# LEGAL DOCUMENTATION FOR COINBASE CUSTODY DEAL ------------------------- ## **Documents & Other Resources** Links to non-confidential materials will be provided as they become available. *Public Documents* * [JAT 3 Deed Poll](https://gateway.pinata.cloud/ipfs/QmaNgXMLWCQZ3KaGnjwBAzpncbEWcMqqPFSR2nmHkDAbqo) (*Agreed*) * [JAT 3 & Monetalis Reporting Agreement](https://gateway.pinata.cloud/ipfs/QmaTv4e42sUQ8DzefdzWisHZoJnQdAcSpqjmjP4EFvQVhr) (*Agreed*) *Confidential Documents* * JAT 3 & FGL Administration Agreement (*Agreed*) * Coinbase Prime Broker Agreement (*Agreed*) * Coinbase Institutional USDC Rewards Program Addendum (*Agreed*) * Opinion of Irish Counsel (*Agreed*) * Specie Insurance Documentation (*Agreed*) *Draft Instruction Sets* * [Ratification of JAT 3 Setup & the Coinbase Transaction](https://gateway.pinata.cloud/ipfs/QmY8XnxteC5RdCuAtpGLiqhjBHP6y6HK8Abi4bfSvZBfsV) * [Deposit of USDC to Coinbase Custody](https://gateway.pinata.cloud/ipfs/QmadGkXu3f2sp4VeFpABykUTYhibMT5XTeceKa9FtVGcEr) * [Allocation of USDC to Cold Storage](https://gateway.pinata.cloud/ipfs/QmWt4GQXi1WHWMxDoKmkbuA3tBpabNndWCpTmCgSA2Ssxq) * [[Template] Withdrawal from Coinbase Custody](https://gateway.pinata.cloud/ipfs/Qma7LbexU17Ni8Sf4uGLiEvmXc8eSSKgisFnknLsbv8PuY) *Related Resources* * [MIP65 Monetalis/Clydesdale Legal Assessment](https://forum.makerdao.com/t/rwa-007-mip65-monetalis-clydesdale-legal-assessment/17834) * [The DC Increase (MIP65) - Legal Assessment](https://forum.makerdao.com/t/the-dc-increase-mip65-legal-assessment/20267) * [Clydesdale (MIP65) Documentation HQ](https://forum.makerdao.com/t/clydesdale-mip65-documentation-hq/17923) ------------------------- # ORIGINAL FORUM THREAD FOR EXTRA CONTEXT. THE BELOW POSTS CONTAIN THE ABOVE LINKS ## Source: https://forum.makerdao.com/t/coinbase-custody-legal-assessment/20384 ------------------------- steakhouse | 2023-04-20 16:22:39 UTC | #1 # **Coinbase Custody - Legal Assessment** *Legal Disclaimer: This communication is provided for information purposes only. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but such information has not independently been verified and this communication makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, financial or tax advice. You should consult your own advisers as to those matters. References to any digital assets and the use of finance-related terminology are for illustrative purposes only, and do not constitute any recommendation for any action or an offer to provide investment, financial or other advisory services. This content is not directed at nor intended for use by the MakerDAO community (“MakerDAO”), and may not under any circumstances be relied upon when making a decision to purchase any other digital asset referenced herein. The digital assets referenced herein currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions, including but not limited to the UK, European Union, Singapore, Korea, Japan and China. The legal and regulatory risks inherent in referenced digital assets are not the subject of this content. For guidance regarding the possibility of said risks, one should consult with his or her own appropriate legal and/or regulatory counsel. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any decision. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.* ## **Introduction** This is a legal assessment of the proposed transfer of 500 million USDC from the PSM to Coinbase Custody International Limited (“CCI”) in connection with participation in the Coinbase Institutional USDC Rewards Program (the “Proposed Transaction”). CCI is an Irish company and a wholly owned subsidiary of Coinbase Global Inc (“Coinbase”) that provides Coinbase Custody services to institutions and high net worth individuals in non-US jurisdictions. The Proposed Transaction is in accordance with [Section 5.2.2 (Liquid Reserve Implementation)](https://forum.makerdao.com/t/mip105-the-real-world-asset-collateral-scope-framework/19688#h-52-implementation-of-real-world-asset-stability-collateral-28) of the Real-World Asset Collateral Scope Framework (MIP105). This transaction represents an interim solution pending the development of a self-custodial implementation by Coinbase and MakerDAO. Once the self-custodial solution is available, the MakerDAO community will have the opportunity to review before it can be implemented. This legal assessment was prepared by @dsm who holds legal credentials. ## **Key Transaction Terms Table** |Term|Figure|Description| | --- | --- | --- | |Debt Ceiling|500MM DAI|A new vault with a debt ceiling of 500MM DAI will be deployed.| |USDC Rewards Rate|2.60%|USDC rewards are calculated on a monthly basis. USDC earned in the previous month will be credited to the client account within 5 business days following the start of the next calendar month.| |Term|364 days|This is an interim solution that will be terminated once the self-custodial solution is ready. If 364 days pass before the self-custodial solution is ready, the agreement will automatically terminate. Progress updates to be provided every 90 days.