The Commission, the Crypto Task Force, and staff across the Divisions have done tremendous work in the past year and a half to provide clarity to crypto markets as to when a certain asset or activity is subject to the federal securities laws and, if so, how those laws apply. Much of this work has clarified that many crypto assets and activities are not subject to the federal securities laws. That the securities laws do not apply to all crypto assets and activities, however, does not mean that the securities laws do not apply to any crypto assets or activities. If you do headstands, backflips, and other gymnastics to read the law so that it does not apply to crypto assets and activities that are well within the scope of the federal securities laws, you will have a painful fall. If your activities are within the securities perimeter, a better approach is for you to work with us to find a compliant path forward so that you can use new technology to serve investors without running afoul of the federal securities laws.
Last summer, I issued a statement reminding market participants that “[t]okenized securities are still securities.” That statement addressed a particular example of a broader principle: Moving activities that fall within the scope of the federal securities laws onchain, as a general matter, does not take those activities outside the scope of the laws the Commission administers.
That principle holds for vaults, which have attracted recent attention as a tool for allowing holders of crypto assets to generate a yield on those assets. Vaults facilitate asset deployment by using smart contracts to allocate user assets to various yield-generating activities, including staking and lending. Vaults are not uniform. They fall along a spectrum from programmatic allocations determined solely by immutable smart contracts, to allocations at the sole discretion of another person or group of persons. This description is purposefully broad and generic. As with many new developments in crypto, the term does not have a specific, widely understood definition; features and strategies employed by vaults vary and are evolving rapidly. Parties involved in managing these vaults, for example, by selecting the yield-generating activities, re-allocating assets among yield-generating assets, or selecting the parties that will make those decisions, may want to analyze whether their activities implicate the federal securities laws.
Similarly, crypto lending strategies have developed over the course of several years. These strategies allow participants to deposit their assets into onchain systems that lend them for a fee to borrowers who can put those assets to use. Parties involved in managing these strategies, for example, by setting interest rates, deciding which assets to accommodate, setting loan-to-value limits, and establishing liquidation thresholds, may want to analyze whether their activities implicate the federal securities laws.
These new approaches to the deployment of assets hold great promise. Depending on their design, they can enable people to use the assets they own to generate income efficiently and cheaply. As securities move onchain, vaults and onchain lending strategies may become mainstream tools for managing investment portfolios. The promise will only be realized, however, if we grapple now with the intersection between these asset deployment tools and the federal securities laws.
Vaults and lending strategies may implicate the federal securities laws in several ways. A vault, for example, could be a common enterprise in which users invest money with a reasonable expectation of profits to be derived from the vault deployer’s and curator’s entrepreneurial or managerial efforts. A vault that holds securities or allocates assets to investments in securities could fall into investment company territory. Some vaults may function similarly to unit investment trusts that hold a fixed portfolio of assets with little or no active management; others may function similarly to management investment companies; and still others may more closely resemble separately managed accounts that offer individualized client treatment. Lending strategies also can carry significant federal securities law implications that do not turn on the assets involved. For example, onchain loans, depending on the parties’ motivations, the plan of distribution, and other relevant factors, can bear the hallmarks of notes that are securities. Involvement in managing vaults and lending strategies also may implicate investment adviser issues. Whether a particular vault or lending strategy’s structure and activities are within the scope of the federal securities laws will come down to the specific facts and circumstances. Any SEC analysis of these issues requires respect for the limits Congress set on our jurisdiction and an unwavering commitment to protecting developers’ free speech rights.
We welcome inquiries from market participants involved in designing and operating vaults or facilitating onchain lending. You may not fall within our regulatory scope, but, if you do, we welcome the opportunity to talk with you about how to serve your customers in compliance with the federal securities laws. Those laws are flexible because Congress recognized that technologies would change. Sometimes, even with that flexibility, our regulations block innovation and entrench the status quo. We welcome your thoughts on whether we need to modify our rules to accommodate vaults, onchain lending, or other innovations and how we can do so while still ensuring that investors are protected, markets are fair, orderly, and efficient, and capital formation is facilitated.