SEC's 'Crypto Mom' Warns DeFi Vaults May Be Securities

SEC Commissioner Hester Peirce has sounded the alarm on decentralized finance (DeFi) vaults, warning that they may be considered securities. In a statement titled 'Headstands and Backflips,' Peirce emphasized that regulators will look beyond terminology to the underlying economic substance of these platforms.

The concern is that DeFi entrepreneurs are engaging in 'legal acrobatics' by rewriting platform code and rules to avoid U.S. laws. However, Peirce made it clear that regulators will scrutinize the management of user funds, including smart contracts that allocate profits and lending strategies built around user vaults.

Pierce noted that creators of individual vaults on platforms like Hyperliquid may be vulnerable to charges of unregistered investment advisers if they offer public vaults with copied derivatives trades. The SEC commissioner also highlighted key risk indicators, including the involvement of specific teams or traders in managing funds, tokenizing assets without legal exemption, and classifying vaults as investment companies or separately managed accounts.

While Peirce acknowledged that her views may be seen as a challenge to the industry's 'Wild West' approach, she encouraged DeFi builders to work with the SEC to adapt existing rules to new realities. The commissioner invited feedback from market participants to understand which specific rules are hindering innovation and warned that regulators will eventually move toward enforcement action if necessary.