| |Fees| --- | Coinbase won’t charge any fees for participation in the rewards program or for custody of the USDC.| |Rehypothecation|None|Coinbase cannot lend, pledge, hypothecate or rehypothecate assets in the client’s custodial account.| |Insurance (HS)|$320MM|$320MM Commercial Crime Insurance covers assets stored in hot storage.| |Insurance (CS)|$320MM; $500MM|In addition to Commercial Crime Insurance, $500MM Specie Insurance is available for assets stored in cold storage.| |Withdrawal time (HS)|Under 10 mins|Hot storage withdrawal time.| |Withdrawal time (CS)|Up to 24 hrs|Cold storage withdrawal time.| |Coinbase Liability Cap (HS)|Previous 12 month's fees|Hot storage: Coinbase's liability is capped at fees paid for the preceding 12-month period.| |Coinbase Liability Cap (CS)|$100MM / address|Cold storage: Coinbase's liability for each cold storage address is capped at $100MM. USDC allocated to cold storage will be limited to $85MM per address.| **Note:** The Trustee, as directed by Maker Governance, has the sole discretion as to the allocation of digital assets between hot storage (“HS”) and cold storage (“CS”). ## **Executive Summary** A new vault with a debt ceiling of 500 million DAI will be deployed for the Proposed Transaction. Key steps in the transaction will include (i) the issuance of DAI, (ii) its redemption against USDC in the PSM and (iii) the transfer of this USDC to CCI. Once fully deployed, USDC placed in CCI as part of the Proposed Transaction will earn a USDC Rewards Rate of 2.60% APY. CCI will credit USDC rewards earned in the previous calendar month to the relevant client account within five business days following the start of the next calendar month. For more details, see “*Coinbase Custody International*–*Key Terms of the USDC Rewards Program*” below. The Proposed Transaction is an interim solution that allows Maker to quickly begin earning USDC rewards while Coinbase and Maker pursue the development of a self-custodial solution. This legal assessment only relates to the interim solution and a standalone review will follow for the self-custodial implementation once it is ready to replace the interim solution. In the event that 364 calendar days have passed since the effective date of the Proposed Transaction and the self-custodial solution is not yet ready, the agreement governing the Proposed Transaction will automatically terminate. A progress report on the development of the self-custodial solution will be provided to the Maker forum every 90 calendar days following the effective date. James Asset (PTC) Limited (“JAL”) will act as Trustee and will hold all contractual rights and accounts relating to the Proposed Transaction in James Asset Trust 3 (“JAT 3”). When acting in connection with the Proposed Transaction, JAL will act in its capacity as Trustee for JAT 3 pursuant to powers outlined in a deed poll and MakerDAO Resolutions. Although the Proposed Transaction uses the same Trustee as [MIP65](https://forum.makerdao.com/t/rwa-007-mip65-monetalis-clydesdale-legal-assessment/17834), the trust assets from each transaction will be held in separate trusts. MIP65 assets are held in James Asset Trust 1 (“JAT 1”) & James Asset Trust 2 (“JAT 2”), while the trust assets from the Proposed Transaction will be held in JAT 3. The documents governing the JAL trust structure for the Proposed Transaction closely mirror those used in MIP65 and are listed in “*Documents*” below. For a structure chart that describes the JAL trust structure, see “*Governance, Decision-Making & Control*” below. Withdrawal times from CCI are a function of whether digital assets are allocated to hot or cold storage. JAL, as directed by Maker Governance, has the sole discretion as to the allocation of digital assets between hot and cold storage. In addition to withdrawal times, this allocation decision also has an impact on insurance coverage and the level of liability that Coinbase is willing to accept. See “*Coinbase Custody International*–*Withdrawals*” and “*Coinbase Custody International*–*Insurance*” below. According to Irish counsel, in the event of insolvency proceedings affecting CCI in Ireland, it is unlikely that the USDC stored in CCI would be included in the insolvency estate of CCI. Under the Proposed Transaction, CCI cannot lend, pledge, hypothecate or re-hypothecate any digital assets in the client’s custodial account. For more details, see “*Coinbase Custody International*–*Insolvency*” below. Risks relating to the Proposed Transaction include withdrawal, insolvency, security and concentration risks. See “*Risks*” below. Mitigants of such risks include insurance, optional cold storage, Irish trust law and public company disclosures. See “*Mitigants*” below. ## **Key Definitions** |Term|Definition| | --- | --- | |CCI|Coinbase Custody International Ltd| |Coinbase|Coinbase Global Inc| |JAL / Trustee|James Asset (PTC) Limited| |JAT 1|James Asset Trust 1, a trust created by the Trustee by way of a deed poll where the original MIP65 trust assets are held.