[FIP - 277] Onboard FinresPBC as FRAX v3's Offchain RWA Partner

Author

Sam Kazemian

Background

The Frax Protocol needs a method to hold cash deposits and other low-risk cash-equivalent assets (such as reverse repo contracts and treasury bills) in order to execute its FRAX v3 RWA asset strategy. The Frax Core Developers have been working to create traditional financial infrastructure that can serve this purpose.

Earlier this year, Financial Reserves and Asset Exploration Inc (dba FinresPBC) was incorporated in the US state of Delaware as a public benefit C corporation to accomplish this mission.

FinresPBC has been set up to be a conduit to accomplish this task for the Frax Protocol. FinresPBC is not a for profit entity: its incorporation documents state that its public benefit mission is to bring traditional financial assets (colloquially known as “RWAs”) onchain for the benefit of the public. Thus, any yield generated from assets it holds on behalf of Frax Protocol will be returned to the protocol (minus costs/fees incurred to operate the public benefit business). Therefore, FinresPBC’s public mission is to provide the Frax Protocol access to safe cash-equivalent assets and near Fed rate yields for the benefit of all without seeking to make profit from this relationship or charge fees (other than to pay for minimum costs related to serving its mission). Additionally, FinresPBC’s mission is to continue expanding its traditional infrastructure including meeting requirements for a Federal Reserve Master Account (FMA) in the future.

FinresPBC does NOT partake in any Frax Protocol development, smart contract engineering, or in any way participate in Frax Finance operations. FinresPBC’s involvement and relationship to the Frax Protocol is solely restricted to holding cash-equivalent reserves and/or issuing token representation of such reserves. FinresPBC is NOT a developer lab or corporation responsible for or maintainer of the Frax Protocol smart contracts/open source code.

FinresPBC does NOT partake in any additional for profit activity or hypothecate reserves held for the Frax Protocol. FinresPBC is not a profit maximizing organization. It’s sole public benefit mission is to give onchain users access to offchain “cash-equivalent RWAs.” FinresPBC will not hypothecate, lend, pledge, or conduct business activity outside of its sole public mission to provide onchain access to offchain RWAs.

FinresPBC’s current banking partner is Lead Bank (lead.bank) an innovative regional bank that has opened its doors for crypto businesses to conduct safe, compliant traditional financial activity. FinresPBC is actively expanding its banking and financial relationships with compliant & crypto friendly financial partners (including full-service banks) and will announce new partners as appropriate. Any traditional financial entity that is interested in exploring a direct relationship, please reach out directly.

Currently, FinresPBC is capable of conducting the following for the Frax Protocol:
1.) Hold US Dollar deposits in FDIC Insured IntraFi savings accounts & earn yield on such accounts.
2.) Mint/Redeem Paxos USDP stablecoins & earn yield.
3.) Mint/Redeem Circle USDC stablecoins & earn yield.
4.) Hold/Purchase/Sell United States Treasury Bills in segregated brokerage accounts & earn yield.

Reporting, Auditing, & Attestations

No later than every month, FinresPBC will give a full asset breakdown and report of all reserves it holds for the Frax Protocol including expanded view of yields it has earned on such reserves as well as maintenance fees/costs incurred to hold such reserves and conduct such transactions.

Reports will be published publicly on this forum & sent to the Frax Core Developers to publish on Frax Facts and relevant protocol front end data sources deemed appropriate by the community.

Summary

Approve FinresPBC to be FRAX v3’s Offchain Partner & Custodian for the above mentioned transactions.

Proposal

For: Onboard FinresPBC for FRAX v3

Against: Do Nothing

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Awesome! It was very much needed, I’m all for it. Congrats to the team for working to bridge the safest possible RWA to the protocol.

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All roads lead to Frax.
[F]inancial [R]eserve & [A]sset Eploration, Inc.

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Expedite this to voting TODAY

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How does FXS protect the RWA asset placed off-chain, and avoid any sort of government action freezing these related assets? Is the partner (FinresPBC in this case) responsible to ensure we have access to these funds at any point of time (and redeemable) should it need to be moved?

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The RWAs belong to the Frax Protocol but are custodied by FinresPBC. As you said, the entire point of FinresPBC is to be compliant, follow proper regulations, guidance, and be in good standing so that it can provide 24/7 access to all of Frax Protocol’s assets should it need to be sent back in the form of stablecoins like USDC/USDP or other tokenized assets. FinresPBC is not necessarily going to offer minting/redeeming of those deposits as a generalized service for any user. Its sole relationship is meant to be onchain protocols such as Frax Protocol (and perhaps other partners) so the main way it can send value back to the Frax Protocol on demand is to:
1.) mint fiatcoins such as USDP and USDC and send them to Frax Protocol’s AMOs
2.) purchase FRAX stablecoins onchain using the reserves and burn the FRAX

Both methods should provide near instant access to Frax Protocol’s value barring tradfi limits/hours/regulations. Hope that helps :slight_smile:

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Love to see FRAX growing in this direction.
Congrats to the team for having worked on the fundamentals for bridging RWAs benefits on-chain.

