold fixed portfolios with little or no active management, others may function similarly to management investment companies or resemble separately managed accounts that offer individualized client services.
• Involvement in managing a vault may implicate investment adviser considerations under the Investment Advisers Act of 1940 (Advisers Act).

The analysis is therefore functional and depends on the vault’s particular facts and circumstances. Relevant considerations include the assets and investments involved, how assets are allocated, the nature and extent of any intermediation, who exercises decision-making authority, and the functions performed by those involved in managing the vault. These considerations may inform whether the vault, its activities, or those involved in its management implicate one or more federal securities law frameworks.

ONCHAIN LENDING CONSIDERATIONS

The securities law analysis of an onchain lending strategy is not limited to the status of the crypto asset being lent. The terms of the lending arrangement and the activities of those managing the strategy may raise separate securities law considerations:

• The loan itself could bear the hallmarks of a note that is a “security” under the 1933 Act, depending on the parties’ motivations, plan of distribution, and other relevant factors.[5]
• Involvement in managing the lending strategy may implicate investment adviser considerations. Commissioner Peirce identified functions such as setting interest rates, determining which assets the strategy will accommodate, establishing loan-to-value limits, and setting liquidation thresholds as examples of activities that may implicate the Advisers Act.

Parties involved in managing onchain lending strategies should consider the securities status of the lending instrument and the functions performed by those who design or manage the strategy. The securities law analysis does not depend solely on the status of the assets involved.

KEY TAKEAWAYS

The Statement does not announce a new rule or establish categorical treatment for crypto vaults or onchain lending strategies. Instead, it identifies federal securities law considerations that may arise from the structure and operations of these products and the activities of those involved in the product stack.

• Moving onchain does not mean moving outside the securities laws. Using blockchain technology, smart contracts, and digital wallets for activities that otherwise fall within the federal securities laws generally does not change the regulatory analysis.
• Analyze the full product stack. The status of the underlying crypto asset is only part of the analysis. The structure of the product, the instruments involved, and the functions performed by participants within the product stack should also be considered.
• Vaults may implicate several regulatory frameworks. Depending on their structure and activities, vaults may raise questions under the 1933 Act, 1940 Act, and the Advisers Act. Commissioner Peirce noted that some vaults may function similarly to unit investment trusts, management investment companies, or separately managed accounts.
• Discretion and management functions matter. Participants involved in selecting yield-generating activities, reallocating assets, selecting decisionmakers, or managing lending strategies should also consider whether those functions implicate the federal securities laws, particularly the Advisers Act.
• Vaults and lending strategies require analysis at more than one level. The securities law analysis must consider the crypto assets involved (including the receipt tokens received by a vault user), as well as the structure and activities of the vaults. An onchain loan may itself bear the hallmarks of a note that is a security, and involvement in managing the lending strategy may implicate investment adviser considerations.

Commissioner Peirce invited market participants who are designing or operating vaults or facilitating onchain lending to engage with the SEC, while acknowledging that some arrangements may fall outside the SEC’s regulatory scope and that existing rules may need modification to accommodate innovation.

HOW WE CAN HELP

If you would like to engage with the SEC on its call for input, please contact your regular Morgan Lewis lawyer or a lawyer listed below who can facilitate such discussions.

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