Ji Kim

Everyone agrees about the vaults that hold most of DeFi’s capital. If a user supplies assets to a lending protocol with parameters that no one can unilaterally reconfigure, the securities laws aren’t triggered—the user didn’t buy a security, the protocol isn’t an investment company, no one is an adviser, no one is a custodian. Control is what matters. The same applies to vaults where a DAO can change parameters through public, timelocked votes. DAO governance that sets rates and collateral parameters is market administration, not managing anyone’s money. In July, then-Commissioner Peirce asked the people “setting interest rates, deciding which assets to accommodate, setting loan-to-value limits, and establishing liquidation thresholds” to think about whether the securities laws are implicated. A group led by CCI and a group led by Aave recently submitted compelling answers to that call—securities laws do not reach the vaults that hold most of DeFi’s capital, and the SEC should confirm that this activity sits outside their scope. But vaults come in many forms, and when you add complexity, the legal arguments get more complex. Where a vault has a single curator with unbounded discretion over how the vault’s assets are deployed, the argument that it falls outside the securities laws is much more tenuous, because one cannot credibly argue that such a vault is truly autonomous. Aave’s letter makes the strongest form of the argument that even curated vaults fall outside. But that argument depends on the SEC reading “note” to require a person who promises repayment, “common enterprise” to require a venture that investors finance rather than assets they co-own, and “issuer” to require an entity that owns the vault’s assets. Those are good arguments, but they're not conclusive. The letter also concedes that curators may be subject to the Investment Advisers Act, but does not say how they would comply. CCI’s letter addresses what happens if the SEC does interpret securities laws to apply to some subset of curated vaults. In that world, curated vaults should still exist! The passages being quoted as “concessions” are CCI stating the adverse facts before the SEC does, which is how the baseline argument keeps its credibility, and it is what lets CCI then argue for a way for curators to comply under authority the SEC already has to tailor compliance. Ultimately, the two letters work well together. Both safeguard a broad vision of DeFi, both open the door for regulated financial activity—like investment fund management—to move onchain, and both provide the SEC with a lot to consider, based on how different types of vaults actually work. *Disclosure: a16z is a member of CCI and commented on drafts of its paper.