It’d be great to receive some flow of funds charts for the transactions mentioned above (1-4).

I also have additional questions:

  • Can we have an estimation of the overhead costs (especially overhead as the operational would be linked to the transactions themselves) as ultimately would be paid by the DAO? Transparency from the get-go on this (dashboard?) would be a strong signal towards the pros of our industry.

  • Any reason why not having added as a transaction type the minting and redemption of USDT while mentioned as a supported stablecoin on the website?

  • Would FinresPBC through minting and redeeming mechanism of USDC/USDP/FRAX be able to conduct arbitrage strategies, or would these transactions be out of scope? IF possible, I assume this process would need to be duly analysed, automatised, with parameters agreed at the DAO level at a later stage?

  • Any plans on tokenising holdings in FinresPBC on-chain? (i.e. on-chain trading of 6 months T bills held by the entity? If yes, any legal opinion on this? if not, is there any rationale?

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  1. Who is converting USDC / USDP to USD to invest in TBills or hold in bank account with Intrafi
  2. Can customers who DONOT have USDC / USDP directly send USD / other currencies ?
  3. What license does FinresPBC plan to get, given that it will be aiming to get its own FMA ?
  4. How does FinresPBC ensure USDC / USDP it is receiving is AML / Sanctions / Patriot act compliant ?
  5. What happens when yield in Fed / TBills goes down to almost zero like in past?
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Hey @EasternBeaver23 great questions.

1.) For overhead costs, I don’t think it should be very high. It would really just be things like wire fees/minting/redeeming fees (for example Tether has fees but USDC/USDP do not so these fees aren’t relevant for now but could be in the future if some stablecoin providers enact them). And there will likely need to be 1 or 2 salaried people at a modest market rate for a manager to keep the lights on and manage assets. Then the final costs would be for periodic audits and transparency reporting. Overall, I expect these costs/fees to be significantly below peers and not much. For example, if FinresPBC holds $500m of assets for Frax Protocol, I don’t expect the annual cost of fees/salary/reporting costs to be higher than $100-200k. That would be about 2-3 days worth of the yield of that principal to pay for the entire operation the whole year. That would be very economical. We aren’t big on bureaucracy and running up costs as this community knows. We do things professionally, cleanly, and efficiently. To put it bluntly, I’m confident that the FinresPBC costs would be substantially lower costs to do the same thing compared to peer protocols like Maker’s model or other structures. I’d venture to say it could even be an entire order of magnitude less costly due to no profit-seeking fees by FinresPBC and also our commitment to extreme efficiency and low bureaucracy.

2.) We didn’t do USDT because we’re having a hard time getting accepted to mint/redeem USDT. As I’m sure many people in crypto are aware of, Tether is quite reclusive and we aren’t aware of a single entity that can mint/redeem Tether. And none have helped us or reached out. And Tether has not either. I am not trying to imply anything about Tether’s backing or make FUD statements. Just answering your question about exactly why we don’t have Tether mint/redeeming yet. We might have it in the future if we can figure it out.

3.) In theory FinresPBC would be able to do arbitrage yes, but I don’t really think that’s a good use of time and resources in terms of accomplishing the mission itself. While it might sound good to make some revenue for the DAO doing arbitrage through FinresPBC, I’d rather just let the free market take care of that.

4.) We’ve thought about this a lot yes. When FRAX v3 specs are released, you will see that question answered in full. :wink:

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1.) FinresPBC is doing the converting/investing/holding.

2.) No. FinresPBC is NOT a customer/retail facing entity. Its only “customer” (aka relationship) is Frax Protocol onchain and its various offchain banking/tradfi partners. Think of FinresPBC as a bridge/adaptor for the Frax Protocol to the outside/tradfi world. FinresPBC’s scope is not to service offchain customers/users. Its only mission is to connect offchain partners onchain to the Frax Protocol.

3.) This question deserves a much longer response and is not easy to answer here in a single forum post but the short answer for now is that we are slowly building up our ability to work with large banks and traditional financial entities this year. And over time, when we are qualified to, we will pursue the bank charters/FMA applications as necessary. One step at a time. The current structure is the first step toward the final goal.

4.) FinresPBC has an internal compliance process for all operations it conducts and makes sure to comply with all traditional financial laws that must be adhered to in order to continue its relationship with its banking and tradfi partners. If the received stablecoins weren’t KYC/AML how do you expect Circle/Paxos would work with FinresPBC? They wouldn’t. We have a compliance process in place clearly.