| |JAT 2|James Asset Trust 2, a trust created by the Trustee by way of a deed poll where the additional MIP65 trust assets are held.| |JAT 3|James Asset Trust 3, a trust created by the Trustee by way of a deed poll where the assets for the Proposed Transaction will be held.| |PBA|The Prime Broker Agreement, a confidential agreement between CCI and JAL in its capacity as Trustee for JAT 3 (as client) pursuant to which the custodial services are provided.| |Proposed Transaction|The transfer of 500 million USDC from the PSM to CCI in connection with participation in the Coinbase Institutional USDC Rewards Program.| ## **Documents & Other Resources** Links to non-confidential materials will be provided as they become available. *Public Documents* * [JAT 3 Deed Poll](https://gateway.pinata.cloud/ipfs/QmaNgXMLWCQZ3KaGnjwBAzpncbEWcMqqPFSR2nmHkDAbqo) (*Agreed*) * [JAT 3 & Monetalis Reporting Agreement](https://gateway.pinata.cloud/ipfs/QmaTv4e42sUQ8DzefdzWisHZoJnQdAcSpqjmjP4EFvQVhr) (*Agreed*) *Confidential Documents* * JAT 3 & FGL Administration Agreement (*Agreed*) * Coinbase Prime Broker Agreement (*Agreed*) * Coinbase Institutional USDC Rewards Program Addendum (*Agreed*) * Opinion of Irish Counsel (*Agreed*) * Specie Insurance Documentation (*Agreed*) *Draft Instruction Sets* * [Ratification of JAT 3 Setup & the Coinbase Transaction](https://gateway.pinata.cloud/ipfs/QmY8XnxteC5RdCuAtpGLiqhjBHP6y6HK8Abi4bfSvZBfsV) * [Deposit of USDC to Coinbase Custody](https://gateway.pinata.cloud/ipfs/QmadGkXu3f2sp4VeFpABykUTYhibMT5XTeceKa9FtVGcEr) * [Allocation of USDC to Cold Storage](https://gateway.pinata.cloud/ipfs/QmWt4GQXi1WHWMxDoKmkbuA3tBpabNndWCpTmCgSA2Ssxq) * [[Template] Withdrawal from Coinbase Custody](https://gateway.pinata.cloud/ipfs/Qma7LbexU17Ni8Sf4uGLiEvmXc8eSSKgisFnknLsbv8PuY) *Related Resources* * [MIP65 Monetalis/Clydesdale Legal Assessment](https://forum.makerdao.com/t/rwa-007-mip65-monetalis-clydesdale-legal-assessment/17834) * [The DC Increase (MIP65) - Legal Assessment](https://forum.makerdao.com/t/the-dc-increase-mip65-legal-assessment/20267) * [Clydesdale (MIP65) Documentation HQ](https://forum.makerdao.com/t/clydesdale-mip65-documentation-hq/17923) ## Coinbase Custody International CCI is an Irish company and a wholly owned subsidiary of Coinbase Global Inc (“Coinbase”) that provides Coinbase Custody services to institutions and high net worth individuals in non-US jurisdictions. The custodial services provided by CCI in connection with the Proposed Transaction are governed by the Prime Broker Agreement (the “PBA”), a confidential agreement to which CCI and JAL in its capacity as Trustee for JAT 3 (as client) are parties. Coinbase also operates the Coinbase Custody Trust Company (“CCTC”), which was established as a New York Trust Company. CCTC is the largest digital assets custody solutions provider in the US and falls under the jurisdiction of the New York State Department of Financial Services (“NYDFS”). According to Coinbase, the company has developed market-leading security infrastructure around its US custody operation and has replicated this infrastructure as the basis for CCI’s custody operations. CCI is subject to applicable EU regulatory requirements and Irish law, including the Companies Act. It is also registered as a Virtual Asset Service Provider (VASP) with the Central Bank of Ireland. ### **Insurance** ||Hot Storage|Cold Storage| | --- | --- | --- | |Withdrawal Time|Under 10 minutes|Up to 24 hours| |Insurance|$320MM Commercial Crime Insurance|$320MM Commercial Crime Insurance; $500MM Specie Insurance| |Coinbase Liability Cap|Fees paid to Coinbase for the preceding 12-month period|$100MM per cold storage address| Coinbase maintains an annually renewed Commercial Crime Insurance policy of $320 million to which Coinbase Global is named as the insured. The Commercial Crime Insurance policy protects both CCTC and CCI and covers assets whether they are stored in hot or cold storage. In addition to the Commercial Crime Insurance policy, Coinbase also has an optional Specie Insurance program which provides an extra layer of protection with an incremental $500 million of coverage for client assets *stored in cold storage* . If JAL, at the direction of Maker Governance, opts into the Specie Insurance program by electing to allocate assets into cold storage, JAL would be added as a “loss payee” under the Coinbase Custody Vault Risk Insurance policy, meaning JAL would be entitled to payment from the insurance carrier in the event of a loss. There is no additional cost for JAL’s enrollment in the Specie Insurance program. Both the Commercial Crime and Specie programs provide coverage for losses arising from employee collusion or fraud, physical loss (including theft), damage of key material, security breach or hack and fraudulent transfer. In the coming