The Funding: Are crypto vaults funds and curators fund managers?

Quick Take

• This is the main section from the 56th edition of The Funding sent to our subscribers on July 26.
• The Funding is a fortnightly newsletter written by Yogita Khatri, The Block's longest-serving editorial member.

Earlier this week, SEC Commissioner Hester Peirce published a statement saying crypto vaults and onchain lending strategies may already fall within federal securities laws. Moving an activity onchain does not, as a general matter, take it outside those laws, she wrote. Anyone doing "headstands, backflips, and other gymnastics to read the law so that it does not apply" to activities within its scope "will have a painful fall."

Peirce set out several ways the laws could apply. A vault could be a common enterprise in which users invest money expecting profits from the efforts of its deployer and curator. A vault that holds securities, or allocates assets to securities, could fall under investment company laws. Depending on how it operates, a vault could resemble a unit investment trust, a management investment company, or a separately managed account (which all require different levels of SEC registration). Onchain loans could also be notes that are securities, while managing vaults or lending strategies may raise investment adviser issues.

Whether any of these laws apply "will come down to the specific facts and circumstances," Peirce wrote. She invited firms to come and talk. The statement is not a rule or an enforcement action, and Peirce spoke only for herself, not the Commission. But it marked the second time in three months that SEC leadership had publicly addressed vaults.

In May, SEC Chair Paul Atkins said the Commission "should consider ways to provide clarity surrounding what are commonly referred to as 'crypto vaults,' particularly regarding Securities Act and Advisers Act touch-points." He said that clarity should come through notice-and-comment rulemaking and the SEC's exemptive authorities, noting that onchain market structures are "hybrid in nature," combining elements of traditional and decentralized finance.

That raises an important question for a fast-growing market: are vaults funds, are the curators who run them asset managers and, if so, what needs to be registered? I put those questions to curators, protocols, investors, an industry group and a data provider.

What a vault actually is

Part of the difficulty is that the term covers almost anything. A vault is an onchain contract that pools deposits and deploys them under a stated strategy, with depositors holding shares in the pool, according to Ryan Rodenbaugh, co-founder and CEO of vaults.fyi, a data provider whose APIs let apps embed DeFi yield discovery, deposits and position tracking.

ERC-4626, the main token standard for vaults, defines deposits, shares and redemptions but says nothing about the strategy inside, Rodenbaugh said.

"A passive yield farm and a discretionary hedge fund can sit behind the same interface," he said. "The word carries about as much information as 'fund' does in traditional finance: there is a pool, there are shares, and someone decides what happens inside."

Even that definition only goes so far. Of the roughly $75 billion in deposits vaults.fyi tracks across Ethereum Virtual Machine networks, only about $20 billion sits in contracts using the ERC-4626 standard, Rodenbaugh said. The rest is in staking and lending positions that never adopted it.

Peirce appeared to recognize the problem, calling her own description of a vault "purposefully broad and generic."

"They fall along a spectrum from programmatic allocations determined solely by immutable smart contracts, to allocations at the sole discretion of another person or group of persons," Peirce said.

The market

Curated vaults currently hold about $8.75 billion across 811 live products run by 110 firms on 18 protocols, according to vaults.fyi. That is roughly 12% of the deposits it tracks.

"In our data, a curated vault is one where a named entity's decisions determine what depositors are exposed to," Rodenbaugh said.

Within the curated market, lending vaults account for $5.8 billion across 617 products. In these vaults, a curator selects markets and sets limits, while code enforces where funds can go. Strategy vaults, where a manager actively runs the capital, hold $3 billion across 194 products. A smaller category, counterparty credit, where deposits lend directly to a named firm, holds $182 million.

Lending vaults tracked by vaults.fyi currently earn an average return of about 3.7%, compared with about 7.7% for strategy vaults. Much of the higher return comes from real-world asset and private credit strategies.

"That premium is compensation for manager discretion, which is the same property the regulatory conversation is about," Rodenbaugh said.

The market is also highly concentrated. The five largest curators hold 70% of curated value, while the 25 largest stablecoin vaults on Morpho allocate half their combined capital to just three underlying markets, Rodenbaugh said.

Using a broader definition, S&P Global Ratings said in May that total vault deposits had reached about $131 billion as of April, up from roughly $24 billion three years earlier. It noted that 94% of current activity remains concentrated in crypto-native strategies such as staking and crypto-backed lending.

Funds or not

Whether vaults are already funds largely depends on those with the most discretion over how assets are managed.

"Since the beginning of the year we have been clear about vaults: this is asset management, it is a regulated activity, and you cannot get away from that," said James Harris, CEO of Tesseract Group, a European crypto asset manager.

Pooled structures at this scale "very much look like collective investment schemes," Harris said. Europe drew the line first, he added. Under the Markets in Crypto-Assets (MiCA) legal framework, discretionary management of crypto assets is regulated, regardless of who runs it or where the code sits, Harris noted.

He said Tesseract is authorized for European portfolio management under MiCA. In April, it launched what it calls "dedicated client vaults," with one client, one vault and one segregated mandate.

Andy Martinez, founder and CEO of Crypto Insights Group, said the argument that "many vaults function as unregistered funds deserves to be taken seriously." He said where a curator exercises discretion over assets that are securities and depositors expect profits from that judgment, "the relationship looks a lot like advisory activity under existing law," he said.