5.) That would be great. When rates are 0% again and there is another bull market/growth phase in the global macro economy, there will be much less need for FinresPBC and Frax Protocol can go back to more of its onchain AMO/overcollateralized lending strategies. Recall that in a bull market overcollateralized loans were the bread and butter of Maker and all stablecoins. Users paid double digit interest rates to borrow dollars (DAI/FRAX/USDC) from Aave to leverage their ETH in a 0% Fed rate environment. We expect the same thing to happen in a bull market with ETH LSDs and overcollateralized loans.
In a 0% Fed rate environment, there will be less need to hold tbills or deposit dollars in FMAs and IntraFi accounts. Most operations would go back onchain and the decentralization of the Frax Protocol would increase as the RWA component would shrink based on market demand (in a zero rate environment market demand for RWAs is low).

2 Likes

Awesome. My guys Charles and Corval will be chatting about this on our DeFi show today

This proposal is up for voting here: Snapshot

Hello Frax community,

The Backed Finance team is excited to see interest from Frax in bringing traditional financial assets on-chain. We launched our project more than 2 years ago with that same goal in mind.

Backed issues tokens that track the value of public assets, such as stocks or ETFs. Tokens are freely transferable across wallets, are fully collateralized by the underlying asset, and are issued in compliance with the Swiss DLT act. The underlying assets are held with a licensed Swiss custodian bank, separate from the bank’s balance sheet and thus bankruptcy remote. Backed Assets GmbH has filed and approved a prospectus for the security-tokens with the FMA in Lichtenstein.

Our most popular token (bIB01) is designed to track the price of the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01). It is a robust tool to gain access to the USD risk free yield and perform on-chain treasury management. Chainlink provides oracle feeds for the underlying ETF (IB01): 0x32d1463EB53b73C095625719Afa544D5426354cB

We would be happy to continue the discussion and help the community execute its FRAX v3 RWA asset strategy.

You can find more information here:

bIB01 Product Page

Backed legal documentation


Not for the distribution to any U.S. Person or any person or address in the United States.

Backed DOES NOT sell its tokens to U.S. Persons or for the account or benefit of U.S. Persons, and tokens are not marketed, offered, or solicited in the U.S. or in any other prohibited jurisdiction.

For a full list of prohibited and restricted countries please review our legal documentation.

Hello FRAX Community,

Referring to samkazemian’s initial FIP-277 proposal to onboard RWA partners as part of the FRAX v3 RWA asset strategy execution, a potential partner to consider is OpenEden, which offers tokenised short-term U.S. Treasury Bills (‘T-Bills’).

The OpenEden TBILL Vault is the first smart contract vault managed by a regulated entity (BVI registered professional fund) to offer 24/7 and direct access to T-Bills. Investors mint “TBILL” tokens instantaneously when they deposit USDC into the Vault, which are contractual representations of their interests to a proportionate share of underlying assets, which include USDC, fiat USD and T-Bills.

The Vault was launched in May 2023 and accepts USDC deposits. At the time of writing on 11 August 2023, the TVL of the Vault is approximately $12.5 million and offers a net estimated yield of about 5.33% on invested assets, the highest among all other tokenised T-Bills offerings. The Vault has a minimum investment amount of 100k USDC, and 10k USDC on subsequent deposits. With fees being waived for the foreseeable future, OpenEden Labs’s offering would offer the highest net and gross yield on that basis.

While the tokenised T-Bills market has seen several entrants with differing offerings, these are the key features of the OpenEden TBILL Vault which sets it apart from competitors:

  1. Instant settlement on-chain: Interactions with the TBILL Vault are atomic. Subscription and redemption processes happen instantaneously in a DeFi-like transaction on-chain. By remaining aligned with how DeFi transactions happen, the TBILL Vault product offers familiarity and ease-of-use to DeFi-native investors.

  2. Direct T-Bills exposure without intermediaries: The underlying assets of the TBILL Vault consist mainly of T-Bills that are purchased directly through a regulated and qualified broker. This approach offers holders of the TBILL tokens direct exposure to T-Bills, as opposed to ETFs. There are several benefits of having direct exposure to T-Bills. Investors would not incur additional charges like ETF management fees. There will also be no tracking error that may arise from ETFs. These additional costs from ETFs will reduce the net yield received by investors. Furthermore, direct T-Bills exposure means having access to the highly-liquid T-Bills secondary market, which has an average daily volume of $150 to $200 billion as compared to Bond ETFs which trades less than $400 million a day

  3. Regulatory compliance: TBILL tokens are issued by a professional fund regulated by the BVI Financial Services Commission. Token holders’ contractual rights are documented in the Private Placement Memorandum and Subscription Agreement. Furthermore, there are independent service providers engaged by the fund such as Fund Administrator, Fund Auditor, Legal Counsels, Regulated Custodians and prime brokers. The underlying assets of the TBILL Vault are held via a bankruptcy-remote special purpose vehicle, with fully segregated accounts in qualified custodians which are regulated. Assets held in segregated accounts cannot be used by the custodian to pay its own debt or obligations by regulation, and it must keep those assets separate to protect client interests. The portfolio of T-Bills are managed by a regulated investment manager in Singapore. TBILL tokens are available to all accredited investors, including those based in the U.S through SEC Reg D 506c.