weeks, Coinbase and its insurance providers will finalize JAL’s enrollment in the Specie Insurance program. In the event that Specie Insurance coverage is not established as agreed, JAL, at the direction of Maker Governance, retains the right to withdraw assets it has custodied with CCI under the Proposed Transaction until such time as Specie Insurance coverage is established. Updates on the developments relating to Specie Insurance will be provided in this thread as they become available. ### **Withdrawals** The amount of time it takes CCI to process withdrawals of digital assets is a function of whether the assets are stored in hot or cold storage. Digital assets stored in a hot wallet can be withdrawn within minutes, while it may take CCI up to 24 hours to process a withdrawal of assets stored in cold storage. JAL, as directed by Maker Governance, has the sole discretion as to the allocation of digital assets between hot and cold storage. In addition to different withdrawal times, the allocation of assets between hot and cold storage also brings other trade-offs. With respect to insurance, CCI’s $320 million Commercial Crime Insurance provides coverage regardless of whether assets are stored in hot or cold storage. However, the optional Specie Insurance program, which provides incremental coverage of up to $500 million is only available for assets stored in cold storage. Additionally, the allocation between hot and cold storage has an impact on the level of liability that CCI is willing to accept in connection with the custodial services. For example, if digital assets were lost by CCI due to gross negligence, fraud or willful misconduct, CCI’s liability in respect of each cold storage address is capped at $100 million *per cold storage address*. Should JAL, as directed by Maker Governance, elect to allocate the entire 500 million USDC into cold storage, this would be stored across six cold wallet addresses to ensure that the entire amount of USDC fell within the liability cap. For assets stored in a hot wallet, CCI’s liability is capped at fees for the preceding 12-month period. In the case of the Proposed Transaction, this would be nil, given CCI is not charging JAL any fees for custody of USDC or participation in the USDC Rewards Program. Finally, CCI reserves the right to decline to process a withdrawal request to comply with applicable law or in response to a subpoena, court order or other binding government order. See “*Risks*” below. ### **Insolvency** #### A Trust Under Irish Law Based on an opinion to be delivered by Irish counsel with the rest of the transaction documents, in the event of insolvency proceedings affecting CCI in Ireland, the USDC stored in CCI should not form part of the proprietary assets or the insolvency estate of CCI. Irish counsel is of this view because as a matter of Irish law, the USDC custodied at CCI should be regarded as being held in trust for JAL by CCI. Under Irish law, a trust is established where a trustee agrees to hold certain assets for the benefit of the beneficiaries. Paragraph 1 from Exhibit A of the PBA creates such a relationship by stating that digital assets in a client’s custodial account shall: 1. Be segregated from both the assets held by CCI as principal and the assets of other customers of CCI. 2. Not be treated as general assets of CCI and that CCI shall have no right, title or interest in such digital assets. 3. Constitute custodial assets and client’s property and are held by CCI in trust for the client absolutely. #### Recovery The key insolvency processes in Ireland under Irish company law are examinership, liquidation or receivership. In the case of an examiner, liquidator or receiver being appointed to a CCI insolvency, the first step would be for the client to liaise with the examiner, liquidator or receiver to ensure they agree that the assets in the custodial account will fall outside the estate of CCI. If there was a dispute as to the existence of a trust over the Irish assets, the next step would be to bring the matter before the Irish courts. #### No Rehypothecation Under the PBA, CCI cannot lend, pledge, hypothecate or rehypothecate any digital assets in the client’s custodial account. ### **Key Terms of the USDC Rewards Program** |Term|Description| | --- | --- | |No Fees|There are no fees associated with or payable by JAL in connection with enrollment or participation in the USDC Rewards Program.| |JAL Opt-out|JAL may opt-out of, or back into, the USDC Rewards Program at any time and will remain entitled to rewards that have accrued but have not yet been distributed| |Coinbase Opt-out|Coinbase may elect to end the USDC Rewards Program at any time| |Calculation|USDC Rewards are calculated on a monthly basis and earned in the form of USDC in accordance with the USDC Rewards Rates. Currently, the USDC Rewards Rate for clients with between 100 million and 1 billion USDC in CCI is 2.60%. CCI will use the monthly average balance to determine the rewards earned for a particular month (determined pro rata for any part of a month).