DeFi Industry Split Over Regulation of Crypto Vaults

The decentralized finance, or DeFi, industry is divided over the regulation of crypto vaults.

Crypto in America reported on Nov. 3 that the Crypto Council for Innovation, or CCI, recently submitted a 238-page report to the U.S. Securities and Exchange Commission analyzing whether crypto vaults should be classified as securities. Bitwise, Galaxy Digital and Morpho joined the effort.

Vaults are DeFi services that manage users' deposited crypto assets through a range of investment strategies, including lending.

CCI argued that the degree of operator involvement should be a key factor in determining whether a vault is a security. Vaults that run under pre-set rules without human intervention could be excluded from securities regulation, according to the group.

Aave and Kamino countered that CCI's proposed standard is overly restrictive. They argued that vaults managed directly by people, as well as lending protocols overseen by decentralized autonomous organizations, or DAOs, could also fall outside securities law. If users retain rights to their assets and the structure is not operated as a pooled investment, the products should not be classified as securities.

Linda Jeng, Aave's chief legal and policy officer, said a community that openly sets market rules and gives users time to exit before changes take effect is operating a market rather than managing assets.