A formal request has been made to the SEC to confirm that setting risk parameters for a protocol constitutes market administration rather than managerial effort. This submission, spearheaded by a coalition including Aave Labs, Kamino Foundation, and Veda Tech Labs, represents a definitive move to clarify the regulatory environment for decentralized finance. As the industry matures, the need for a precise legal boundary between autonomous code and traditional financial intermediation has become a priority for developers managing over fifty billion dollars in total value locked. The proposal argues that supplying assets to or borrowing against collateral within a truly decentralized protocol does not fall under the jurisdiction of federal securities laws. By providing this framework to the Commission, these leaders seek to replace the current climate of uncertainty with a structured understanding of how blockchain-based markets operate without central issuers. This initiative serves as a critical bridge between innovation and oversight.
The Legal Distinction: Code-Based Execution and Traditional Intermediation
The core argument presented by the coalition rests on the distinction between human-led financial promises and autonomous, code-based execution. Federal securities laws, specifically those enacted in 1933 and 1940, were originally designed to regulate the activities of intermediaries who manage assets and make discretionary decisions. In the decentralized models championed by Aave and its partners, these human elements are replaced by transparent, pre-set algorithmic rules that govern every transaction. The framework systematically applies the Howey Test to demonstrate that no ‘common enterprise’ exists when users interact with a self-executing market. Unlike traditional investments where profits depend on the essential managerial efforts of a third party, returns in these protocols are generated through math-based formulas that are visible to all participants. This technological shift ensures that users are not relying on a promoter’s skill or integrity.
Building on the technical separation of functions, the framework also addresses the Reves Test to clarify why decentralized lending does not create traditional debt instruments. In a conventional banking or lending scenario, a specific legal entity owes a repayment obligation to the lender, creating a note that may be classified as a security. However, within these protocols, there is no centralized borrower; the system acts as a neutral venue where assets are pooled and managed by smart contracts. The submission emphasizes that the protocol itself lacks the capacity to make promises or take on debt in a corporate sense. Instead, it functions as a piece of digital infrastructure, much like a physical marketplace or a common utility. Because there is no issuer who holds assets for their own benefit or uses them to fund business operations, the authors argue that the classification of these ‘vaults’ as investment companies is a fundamental misunderstanding of the architecture.
Strategic Proposals: Governance as Administration and Clear Regulatory Requests
One of the most innovative aspects of the proposal is the redefinition of protocol governance as a form of market administration rather than corporate management. The coalition explains that when token holders vote to list new assets or adjust risk parameters, they are performing duties similar to those of an exchange setting its internal rulebook. These actions do not constitute ‘managerial work’ because they do not involve the active deployment of capital to generate profit for others. To ensure user protection and individual agency, the framework highlights the implementation of ‘timelocks’ within the protocol code. These programmed delays provide a window of time between the approval of a change and its actual execution on the blockchain. This mechanism allows any user who disagrees with a new administrative rule to withdraw their funds before the change takes effect, effectively negating the idea of a controlled investment and maintaining decentralization.
The submission of the Aave SEC Framework signaled a transition from industry evasion to a period of proactive legal definition. By providing five specific requests for clarity, including the need for the SEC to identify a clear ‘issuer’ before applying traditional tests, the coalition established a benchmark for future protocol development. The framework effectively argued that the inherent transparency of the blockchain solved the very problem of ‘information asymmetry’ that securities laws were created to address. Looking forward, stakeholders should prioritize ‘decentralization-by-design’ as the primary method for ensuring long-term regulatory resilience in the United States. Developers were encouraged to integrate automated risk-management tools and verifiable audit trails directly into their smart contracts. These steps demonstrated how decentralized protocols could coexist with established legal structures while maintaining the autonomy that defined the original vision of decentralized finance.