| |Distribution|USDC Rewards earned in a particular month or part thereof will be credited to the client’s trading balance within five business days following the start of the next calendar month.| |Changes|Coinbase reserves the right to change the USDC Rewards Rate at any time by notification to JAL. Unless otherwise stated in the notice, no change will be effective until the first day of the calendar month after such notice is made.| ### **Risks** #### 1. Withdrawals Typically, withdrawals from hot wallets are expected to take minutes while withdrawals from cold wallets can take up to 24 hours. Following a withdrawal request by JAL to CCI as directed by Maker Governance, it may take CCI longer than the standard withdrawal times to process a cold storage withdrawal due to the need to retrieve certain information from offline storage in order to facilitate the withdrawal. JAL, as directed by Maker Governance, has the sole discretion as to the allocation of digital assets between hot and cold storage. See “*Coinbase Custody International—Withdrawals*” above. In addition, there may be a lag between the intent to withdraw and the execution of a withdrawal request by CCI due to the Maker Governance process. Finally, Coinbase operates globally in a complex and rapidly evolving regulatory environment and is subject to a wide range of laws and regulations. CCI may decline to process a withdrawal request in order to comply with applicable law or in response to a subpoena, court order or other binding government order. #### 2. Insolvency Despite the opinion of Irish counsel that, in the event of insolvency proceedings, assets custodied with CCI would likely fall outside the insolvency estate of CCI, there can be no guarantee that this would be the case. The treatment of digital assets in insolvency or bankruptcy proceedings is a novel area of law. As such, it is difficult to predict how a court would decide in a particular set of facts and circumstances. In the event that the USDC custodied with CCI was considered to be part of CCI’s insolvency estate, it could be subject to insolvency or bankruptcy proceedings where JAL would be treated as a general unsecured creditor. Additionally, protections available under Irish law are subject to the risk of delay in recognition and legal complications that may arise in other jurisdictions. It is possible that CCI, along with the custodied assets, might be consolidated into the bankruptcy estate of Coinbase under US bankruptcy law. #### 3. Security To the extent that any of the private keys relating to CCI’s wallets containing digital assets held for customers are lost, destroyed, or otherwise unavailable, and no backups of the private keys are accessible, CCI will be unable to access the digital assets held in affected wallets. Crypto assets and blockchain technologies have been, and may in the future be, subject to security breaches, hacking, or other malicious activities. Any loss of private keys relating to, or hack or other compromise of, digital wallets used to store CCI’s customers’ digital assets could result in the loss of USDC placed with CCI for custody. #### 4. Concentration In this context, concentration risk describes the risk of loss arising from a concentration of transactions with a single entity, a group of closely linked entities, the same geographic area, specific economic or industry sector. The Proposed Transaction leverages the existing JAL structure originating from the British Virgin Islands and utilizes the same service providers as MIP65. In the event of adverse developments in any of the transactions or entities related to JAL, the overall impact of such developments could be considerably greater than if the transactions had not been concentrated to such an extent. ### **Mitigants** #### 1. Withdrawals The risks relating to withdrawals in the Proposed Transaction are those that necessarily accompany the type of custodial services provided by CCI. As such, there is little scope for mitigation. Ultimately, these risks will be mitigated once the self-custodial solution is in place. For more background, see “*Coinbase Custody International—Withdrawals*” and “*Executive Summary*” above. #### 2. Insolvency The PBA creates a trust relationship between CCI and JAL, whereby CCI holds USDC for JAL as a beneficiary of the trust. Based on an opinion to be delivered by Irish counsel with the rest of the transaction documents, in the event of an insolvency of CCI, the trust relationship between CCI and JAL increases the likelihood that the trust assets would fall outside the insolvency estate of CCI under Irish law. For more, see “*Coinbase Custody International—Insolvency*” above. Furthermore, Coinbase is a public company with quarterly reporting obligations. This means the company can be monitored for early signs of deteriorating financial health, allowing appropriate action to