Crypto vaults draw billions into higher-risk digital asset lending

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Crypto vaults draw billions

Highlights

Crypto vault deposits surged from $4 billion to over $10 billion since early 2023, targeting yields of 3 to 20 percent through curated strategies.
Regulators including the U.S. SEC and ESMA are scrutinizing vaults’ likeness to securities and funds, raising the prospect of new compliance requirements for curators and access providers.
DeFi platforms lost $972 million to hacks in H1 2024, while coding flaws and automatic liquidation features heighten contagion and technical risks for vault users.

Growth in vault lending and rising regulatory focus

As reported by Financial Times, more than $10 billion has been deposited into crypto vaults, up from $4 billion at the start of last year, based on data from Blockworks. The products let digital asset holders place tokens into curated strategies that lend or stake assets through smart contracts, typically targeting returns of 3 to 10 per cent, while some riskier strategies offer 20 per cent or more.

Unlike broader decentralised finance lending, vaults include a "curator" who selects the strategy, sets risk parameters and collects fees, making the role similar to that of a fund manager. Supporters say the model expands the use of tokenised assets and gives depositors more options as blockchain-based trading develops beyond cryptocurrencies.

Current users are mainly fintech groups with large stablecoin balances, digital asset treasury companies and hedge funds, Adrian Cachinero Vasiljevic, co-founder of Steakhouse Financial, says. Regulators are now examining whether the structure, and particularly the role of curators and access providers, places parts of the market closer to existing securities or fund rules.

Liquidation, coding and contagion risks for the sector

Industry specialists warn that the search for yield is directing capital into one of crypto's more fragile segments, recalling failures such as Voyager Digital, Celsius and Genesis in 2022. Léopold Wenger, digital assets director at Kaiko, says investors often focus on the interest rate without fully understanding liquidity metrics, collateral ratios or other terms embedded in smart contracts.

Automatic liquidation features can also intensify losses during periods of market stress. Andrew O'Neill, digital assets analytical lead at S&P Global Ratings, says problems in decentralised finance can spread much faster than in traditional financial markets because distressed positions can unwind quickly.

Technical vulnerabilities remain another major concern. TRM Labs says $972 million was stolen from DeFi platforms in the first half of this year, while coding flaws can leave vaults exposed to unforeseen events. In March, a hack at decentralised protocol Resolv triggered a drop in some crypto prices, but vaults using the USR token as collateral had its value hard-coded at $1, preventing the structures from recognising the token's actual decline after the incident.

The underlying strategies can also be difficult to assess, including arrangements that accept illiquid or complex crypto-backed instruments as collateral. On Morpho, one of the most popular vaults lends the USDG stablecoin against assets including a stablecoin backed by crypto tokens rather than sovereign currencies, and another token linked to a pool of tokenised private credit assets.

The U.S. Securities and Exchange Commission says in July that it is examining how vaults may fall under securities laws, while the European Securities and Markets Authority proposes in September that "gatekeepers" facilitating access to DeFi services should face regulation. Lawyers say curators who adjust parameters daily and remain closely involved in asset movements are more likely to be viewed in a way similar to traditional fund managers, raising the prospect of compliance demands for a sector that has largely operated without formal oversight.

Our earlier article on the surge in cybersecurity funding highlighted how investors were still committing large amounts of capital even as the number of deals declined. We noted that AI- and identity-security firms attracted the biggest rounds and that consolidation via major acquisitions accelerated, underscoring how risk and competition intensify when funding concentrates in fewer, larger bets.

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