# MIP120: XBTO Peg Stability Module (PSM) Stablecoin Management ## Preamble ``` MIP#: 120 Title: XBTO Peg Stability Module (PSM) Stablecoin Management Author(s): @XBTO Contributors: @mdanial, @Behzad.Taufiq Tags: psm, stablecoin, xbto Type: process Status: Obsolete Date Proposed: 2023-03-05 Date Ratified: N/A Dependencies: Replaces: Forum URL: https://forum.makerdao.com/t/mip120-xbto-peg-stability-module-psm-stablecoin-management/20062 Ratification Poll URL: Extra: This MIP has been made obsolete by the passage of [MIP102c2-SP1](https://mips.makerdao.com/mips/details/MIP102c2SP1) ``` ## Sentence Summary MIP120 will (i) onboard and activate a DAI Real World Asset (RWA) vault to acquire up to 500MM USDC via MakerDAO’s PSM and (ii) approve the future purchase and active management of a diversified portfolio of short-duration US Treasuries, Investment-Grade Corporate and Structured Credit securities, including ESG/Green Bonds that can help fund renewable energy (such as wind, solar and hydro), recycling efforts, clean transportation, and sustainable forestry. Throughout this proposal, the term “securities” has an equivalent meaning to a “bond” or “bonds”. ## Paragraph Summary Under MIP120, up to 500MM of the PSM’s USDC will be managed by one of the entities wholly owned by XBTO Global (“XBTO”), which will invest, on behalf of MakerDAO, the funds in various traditional fixed-income assets according to the ratified Declaration of Intent [MIP13c3-SP12: Invest in Short-Term Bonds](https://mips.makerdao.com/mips/details/MIP13c3SP12). All investments will be obtained on the open market through impartial, competitive processes conducted by investment banks and/or broker-dealers. At the end of every quarter, the DAI 500MM RWA vault will remit collected interest coupon proceeds to MakerDAO to provide current cash flow to bolster the Surplus Buffer. Principal proceeds generated from the portfolio’s positions will be reinvested until Maker governance has passed an executive vote to trigger a liquidation of the portfolio. The portfolio will have an average duration of 1.5 years with a max maturity or WAL (weighted average life) of 3.5 years, managed in a laddered approach allowing for active rebalancing and duration management. The portfolio will also be relative value focused across US Treasuries, Corporate and Structured Credit securities, and ESG/Green Bonds seeking to maximize risk-adjusted total returns while remaining confined to prudent risk of issuer and sector constraints. ## Motivation Following the ratification of [MIP13c3-SP12](https://mips.makerdao.com/mips/details/MIP13c3SP12), MakerDAO identifies a framework to allow a portion of its balance sheet held in idle stablecoins to provide yield while maintaining counterparty risk to stablecoin issuers (e.g., Circle). [MIP13c3-SP12](https://mips.makerdao.com/mips/details/MIP13c3SP12) details standards that align with XBTO’s well-established position in the institutional space and an investment framework consistent with the firm’s credit experience. XBTO’s position and motivation are strengthened by the fact that since early 2022, traditional finance assets have offered a more significant risk/reward than current CeFi and DeFi solutions. Investing in CeFi and DeFi Stablecoin Markets has not been easy to scale in the last few years due to the nascency of the space. Furthermore, the collapse of CeFi entities (e.g., Genesis, BlockFi, FTX, and Celsius) has made risk in the ecosystem intolerable. MIP120 achieves the following goals for Maker: - Generate meaningful yield for the Surplus Buffer through Maker’s USDC holdings. - Provide a liquid, diversified investment profile well aligned with Maker’s liquidity and risk management needs. - Diversify Maker’s existing base of fixed-income holdings with floating and fixed-rate structured credit securities. - Diversify the counterparty risk MakerDAO takes when engaging with off-chain real-world asset managers. - Establish MakerDAO as a significant player in the traditional fixed income markets, potentially leading to more opportunities for institutional-level acceptance and widespread use of DAI in the traditional finance world. ## Component Summary **MIP120c1: Presentation of XBTO** This component presents XBTO business activities. **MIP120c2: The Opportunity** This component explains why investing in fixed income is a fantastic opportunity right now. **MIP120c3: Investment Program** This component thoroughly outlines XBTO’s portfolio strategy for MakerDAO. **MIP120c4: Terms for Adding and Withdrawing Liquidity** This component describes the structure of the flow of funds. **MIP120c5: Transparency and Monitoring** This component describes how XBTO plans to maximize transparency and ease of use for the MakerDAO community through reporting and regular correspondence. **MIP120c6: Proposed Legal Structure** This component proposes a low intermediary, smart-contract enabled, bankruptcy remote structuring for the partnership. **MIP120c7: Custody** This component explains the business activities of Stablehouse, which is XBTO’s regulated, in-house custody solution. **MIP120c8: Collateral Onboarding** This component explains how XBTO will actively participate in the Collateral Onboarding Verification and Assessment process in cooperation with the relevant Core Units and community members. **MIP120c9: Fee Structure** This component outlines XBTO’s fee structure for managing