be taken if needed. #### 3. Security Prior to a large transfer of USDC to CCI, an end-to-end test will be completed using a small amount of funds to ensure that transaction monitoring systems can confirm completion of all payment flows for the transfer of USDC to CCI. Following this, funding of the CCI account will occur on an incremental basis at a rate of 100 million USDC per day. Once the USDC is custodied with CCI, Coinbase’s Commercial Crime Insurance and optional Specie Insurance will provide coverage for losses arising from employee collusion or fraud, physical loss, damage of key material, security breach or hack and fraudulent transfer. For more, see “*Coinbase Custody International—Insurance*” above. #### 4. Concentration Once the self-custodial solution is in place, concentration risk will be reduced as the contractual rights and accounts relating to the Proposed Transaction will no longer be housed in the James Asset Trust structure. In the interim, the assets from each transaction are held in standalone trusts and external counsel has noted that the assets are segregated from one another. The JAL structure also delegates key actions and decisions to independent third parties in order to mitigate potential losses from rogue actors. For a structure chart that describes these relationships, see “*Governance, Decision-Making & Control*” below. **Note:** Despite mitigating actions, some residual risks will remain as risk cannot be entirely eliminated. ## Governance, Decision-Making & Control ![JAL|690x388, 100%](upload://2PwlCTysyIz6Q6f2N3iHY4KuO1Y.png) 1. James Asset (PTC) Limited (“JAL” or the “Trustee”) is a British Virgin Islands (BVI) private trust company that was created in connection with MIP65. The MIP65 trust assets are held by JAL in JAT 1 & 2 while the trust assets for the Proposed Transaction will be held in JAT 3. Each trust is created by way of a deed poll (each, a “Declaration of Trust”) governed by the laws of BVI and executed by JAL. (For a summary of the James Asset structure, see this [memorandum](https://gateway.pinata.cloud/ipfs/QmfEuoL8D6mFm1RwMmJDmiJa4NjdusXas5wnUmANdfZWfK?_gl=1*tmbhl3*_ga*MmEzMGU4N2EtNWZhZS00ODYwLTk4NjgtNGE4ZmM5ZGUzOWVj*_ga_5RMPXG14TE*MTY3OTYxMTkzMC4yLjEuMTY3OTYxMzU1MC4yOC4wLjA.) by external counsel. To view transaction documents for JAT 1 & 2, see the [Clydesdale MIP65 Documentation HQ](https://forum.makerdao.com/t/clydesdale-mip65-documentation-hq/17923).) 2. SHRM Trustees (BVI) Limited (the “Share Trustee”) holds the issued and outstanding shares of JAL in trust pursuant to a BVI purpose trust (the “Share Trust”). 3. Belvaux Management Limited (the “Enforcer”) must monitor the activities of the Share Trustee to ensure that the Share Trustee is using the assets subject to the Share Trust in such a way that furthers its purposes and that the Share Trustee is otherwise properly administering the Share Trust. 4. The Share Trust is established between the Share Trustee and the Enforcer. It contains the shares of JAL. 5. Riverfront Capital Ltd is the sole director of JAL. 6. Fiduciary Group Limited (the “Administrator”) is responsible for ensuring that the actions of JAL with respect to the trust assets are in accordance with the relevant MakerDAO Resolution. 7. Monetalis provides reporting services in relation to the assets of JAT 1, 2 & 3 by way of posts in the MakerDAO forum. 8. Each Declaration of Trust implements measures to ensure the MakerDAO protocol directs the key aspects of JAT 1, 2 & 3 and the acts of JAL as Trustee. The actions that can be undertaken with respect to the trust assets are strictly limited to: (a) acquiring, holding and disposing of trust assets; and/or (b) appointing one or more persons to acquire, hold and dispose of trust assets on behalf of the Trustee and/or providing other services in relation to such trust assets; and (c) paying the proceeds of such trust assets to the relevant MakerDAO vault, in each case in accordance with the applicable MakerDAO Resolution. (See Clause 5 in the relevant Declaration of Trust). To mitigate “rogue actor” risk in respect of JAL, Fiduciary Group Limited is appointed as the Administrator under each Declaration of Trust. The Administrator is responsible for ensuring that the actions of JAL with respect to the trust assets are in accordance with the relevant MakerDAO Resolution. (See Clause 5.4 in the relevant Declaration of Trust). Fiduciary Group Limited is regulated by the BVI Financial Services Commission. Ultimately, reversibility of an action taken by the Trustee will be a matter of BVI law. The likelihood of success in such a reversal is therefore outside the scope of this review. Nevertheless, “rouge actor” risk is not entirely eliminated as human participation is still required in the overall transaction. ## Funds Flow See [CES - MIP65 Review](https://forum.makerdao.com/t/rwa007-mip65-monetalis-clydesdale-ces-domain-team-assessment/17787) for execution of the smart contracts within the Maker