Peer-to-pool-to-peer business models need to be registered as a security.
Most DeFi lending platforms pool client assets and offer yield on these assets. These are peer-to-pool-to-peer business models. For example, Aave and Compound do this. Their model can be visualized as this:
Peer-to-pool-to-peer business model
Although this sounds like common sense, this approach automatically classifies the investment product as a security.
This is because:
by pooling retail investors’ assets, and
by offering a return on these assets to retail investors
one is creating a security, which needs to be registered by the SEC (Securities Exchange Commission) if there is at least one user from the U.S. And not only this, the provider of this product—be it a DAO or a limited company—will need to register as an investment company (sometimes called an investment fund manager)
This means two regulatory licenses are required:
A license to offer a security product
A license to become an investment company
Securities regulations are a complicated process. The securities offering prospectus must be prepared, audits are required, quarterly reporting is required, and so on. It’s a costly and time-consuming process, very often with unclear outcomes.
Additionally, we wrote extensive analysis of the custodial lending platforms, especially with the focus on the regulatory licenses. Custodial platforms will require even more licenses, it's because of the digital asset's custody. More info is available here: