MakerDAO RWA Structure Issues
MakerDAO has a “real world assets” program that seeks to earn income by funding traditional bonds, loans and the like. As this activity seeks to connect anonymous on-chain token holdings with very-much-off-chain assets it raises a number of interesting questions.
Rather than philosophizing about whether, or how, this can work we are going to ask a few concrete questions. These relate specifically to two points:
- Given the increase in enforcement actions in the US, how safe are Maker’s RWA holdings?
- How can Maker comply with Corporate Transparency Act rules which come in to force in 2024?
This matters to MKR and DAI holders as it looks as though there are a number of short, simple routes to losing the RWA holdings.
As usual none of this concerns whether the rules are right or fair or reasonable. This is about seeing things as they are and considering what that means for a range of assets.
Trustee
Maker’s trustee is Wilmington Savings Fund Society, a US bank with about $20 billion in assets and $2 billion market cap. It is not huge but it is substantial and highly regulated.
So the trust agreement between Maker and WSFS is worth reading. Maker created an “RWA Foundation” in the Cayman Islands to sit at the top of the structure. This foundation is WSFS’s client in setting up the “RWA Master Participation Trust” in Delaware. So far so good.
Now read this passage from the trust agreement:
If WSFS is fined for any of these activities it can, approximately, take whatever money it is fined from the Maker trust’s holdings. So let’s game out aggressive government action against Maker. One thing to do is accuse WSFS of bad acts and get WSFS to agree in writing to a large fine. So long as the fine is smaller than the holdings of the RWA trust WSFS will not have an financial incentive to negotiate down the settlement.
If WSFS and the government come to one of these arrangements where a fine is paid and nobody admits or denies wrongdoing well then it looks a lot like Maker’s assets got taken and Maker never even had standing to challenge the action.
This is pretty aggressive. Maker’s RWA are held by a large US bank that is not going to risk liceneses over this relationship. To make matters worse, that bank can in effect pay any fines it incurs with Maker’s money. And none of this even needs court approval. If WSFS settles and pays a fine it’ll file for a lien over Maker’s assets. That action may end up in court but Maker, in the guise of the RWA Foundation, is going to loose. The trust agreement is not complex.
Corporate Transparency Act
The Corporate Transparency Act goes in to effect in 2024. As a result the RWA Foundation is going to need to disclose beneficial ownership information. The rules are quite complex and not all ownership must be disclosed. But, roughly, all “substantial” ownership or control must be.
Further, the US government provides explicit guidance that these rules will apply to DAOs. To quote the guidance:
This provision recognizes that control exercised in novel and less conventional ways can still be substantial. It also could apply to the existence or emergence of varying and flexible governance structures, such as series limited liability companies and decentralized autonomous organizations, for which different indicators of control may be more relevant. As noted by commenters, paragraph (iv) also operates to address any efforts to evade or circumvent FinCEN’s requirements and is intended to prevent sophisticated bad actors from structuring their relationships to exercise substantial control of reporting companies without the formalities typically associated with such control in ordinary companies. Such anti-evasion and anti-circumvention provisions are common in other regulatory frameworks that have proven administrable over time,[151] and, viewed in such a context, paragraph (iv) serves an important purpose to disincentivize unusual structures that may only serve to facilitate illegal activities.
Maker’s RWA program is governed by the MKR governance process. There is no way this sort of anonymous voting process can be brought in to compliance with the Corporate Transparency Act. And that is a crime.
Maybe WSFS could have decided the foundation’s UBO disclosure was adequate before this rule came in to effect. But it is nigh impossible to see how to get there once that guidance is in effect.
This impossibility is consistent with analysis published by a large law firm, the WEF and a16z.
Putting These Together
These two circumstances constitute a sort of pincer around Maker’s RWA program. At some point — perhaps already — WSFS is going to ask these questions and get non-compliant answers.
Maker’s design is based on economic incentives. So let’s consider the various player’s incentives. Maker wants the income but cannot fill out the forms. So it is kind of stuck. WSFS does not want trouble with the government. It is fairly easy to see where this is going.
We will leave it as an exercise for the reader to consider what happens to the USDC inside Maker next.