ecosystem. Monetalis will call the push( ) function at the RwaSwapOutputConduit and cause USDC to be transferred from the PSM to a JAL ethereum wallet/account with Coinbase. Each transfer from the wallet/account will be undertaken by JAL’s director and the Administrator (two-person action required) and pursuant to the relevant MakerDAO Resolution. MKR token holders must approve a resolution for the withdrawal (in whole or in part) of the USDC. Each transfer from an account will be undertaken by JAL’s director and the Administrator (two-person action required) and pursuant to the relevant MakerDAO Resolution. ### Next Steps * Will announce in this thread once external counsel makes JAT 3 documents available. [CONFIRMED] * Will announce in this thread once Specie Insurance coverage is confirmed. [CONFIRMED] * Will announce in this thread when all agreements have been executed. * Will announce in this thread that the eth addresses in the instruction-sets match up with intended use and ownership before transmission of instructions to the Trustee. ------------------------- LongForWisdom | 2023-04-04 12:50:18 UTC | #2 [quote="steakhouse, post:1, topic:20384"] Monthly USDC rewards from CCI will be automatically transferred to the Surplus Buffer. [/quote] I'm sure you're already aware, but just for the sake of clarity. USDC can't directly go into the surplus buffer. Either: * It is traded for ERC20 DAI, then converted into non-ERC20 Dai, and then assigned to the right contract (might be the VOW? I'm not sure.) * It goes to the PauseProxy as USDC. Might be worth writing this out in a little more detail, and confirming the mechanism used to convert the USDC to surplus buffer DAI. ------------------------- hexonaut | 2023-04-04 12:24:36 UTC | #3 Technically speaking any asset can go into the Surplus Buffer directly. If Maker desires to switch it for DAI it can do so with a spell. ------------------------- LongForWisdom | 2023-04-04 12:47:22 UTC | #4 Wait what? Into the Surplus _buffer_? Like, I am totally on the same page if you meant the PauseProxy, but how can non-DAI assets go into the surplus buffer? ------------------------- hexonaut | 2023-04-04 12:49:31 UTC | #5 Oh whoops yes you are right! Surplus Buffer usually refers to the `vow` not the pause proxy, so yes the tokens should be transferred to the pause proxy. ------------------------- dsm | 2023-04-04 13:50:34 UTC | #6 That's helpful, will dig into those mechanisms and update. In the meantime, I've removed the language to avoid confusion. ------------------------- One_Pastrami | 2023-04-06 03:42:15 UTC | #7 [quote="steakhouse, post:1, topic:20384"] Once fully deployed, USDC placed in CCI as part of the Proposed Transaction will earn a USDC Rewards Rate of 2.60% APY [/quote] Although 2.60% is a below market rate for USD, has Coinbase confirmed the reward rate and validity period? In light of recent events, such as their switch in banking partners (SVB/Silvergate/Signature bank collapses) and the need to hold a larger portion as cash deposits (instead of USTs) to meet massive redemptions, it is likely that Coinbase had to adjust their collateral allocation causing a reduction in its interest revenue generated. Therefore, I recommend reviewing and confirming the pricing terms. ------------------------- dsm | 2023-04-06 07:09:07 UTC | #8 Yes they confirmed the USDC Rewards Rate as recently as Monday April 3rd. As per the terms of the agreement, the rate is subject to change. For example, the rate has been revised upwards twice since Q4 2022. Under the agreement, Coinbase must provide notice before they change the rate. Maker has the option to order a withdrawal whenever it sees fit. ------------------------- Eumenes | 2023-04-07 14:53:16 UTC | #9 [quote="steakhouse, post:1, topic:20384"] Coinbase Institutional USDC Rewards Program [/quote] Is there a legal analysis of potential regulatory and compliance risk for this proposal? Some key issues should include: Potential impact of Wells Notice investigations Risk of Coinbase Institutional USDC Rewards Program viewed as being a security for regulators ------------------------- dsm | 2023-04-07 16:59:00 UTC | #10 Important questions Eumenes. The first thing to flag is that this transaction is happening outside the United States. The relevant jurisdictions here are the British Virgin Islands (BVI) and Ireland. So right away, US law considerations are not as relevant as they would be if this transaction was happening inside the US. We are all guilty of this way of thinking, but it’s important to remember that the US is just one part of the global system. Second, Coinbase is a financial institution, and financial institutions get sued every day. I’m reminded of my days as an intern in the legal department at Credit Suisse New York. There was this big trash can that sat in the middle of the whole floor and that’s where all the incoming lawsuits would go, awaiting the attention of the litigators. In sum, financial