TheCorporateCounsel.net

Last week, SEC Commissioner Hester Peirce – lovingly nicknamed “crypto mom” by many in the space – published this statement on crypto vaults and lending strategies. Like any mom knows, “kids” sometimes need reminders and examples:

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.

Before anyone gets offended, I’m not saying the folks in this industry are childish or that Commissioner Peirce is treating them that way. But when I read the statement, I couldn’t help but think of the family lore about my husband, who as a high schooler threw a huge rager while his parents were out of town and claimed ignorance of the rules when they found out, saying, “You never told me I couldn’t have a party!” (I sure hope our kids never hear that story or read this blog, because it sounds exactly like something at least one of them would do.)

Anyway, the statement continues:

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.2 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.3 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.

Being a parent is rewarding, but it can also be exasperating. I imagine that being a crypto mom comes with a mix of victories and headaches too.

– Liz Dunshee