SEC Commissioner Affirms Federal Securities Laws Apply to Onchain Vaults and Lending Strategies

Hester Peirce, a member of the U.S. Securities and Exchange Commission's Crypto Task Force, stated that onchain vaults and lending strategies involving investment contracts are subject to federal regulation. Peirce indicated that existing securities law applies to crypto assets and activities. These comments followed previous statements concerning tokenized securities, where Peirce asserted that such assets remain securities. The SEC has been working to clarify regulations for tokenized assets.

A surge in tokenization activity, including onchain vaults designed for yield generation, occurred during President Donald Trump’s second term. Peirce stated that moving activities within the scope of federal securities laws onto the blockchain does not exempt them from SEC administration. Peirce noted that vaults might implicate federal securities laws, potentially representing a “common enterprise” under the Howey Test or holding and allocating investments into securities, thus falling into “investment company territory.” This applies irrespective of whether vaults are actively or passively managed or resemble separately managed accounts.

Some vault makers and managers are designing structures to segregate user funds to avoid commingling. Onchain lending may also fall under SEC jurisdiction, as onchain loans could be considered notes that are securities. Involvement in managing vaults and lending strategies may also implicate investment adviser issues. Peirce clarified that the agency will treat these vehicles on an individual basis, indicating her statements do not constitute a blanket ban on onchain vault or lending activities. Peirce served as a commissioner under former SEC Chairman Gary Gensler, who believed most crypto-related activity was under the agency’s jurisdiction.

The applicability of federal securities laws to a vault or lending strategy depends on specific facts and circumstances. The SEC has postponed the introduction of an innovation exemption for tokenization experiments. The Clarity Act, a proposed U.S. crypto market structure legislation, aims to define the oversight roles of the SEC and CFTC. The Clarity Act's progress has been hindered by ethics concerns related to former President Trump's crypto affiliations.

The Block, an independent media outlet, has indicated that some advancement on the legislation is occurring. As of November 2023, Foresight Ventures is the majority investor in The Block, and crypto exchange Bitget is an anchor limited partner for Foresight Ventures. Foresight Ventures invests in other crypto companies. The Block maintains operational independence.