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Paul Frambot, CEO of the $16 billion DeFi lending protocol Morpho, proposed splitting onchain vaults into two regulatory categories on September 24. Within the hour, he had a small coalition of critics on his hands.
Aave founder Stani Kulechov, crypto attorney Gabriel Shapiro, and several vault infrastructure builders all pushed back on the framework, arguing it mischaracterizes what “non-custodial” actually means and could benefit Morpho’s own product positioning at the expense of accurate taxonomy.
The proposal and its logic
Frambot’s framework divides onchain vaults into two buckets: non-custodial and discretionary. The distinction rests on how much latitude a vault’s curator, essentially the person or entity managing strategy, actually has over deposited funds.
Non-custodial vaults, under this schema, would enforce strict code-level constraints. Think timelocks, mandatory exit periods for depositors, and immutable smart contracts that prevent a curator from unilaterally changing terms. The idea is that user control remains primary and managerial discretion is minimized to near zero.
Discretionary vaults sit on the other end of the spectrum. Managers in this category would retain meaningful authority over investment strategies, leverage ratios, and incentive structures.
Frambot’s argument is that regulators and institutions need a functional lens, one based on what the code actually does, rather than relying on legacy labels that don’t map cleanly onto DeFi’s architecture. The framing echoes language previously used by SEC Commissioner Hester Peirce, who has advocated for analyzing crypto products by their mechanics rather than slotting them into pre-existing regulatory categories designed for a different era of finance.
Why critics aren’t buying it
Kulechov’s objection cut to the philosophical core of the debate. In his view, a truly non-custodial vault shouldn’t need a manager at all. He pointed to early-generation Yearn Finance vaults as a better reference point for non-custodial design, where strategies are encoded directly into smart contracts and execute autonomously without human intervention at the operational layer.
The implication is uncomfortable for Morpho. If the gold standard for “non-custodial” is a vault with zero managerial oversight, then Morpho’s proposed non-custodial category, which still involves curators operating within code-enforced guardrails, might be something closer to “managed with constraints.” That’s a meaningful difference when regulators start drawing lines around fiduciary duty, securities classification, and custody rules.
Gabriel Shapiro, a lawyer whose opinions carry weight in DeFi governance circles, raised adjacent concerns about the proposal’s potential regulatory consequences. When protocols start self-classifying, they’re effectively lobbying for the regulatory treatment they prefer. If the categories are drawn in a way that flatters one protocol’s architecture over another’s, the exercise starts to look less like neutral taxonomy and more like competitive positioning dressed in policy language.
Morpho’s position in the market
Morpho has grown into one of DeFi’s heavyweight lending platforms, hosting tens of thousands of markets and holding roughly $16 billion in total deposits. Earlier in 2026, the protocol launched Morpho Vaults V2, an upgraded vault architecture that expanded curator tooling and attracted fresh institutional interest.
The protocol has also been busy building bridges to traditional finance. Integrations with Robinhood and Coinbase have positioned Morpho as a gateway for retail and institutional users who want onchain yield without navigating the full complexity of DeFi infrastructure. Those partnerships make the regulatory classification question more than academic. How vaults are categorized will directly affect which compliance frameworks Morpho’s partners need to satisfy and which types of users can access the products.
What’s really at stake
For investors watching the space, the practical takeaway is that vault risk isn’t just about smart contract audits and liquidation mechanics anymore. A vault labeled “discretionary” could face custody regulations similar to traditional fund management. One labeled “non-custodial” might avoid those requirements entirely, assuming the label holds up under regulatory scrutiny.
For Morpho specifically, the stakes are intertwined with its growth strategy. A protocol with $16 billion in deposits and partnerships with two of America’s largest retail trading platforms cannot afford regulatory ambiguity. But neither can it afford to be seen as writing rules that conveniently favor its own architecture.
Disclosure: This article was edited by Estefano Gomez. For more information on how we create and review content, see our Editorial Policy.
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