Could crypto vaults and lending be treading a red line? “Crypto mom” Hester Peirce warns: putting on-chain doesn’t mean you’re out of securities law

U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce—dubbed “Crypto Mom”—issued her latest statement on the 22nd, delivering regulatory warnings regarding the currently popular “crypto vaults” and “on-chain lending strategies.” She emphasized that although many crypto assets are not securities, “tokenized securities are still securities.” If a vault or lending agreement involves active management, profit distribution, or guidance of decision-making, it may still trigger federal securities laws. Peirce urged industry players to proactively engage in dialogue with the SEC and work together to explore practical compliance pathways.
(Background: SEC Crypto Mom Hester Peirce supports privacy tools: protecting financial privacy is equivalent to safeguarding national security)
(Background addition: Crypto Mom Peirce speaks out: developing a blockchain is just writing code—don’t treat DeFi code as a security)

Table of contents

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• On-chain doesn’t mean no regulation! Vaults and lending strategies face legal scrutiny
• Four potential red lines: Howey test and note classification
• A practical attitude to engage in dialogue, urging the industry to co-create compliance paths

U.S. regulators’ stance toward decentralized finance (DeFi) and on-chain yield tools has once again drawn market attention. On July 22, Taipei time, U.S. SEC Commissioner Hester M. Peirce published a public article titled “Headstands and Summervaults: A Statement on Crypto Vaults and Lending Strategies,” issuing regulatory red lines for crypto yield tools that have become all the rage.

On-chain doesn’t mean no regulation! Vaults and lending strategies face legal scrutiny

In her statement, Peirce first affirmed the SEC’s efforts over the past one and a half years to clarify the jurisdictional boundaries of the crypto market, and agreed that many crypto assets and activities are not within the scope of federal securities laws. However, she specifically stressed: “Tokenized securities are still securities.” Moving securities activities onto a blockchain does not automatically free them from securities law constraints.

Regarding the recently popular “vaults”—tools that automatically allocate users’ assets via smart contracts to yield-generating activities such as staking or lending—Peirce noted that their types vary greatly. If a vault is executed entirely by immutable smart contracts, its nature is relatively pure; but if a firm is responsible for selecting yield strategies, redistributing assets, or appointing decision-makers, then it must be analyzed closely whether securities law requirements have been triggered.

Similarly, for on-chain “lending strategies,” if the manager takes on responsibilities such as setting lending interest rates, selecting acceptable assets, deciding the loan-to-value (LTV), or determining liquidation thresholds, the legal risk should also be evaluated actively.

Four potential red lines: Howey test and note classification

Peirce laid out several specific scenarios in which these kinds of on-chain yield tools could potentially implicate securities laws:

• Investment Contract: If users contribute capital and expect to profit from the entrepreneurial and managerial efforts of the vault deployer or curator, it would meet the Howey test standard for a securities determination.
• Notes: Depending on the motivation behind the issuance of the lending transaction and how it is promoted, related lending instruments may be deemed securities (citing the Reves v. Ernst & Young precedent).
• Investment Company Act: If the vault itself holds or invests in securities, it could fall within the regulatory scope of unit investment trusts or management-type investment companies.
• Investment Adviser Regulations: Managing a vault or guiding lending strategies may cause the entity’s status to shift into that of a regulated investment adviser.

A practical attitude to engage in dialogue, urging the industry to co-create compliance paths

Even with the warnings outlined, Peirce still expressed support for the potential of these emerging tools. She believes vaults and lending strategies can help investors manage assets efficiently and at low cost while generating yield, and that once traditional securities are tokenized on-chain, they are more likely to become mainstream portfolio management tools. She also emphasized that when analyzing these matters, the SEC will respect the authority boundaries set by Congress and protect developers’ freedom of speech.

At the end of her statement, Peirce extended a sincere invitation to Web3 developers and innovators. She encouraged teams working on vault design or on-chain lending to proactively contact the SEC. If, after assessment, it is outside the scope of jurisdiction, that is certainly good; if securities laws are involved, the SEC is also willing to jointly explore flexible approaches to compliance services—seeking ways to protect investors while promoting capital formation.