DeFi Regulation Targets Discretion Rather Than Code: Tiger Research Analyzes SEC Statement Impact

The U.S. Securities and Exchange Commission (SEC) has heightened tensions across the DeFi (Decentralized Finance) market by asserting that existing securities law logic can be applied to on-chain vaults and lending strategies. In a recent report, Tiger Research indicated that the SEC's statement targets the entities exercising discretion over fund allocation rather than the code itself, suggesting that the approximately $25.9 billion on-chain asset management market could fall under potential regulatory influence.

The controversy began with a statement from Commissioner Hester Peirce on July 22. The crux of the matter is that even if the economic substance of fundraising and management meets the Howey Test, it could be classified as an investment contract, i.e., a security, regardless of whether it involves on-chain vaults, lending strategies, or yield optimization structures. Although the SEC has not enacted new rules with direct enforcement power, the market reacted sensitively as this marks the first instance of applying the existing securities law framework to specific product categories. Following the statement, the MORPHO token from Morpho saw a temporary drop of about 5%.

However, regulatory authorities are focusing more on the individuals and organizations making investment decisions rather than the 'code' implemented through smart contracts. According to Tiger Research, vaults are merely technical tools for asset management and are largely immutable structures deployed without administrative privileges. In contrast, risk curators or operational entities decide how much of the deposited funds to allocate to which market, when to withdraw if risks increase, and what collateral conditions to apply. From the regulators' perspective, these entities are identifiable subjects that can be summoned, sanctioned, and held accountable.

This explains why curators are particularly targeted. Depositors do not simply trust the smart contract; they ultimately entrust their funds based on the judgment and operational strategy of specific curators. For instance, if a curator selects a specific market among various lending markets and adjusts asset proportions based on interest rates and collateral conditions, the expected returns for investors heavily depend on the 'efforts of others' by that entity. This aligns with the core elements of the Howey Test.

Similar issues were evident in past cases involving Tornado Cash and Uniswap Labs, where the legal status of immutable code or interface operations was the main concern. However, this case shifts the focus from 'who created it' to 'who continues to decide on asset selection and allocation,' indicating a different trajectory. This suggests that regulatory discussions in the DeFi market are transitioning from technical structures to operational discretion and accountability frameworks.

The scope of impact is likely not limited to vaults alone. The report suggests that liquid restaking, yield optimization protocols, and on-chain asset allocation services could also come under regulatory scrutiny. The common criterion is straightforward: whether there exists a discretionary entity that makes judgments and moves users' funds. Based on this criterion, the estimated potential impact market size reaches approximately $25.9 billion in terms of total value locked (TVL). However, the intensity of regulation is expected to vary depending on the opacity of discretion and the level of control mechanisms. Structures that are difficult to verify, such as off-chain delegation or under-collateralized lending, fall into high-risk categories, while those equipped with on-chain records, time locks, and guardian mechanisms are classified as medium-risk. Immutable protocols or registered products without controlling entities are considered relatively safe.

Market participants are not sitting idle either. Stakehouse Financial, Maple Finance, Centora, and Aave have already designed structures to reduce regulatory exposure. The first approach involves restricting investor qualifications. Stakehouse Financial's 'Grove' is designed as an institutional-only capital allocation channel, while Orca's GLDY pool utilizes Regulation D 506(c) exemptions under U.S. securities law to allow only accredited investors access. This is a practical solution to reduce the burden of public offering registration, but it does not eliminate the security nature of the product itself.

The second approach leverages existing KYC and compliance infrastructure. Kraken's 'DeFi Earn' and some lending structures from Coinbase and Binance are evolving to combine on-chain vault infrastructure with centralized exchange customer verification systems. However, in this case, the actual judgment on fund allocation still rests with risk managers or curators. External regulatory infrastructure only reduces distribution stage risks but does not replace legal responsibilities arising from operational discretion.

The third approach is an asset-level whitelist model. Aave Horizon is designed as an institutional-only real-world asset (RWA) lending market, where the eligibility of collateral assets is managed by issuers such as Circle, Ripple (XRP), Superstate, and Centrifuge. Instead of directly filtering users at the protocol level, it controls 'which assets can enter.' At the same time, it utilizes external verification mechanisms like recommendations from Lamerisk and Chainlink's NAV data. However, this division of labor does not completely absolve the protocol of operational responsibilities.

The fourth model separates permissioned lending from permissionless yield tokens. Maple Finance has adopted a dual structure where lending and assessment for institutional borrowers operate under a strict whitelist system while providing yield access tokens like Syrup USDC to general users. This is effective in dispersing regulatory touchpoints, but it does not fundamentally resolve the security nature of yield tokens or the discretionary responsibilities of operational entities.

Ultimately, the current responses are more of a temporary measure to buy time rather than a 'final solution.' Tiger Research pointed out that past institutionalization cases in closed-end funds, LendingClub, and crowdfunding industries indicated that sustainable solutions ultimately involved formal registration within the existing securities law framework or legislating new exemption regulations. Beyond merely restricting access, the legal nature of products, disclosure standards, liability for losses, and operational obligations must be clearly defined for the market to grow sustainably in the long term.

Future options generally fall into four categories: formally registering as existing securities, utilizing private placement exemptions for accredited investors, designing immutable structures that eliminate operational discretion from the outset, or establishing new exemption regulations specifically for on-chain finance. In fact, Ava Labs and the Solana Policy Institute have proposed separate regulatory frameworks to the SEC. Regardless of the path chosen, the key is to clarify the subjects of investment judgment, disclosure levels, and accountability structures.

In this process, regulatory response capabilities are likely to become a new barrier to entry. Building KYC systems, legal reviews, on-chain asset value verification, customized contracts, and designing loss absorption structures will all become ongoing costs. Large curators with capital strength and institutional networks can turn this into a competitive advantage, but small and medium-sized businesses may struggle to bear independent infrastructure, leading to their integration into larger platforms or being pushed out of the market. As DeFi regulation shifts from 'code' to 'discretion,' the winners in the on-chain vault market are likely to be those entities capable of structuring legal responsibilities, not just technological innovation.

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