institutions are constantly entangled in legal action and that is the ordinary course of business. Until a rule comes down that James Asset (PTC) Limited in BVI can’t use the property under its supervision to do business with Coinbase in Ireland, we are good to go. ------------------------- DaveringtonPLLC | 2023-04-07 18:55:19 UTC | #11 [quote="dsm, post:10, topic:20384"] The first thing to flag is that this transaction is happening outside the United States. The relevant jurisdictions here are the British Virgin Islands (BVI) and Ireland. So right away, US law considerations are not as relevant as they would be if this transaction was happening inside the US. [/quote] Hmmm, I don't know about that. If the U.S. based headquarters of a financial institution gets into jeopardy, do we find any evidence in history that suggests international, non-u.s. affiliates might have some troubles? :eyes: Recently the U.K. and Israel were extremely worried about the fallout of the Silicon Valley Bank failure. Were the SVB affiliates okay? Are they okay now? Are the counterparties to those off-shore affiliates good to go? https://www.cnbc.com/2023/03/13/hsbc-buys-silicon-valley-bank-uk-protecting-deposits-.html https://www.jpost.com/business-and-innovation/banking-and-finance/article-734408 And for an even more spicy example, I go back to when I was at Lehman Brothers in 2008. United States employees still had a job on September 15th and became Barclays employees a week later when its purchase of the North America business closed. U.K and some international employees were fired on the spot with no severance because the U.S. headquarters had swept some international affiliates bank accounts on the prior Friday before the bankruptcy filing that fateful Sunday night/Monday morning. The affiliates/subsidiaries had ZERO operating capital since the UNITED STATES bankruptcy filing froze any possibility to get funded by Headquarters on Monday as would ordinarily have been the case. True story. https://www.library.hbs.edu/hc/lehman/exhibition/global-impact-of-the-collapse But more to the point than whether employees get paid in a meltdown, as we have seen with the FTX collapse, U.S. jurisdiction, authority and cooperation arrangements with other nations pursuant to international law and treaties can create a global drag-net of both cooperation by all the relevant jurisdictions where parts of the business may operate and have knock-on negative effects for the operations and going concern status of those non-U.S. businesses and their non-U.S. customers. https://www.wsj.com/articles/clashes-over-ftx-bankruptcy-go-global-11670092304 In the case of Coinbase, it seems particularly relevant that MakerDAO would be sensitive to risks posed by U.S. authorities in light of regulatory enforcement actions and not only bankruptcy dynamics, especially since the latter certainly could be a heightened risk factor in triggering the former. Finally, while it is quite popular to write "4" as a response to any unpleasantness that needs to be taken to heart when one is exposed to large crypto asset financial firms and centralized exchanges, it may be better for MKR holders to consider the effectiveness and influence of coordinated U.S. agency action in cooperation with international authorities as we saw at the center of the Bitzlato enforcement actions. https://www.whitecase.com/insight-alert/bitzlato-founder-charged-facilitating-money-laundering-more-700-million-dark-web So while Crypto Twitter mocked this news as a nothing burger, the SIGNAL in the noise that's relevant for a Legal Assessment of the Coinbase Custody risk is that we have mounting specific evidence in this industry as to exactly how the U.S. manages to make its rules relevant to market participants wherever they are. That fact, along with just plain ole legal, credit and counterparty risk of doing business with a global firm licensed and operating in multiple jurisdictions, suggests to me that @Eumenes ought to have his questions treated more respectfully and professionaly. ------------------------- One_Pastrami | 2023-04-07 19:20:28 UTC | #12 SFCU, MKR cannot afford to be naïve about this. It is common knowledge that Coinbase's revenue is generated by investing USDC's collateral in US treasuries and the rest in interest-bearing bank accounts in the US. If this revenue stream is at risk, not only will the rewards program come to an end, but assets held by Coinbase may also be frozen including those in Coinbase Custody program wallets Furthermore, Maker is the first institution in this rewards program, which is a positive development, but we need to proceed with caution. ------------------------- Eumenes | 2023-04-07 19:22:14 UTC | #13 I am stunned that the Legal Assessment of this proposal did not cover regulatory/compliance risk. This is a key risk (perhaps the key risk) to the proposed transaction and both MKR holders and DAI holders deserve a thoughtful answer. -------------------------