SEC warns crypto vaults and onchain loans may fall under securities law

SEC Commissioner Hester Peirce has indicated that crypto vaults and on-chain lending strategies may fall under US securities law. Whether that is the case depends on the specific structure and operation of the product. Peirce calls on market participants to engage with the SEC on the existing rules.

When does a vault fall under securities law?

According to Peirce, a vault can be seen as a common enterprise where users contribute money with a reasonable expectation of profit derived from the efforts of the vault provider or manager. A vault that holds or distributes investments in securities could therefore run afoul of investment company regulations. Some vaults resemble unit investment trusts with a fixed portfolio and little active management, while others are more like actively managed funds or even individually managed accounts.

Products where management decisions play a role in return strategies, asset allocation, interest rates, loan-to-value limits or liquidation thresholds may raise questions regarding securities, investment companies or investment advice. The SEC states that each analysis depends on the facts and circumstances of the specific case, and that the limits of the Commission’s authority are always respected, as is developers’ freedom of speech.

On-chain loans also in the SEC’s sights

Not only vaults, but also on-chain lending strategies can, according to Peirce, have significant legal implications. Depending on the motivations of the parties involved and the distribution plan, on-chain loans may carry the characteristics of securities in the form of debt instruments. This applies regardless of the specific assets involved.

Peirce encourages market participants to actively reach out to the SEC and provide feedback on whether existing rules should be amended to better accommodate vaults and on-chain loans. The full statement can be read on the SEC’s website. The remarks come at a time when regulators worldwide are scrutinising the crypto sector ever more closely, as also shown by a recent FATF report on AML controls in the crypto sector.