Peer-to-Pool-to-Peer Business Models
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 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 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.
More details about the regulatory analysis in DeFi are available in our blog in the article "DeFi Liquidity Pooling Regulatory Risks and Alternatives".
Additionally, we wrote in June 2020 an extensive analysis of the custodial lending platforms, especially with a focus on regulatory licenses. Custodial platforms will require even more licenses because of the digital asset's custody. More info is available here:
Our forecasts materialized in 2022 - the following companies required Cease and Desist orders for their lending businesses in the U.S.:
- Coinbase Learn
Conclusion: it does not matter is platform, custodial, or non-custodial. Asset pooling is, in both cases, not so brilliant idea. It will require a lot of regulatory licenses.