  4. Highly transparent: Transparency is at the core of the TBILL Vault. The Vault smart contract has been formally audited by Verichains. On the off-chain side, daily portfolio reports from the T-Bills’ custodian, monthly attestations of the BVI fund’s (Token Issuer) balance sheet conducted by a regulated public accounting corporation and monthly NAV report by the Fund Administrator are all uploaded to the portal for investors to view. A Chainlink Proof-of-Reserves is also currently being integrated into the Vault to provide another reliable source of on-chain and off-chain audit of the Vault’s assets.

More information on the OpenEden TBILL Vault can be found at the documentation site.

Greetings Frax community,

We are Adapt3r Digital, a crypto-native fund manager focused on building the future of compliant, blockchain-based financial products. Adapt3r is an affiliate of MJL Capital, a thesis-driven crypto-native fund who has been a long-term believer and active investor in the Frax ecosystem. We are thrilled to observe the proactive steps Frax is taking towards integrating traditional financial assets on-chain.

Our recently launched Short-Term U.S. Treasury Bill Fund (ADAPT I LP or “tfBILL”), offered on Archblock, a decentralized alternatives marketplace built on TrueFi’s on-chain infrastructure, aligns seamlessly with Frax’s objectives. We aim to provide non-U.S. investors access to the highest possible short-term U.S. Treasury Bill yields, while ensuring capital preservation, stable returns, and on-demand liquidity. The Fund offers direct access to underlying Treasury Bills held in a bankruptcy-remote vehicle domiciled in the British Virgin Islands.

As of August 25, 2023, the effective federal funds rate is 5.33% and tfBILL captures a significant portion of the U.S. Treasury Bill yield while offering on-demand subscription and redemptions. The Fund operates on a daily liquidity basis, aiming to process all redemption requests within one trading day. The combination of the risk-adjusted returns of U.S. Treasury Bills and high liquidity makes tfBILL an efficient investment vehicle for non-U.S. DAO treasuries, crypto funds, and other investors with on-chain capital.

tfBILL leverages public blockchain rails to democratize access to U.S. Treasury Bill yields for on-chain investors. The proven technology and smart contracts developed by TrueFi have facilitated over $1.8B in on-chain asset origination and capital deployment. Investors seeking U.S. Treasury Bill yields and other unique investment opportunities can conduct due diligence and review each manager’s investment strategies on the Archblock Marketplace.

TrueFi’s programmatic smart contract interface allows other smart contracts to interact with portfolios on the Archblock platform. The smart contracts streamline and automate the execution of fund operations, such as disbursements, redemptions and reporting. Investors deploy and redeem capital via Archblock’s website. TrueFi’s smart contracts undergo regular audits (details can be found on TrustToken’s Github account).

The Fund’s operations are safeguarded by robust internal controls, including consensus-based approval mechanisms and role-based governance protocols. These measures are bolstered by multi-layered physical and digital security protections. On-chain assets are safeguarded by multi-sig operations and leading custodial providers. Off-chain assets are held in custody with a regulated institutional custodian and a FINRA-regulated broker-dealer.

Transparency is a cornerstone of Adapt3r Digital’s operations. Investors can view the underlying U.S. Treasury Bills held in the off-chain brokerage accounts via Archblock’s investor reporting tool. Annual fund audits of ADAPT I LP will be performed by Wolf & Company, P.C., and daily net asset values are calculated by a third-party fund administrator, NAV Consulting, which are updated directly on the Archblock website. Additionally, we plan to integrate with Chainlink’s proof-of-reserves technology, providing automated audits of the underlying treasury assets.

We believe there’s potential for a synergistic collaboration between Frax and Adapt3r. Our expertise in managing short-term U.S. Treasury Bills, combined with Frax’s innovative approach to bridging RWAs on-chain, could pave the way for new opportunities in the DeFi space.

We’re eager to delve deeper into discussions and explore how our fund can align with the FRAX v3 RWA asset strategy. Let’s work together to bring more traditional financial assets on-chain, benefiting the broader community.

Warm regards,

The Adapt3r Team

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