On October 20, Aave Labs submitted a comment letter to the U.S. Securities and Exchange Commission on proposed Regulation Crypto Assets (File No. S7-2026-27). The full letter is available here.
Reg Crypto Assets gets the core idea right
The SEC’s proposal recognizes something the industry has argued for years: a crypto asset and the investment contract under which it may first have been sold are two different things. As Chairman Atkins has put it, an investment contract describes a relationship between parties, not a permanent label attached to a token. That relationship between parties can be performed, can expire, and can end, while the asset itself continues to circulate.
Proposed Rule 400 puts this principle into practice. An issuer can file a Form TR certifying that it has completed or permanently ceased the essential managerial efforts it promised. Once it does, the asset is treated as no longer subject to the investment contract. This is an important step, and we commend the SEC for taking it.
What Reg Crypto Assets leaves open for DeFi
The proposal largely addresses how crypto assets are issued and traded. For decentralized finance, many of the most important questions arise after that. The hardest ones involve crypto assets that remain subject to an investment contract, assets whose status is uncertain, and tokenized securities:
- May those assets be supplied to a protocol, borrowed, or used as collateral?
- How are automated liquidations involving them treated?
- Do the developers, interface providers, governance participants, and risk stewards who support a protocol risk being treated as securities intermediaries simply because users transact through software?
Our letter starts from a basic point about how Aave works. The Aave protocol is non-custodial, permissionless public infrastructure. Users interact with it directly from their own wallets, and every transaction is initiated and authorized by the user. No person, including Aave Labs, decides whether, when, or on what terms an individual user supplies, borrows, repays, withdraws, or is liquidated. Those outcomes follow from publicly disclosed parameters that apply uniformly to all users and that anyone can verify onchain. Regulation should turn on the functions identifiable people actually perform, not on the existence of software through which independent users transact.
What we asked the SEC to do
Clarify how assets tied to investment contracts can be used in DeFi. The proposal does not address whether or when crypto assets associated with covered investment contracts, or tokenized securities, may be listed, supplied, borrowed, or used as collateral on non-custodial protocols. It also does not address how automated liquidations involving those assets should be treated. We asked the SEC to answer those questions expressly.
Focus on function, not software. Whether or not an asset is a security, providing non-custodial infrastructure should not, by itself, make a protocol, developer, interface provider, governance participant, or risk steward a broker, dealer, exchange, or clearing agency. That covers infrastructure through which users supply assets to and borrow assets from protocol reserves, and through which independent liquidators take part in automated liquidations. Intermediary status should turn on the regulated functions an identifiable person actually performs. We also urged the SEC not to extend Regulation NMS, the margin rules, or securities-lending rules to DeFi. Those rules were built for centralized intermediaries that hold customer assets and exercise discretion, and no person performs those functions in a non-custodial protocol.
Provide pathways to clarity beyond Form TR. Many assets were never sold under an investment contract, and some issuers will reasonably rely on the SEC’s March 2026 interpretation rather than the safe harbor. If Form TR becomes the only practical signal, the market will split into two classes of non-security assets: those with an EDGAR filing and those without one. We asked for objective, non-exclusive criteria that market participants can apply in good faith, so that Form TR remains a source of additional certainty rather than a mandatory regulatory passport. Assets that have separated from an investment contract, or were never subject to one, should be fully usable onchain without a Form TR acting as a prerequisite.
Let the market rely on Form TR. Exchanges, custodians, and protocols should not have to reconstruct an issuer's historical promises before acting on a public filing. We proposed that, beginning 60 days after a Form TR is filed, unaffiliated market participants may rely on it in good faith unless a court or the SEC issues a final determination that the certification is deficient.
Confirm that ongoing development does not extend the investment contract. Protocols continue to evolve after launch, often through decentralized governance and independent contributors. That continued work should not keep the original issuer's investment contract alive indefinitely. Nor should a DAO or developer community that keeps improving a functional protocol be treated as having "assumed" the issuer's promises. We asked that this principle be written into the text of Rule 400, rather than left to preamble discussion and staff FAQs.
Why private law matters
The proposal states that an investment contract "will continue to be transferred" to subsequent purchasers of a token in secondary transactions. That statement conflicts with how state property and contract law work. A token moves when control of it moves. Contract rights against an issuer move only through assignment or novation, which require intent and, for novation, the issuer's consent. Anonymous spot trades involve none of these.
This matters directly for DeFi. When a user supplies collateral to Aave, the protocol's smart contracts take control of the asset, but title remains with the user. Title passes only if a liquidation occurs, and then directly from the borrower to an independent liquidator. The protocol, and the people who build or govern it, never own the collateral and are never a party to its transfer. If the investment contract is said to "travel" with the token, every supply, withdrawal, or liquidation could be mischaracterized as a transfer of the investment contract itself. We asked the SEC to revise the statement so that federal securities-law remedies and state-law contract rights are each addressed on their own terms.
Tokenized securities
Regulation Crypto Assets focuses on crypto assets offered under investment contracts, but tokenized securities raise related questions about onchain use. We asked the SEC to consider how tokenized securities can be used through non-custodial decentralized lending protocols, and to distinguish holders seeking only economic exposure from those exercising governance or control. That work should also be coordinated with the pending transfer-agent rulemaking, so that recordkeeping rules do not inadvertently foreclose onchain transfers and collateral use.
Looking ahead
Interim staff statements have been helpful, but DeFi needs a durable, Commission-level framework. Regulation Crypto Assets is an opportunity to build one that reflects how onchain markets actually function. We look forward to continuing to work with the Commission and its staff.