"Very few" curators of any size are registered advisers today, Martinez said, and he expects that to look very different within a year.

The bluntest view came from Lucas Kozinski, co-founder of liquid restaking protocol Renzo, who wrote on X that "the only thing anyone should be surprised about is that companies have been running unregistered hedge funds for this long." He declined to comment further to The Block.

Curators and protocols reject the broad characterization of vaults as unregistered funds. They say one label cannot cover functions that are genuinely different.

Gauntlet was the most direct. Broad statements of that kind "can't be anything other than misinformed and broadly incorrect," said Nicholas Cannon, chief business officer at Gauntlet, one of the largest vault curators. Every vault, vault platform and curator operates differently, he said.

Asked where Gauntlet's work falls on Peirce's spectrum, Cannon placed it "much closer to programmatic vault curation that is non-discretionary in nature."

For Morpho, whose lending protocol and vault infrastructure support much of the curated market, the objection is structural. The framing "collapses several distinct functions into one, and it skips the analysis Commissioner Peirce herself says is required," said Morpho general counsel Christopher Robins.
Morpho vaults are non-custodial, he said. Curators never take possession of user assets, depositors can typically withdraw at any time, and allocations can be verified onchain in real time within limits enforced by the contract, Robins added.

Rob Hadick, general partner at crypto venture firm Dragonfly, said the analysis also depends on what is being deposited. Vaults are "simply a technology that uses smart contracts to autonomously transact based on a set of criteria," he said. In most cases, the assets being deposited, such as stablecoins, bitcoin and ether, are explicitly not securities, Hadick said.

How curators use that infrastructure "varies wildly," he added. Disclosure, access to funds and the degree of active management could each change the analysis.

Galaxy Digital, which helped launch the Crypto Council for Innovation's Vault Coalition and runs its own digital asset businesses, did not respond to questions.

Where the line sits

Across the interviews, one variable mattered most: discretion.

Harris, however, cautioned against assuming that a passive vault automatically sits outside regulation. Peirce said a vault holding a fixed portfolio with little active management could resemble a unit investment trust, which is still an investment company.

"Being passive changes which regime you are in rather than getting you out of one," Harris said

Alison Mangiero, chief strategy officer and head of U.S. policy at the Crypto Council for Innovation, said discretion is precisely why one label cannot cover the entire market.

The relevant questions are what function is being performed, who is exercising discretion, what rights and obligations exist, and how the technology operates, she said. The answers differ across vaults, so treating every vault as an investment company or every curator as an investment adviser could "risk oversimplifying what is actually a very diverse landscape."

Many vault strategies are also designed to help users reduce risk through automation, diversification or predefined parameters, Mangiero noted.

What clarity looks like

Across sources, the common view was that regulation should apply to the activities being performed, not the technology itself.

The Crypto Council for Innovation's Vault Coalition is developing a common framework that separates the different participants in the ecosystem, including infrastructure providers, protocol developers, curators, interfaces, support services and end users. The goal is to help regulators distinguish between technical infrastructure and investment or asset management activities. Mangiero said the guiding principle is that regulators should focus on activities, not infrastructure, while applying existing laws in a technology-neutral way.

Most operators agreed on two broad points. First, they said infrastructure providers that publish and maintain non-custodial software should not be treated as regulated financial firms. Second, they said the main regulatory focus should be on discretionary curators, because they make the investment decisions.

Morpho's Robins said that if a vault does fall under securities laws, there should be "a workable path to compliance rather than a registration regime designed for a different era."

Richard Galvin, executive chairman and chief investment officer at Digital Asset Capital Management, which invests in vaults, proposed licensing requirements for both curators and platform operators. He said those licenses could also clarify disclosure and anti-money laundering obligations.

Meanwhile, "a sensible outcome would be tailored rules that give the industry clear guidance and reflect how these products actually function," said Bitwise general counsel Johanna Collins-Wood. "What would concern us is an approach that forces genuinely new arrangements into legacy categories that do not fit, or that merely adds to the industry's uncertainty."

What's next

Growth was the one thing nobody disputed.

"The vault market is going to get much larger," Hadick said. He expects distribution to run increasingly through banks, fintech companies, asset managers and other traditional channels as "all of capital markets" is progressively tokenized.

Harris put it as two views he does not consider controversial: all assets will be tokenized, and all tokenized assets will be managed onchain, "which in practice means vaults."

CCI's Mangiero pointed to S&P's recent view that regulatory clarity could drive the next phase of growth in vaults. She said stablecoins showed how uncertainty can limit institutional participation until regulatory frameworks arrive.

Whether institutional money follows, however, depends on more than regulation, Martinez said. He said allocators see the appeal of onchain transparency, daily or instant liquidity, and efficiency, but they still need answers about the firms behind the products.

"The question allocators bring to us is simple: who are we giving the money to? Governance, operational controls, regulatory posture. Most of the vault ecosystem gives you very little to work with," Martinez said, which is why capital in vaults today remains overwhelmingly crypto-native. He expects traditional institutional money to arrive in stages as allocators become more comfortable with smart contract risk, firms provide credible answers about their offchain operations and regulation makes the guardrails clear.

Martinez expects allocators to do the sorting, with flows moving toward curators that have established firms behind them, documented processes and a regulatory position they can defend in a due diligence meeting.

"The winners will run this like an asset management business," he said.