MakerDAO’s stablecoins. ## Specification / Proposal Details ### MIP120c1: Presentation of XBTO Credit and Fixed Income XBTO was established in 2015 as one of the first digital asset market makers and liquidity providers. Originally named “XBT Opps,” which stood for Bitcoin’s original ticker, XBT, and “Opportunities,” it was later shortened to simply “XBTO.” As the digital asset market grew, so did XBTO’s market offerings. By February 2017, XBTO was executing millions of weekly trades across dozens of exchanges. By November 2017, XBTO expanded its market offerings to include OTC trading, crypto-mining, and VC investing. Today, XBTO has expanded its services to Market Making, Asset Management, Institutional Trading, Credit and Fixed Income, Mining Solutions, and Venture Capital. The company has transacted over $100Bn USD worth of digital assets since inception and is currently one of the top five largest crypto-options market makers. XBTO provides exceptional technology infrastructure and financial services to traditional and blockchain-enabled financial companies, ensuring their partners and clients can make the most of investment opportunities in the digital assets class. Partners and clients include exchanges, hedge funds, family offices, UHNW individuals, and DeFi protocols. XBTO’s Credit and Fixed Income group combines traditional financial instruments with digital assets and technology to offer innovative products and services to consumers and financial institutions. The XBTO Credit and Fixed Income team have the experience and dedication to bringing traditional credit and fixed income yields to the digital asset ecosystem, specifically for those entities managing extensive stablecoin holdings, such as DAOs and crypto exchanges. The team is led by Behzad Taufiq, the firm’s Global Head of Credit and Fixed Income. Before joining XBTO, Mr. Taufiq held positions at prominent private equity and asset management firms, dating back to 2005. Most recently, he was Head of Credit Trading and a Managing Director at Hudson Advisors (”Hudson”), the in-house asset manager of the global private equity firm Lone Star Funds. At Hudson, Mr. Taufiq oversaw the credit trading, analytics, and underwriting teams responsible for one of the more extensive holdings of fixed-income securities and loans within the private equity industry ranks. Through MIP120, XBTO Credit and Fixed Income team can help MakerDAO realize these yields efficiently and safely. ### MIP120c2: The Opportunity In a high-interest-rate environment, treasury bills, bonds, and other fixed-income debt investments can offer many advantages as an investment option. One advantage of these instruments is that they provide a predictable and stable source of income since they pay a fixed rate of return periodically. This appeals to investors looking for consistent yield who are less comfortable with stock and crypto market volatility. Compared to investments in the stock and/or crypto market, which can experience significant fluctuations in market value, fixed-income investments generally have lower volatility and are considered less risky, especially shorter-duration fixed-income securities. However, it's important to note that bonds' prices and interest rates are inversely correlated: as interest rates rise, bond prices will fall. This price decrease is driven by an increase in competition from newly issued bonds with higher yields, which makes the older bonds less attractive to investors with their lower fixed interest rates. On the other hand, equities and crypto have the potential for higher returns in the long run compared to traditional debt investments, but they also come with higher risk and price volatility. The stock and crypto markets can provide growth opportunities over time, but they also can be subject to market fluctuations and systematic risk. Additionally, stocks and cryptos are not immune from the negative price pressure of an increasing interest rate environment. Following a turbulent year in 2022, the crypto world needs the stability and predictability of TradFi fixed-income debt instruments. The current overall market conditions make these investment opportunities more popular and attractive than we’ve seen in decades. In light of the possible emergence of economic weakness, including a potential recession, it is crucial to exercise careful credit selection and management. The XBTO team’s pertinent expertise can effectively deliver on this front, all the while upholding exceptional standards of transparency and reporting for the off-chain credit asset portfolio being managed. ### MIP120c3: Investment Program **Objective** This proposal aims to generate attractive risk-adjusted income across a variety of short-duration, high-quality (Investment Grade) traditional and Structured Fixed Income products. The key benchmark/comparable return and yield would be the 1-3yr Bloomberg Credit Index. **Solution** The portfolio will seek to take advantage of the current rate regime where the interest rate curve is inverted (2s/10s -90bps), and many seasoned bonds trade at a substantial discount to par given the current higher yield environment, and newly-issued bonds are being offered at attractive risk-adjusted yields not seen in years. The portfolio will benefit from low overall volatility due to the low duration (and thus sensitivity to interest rate moves) of these assets, as well as the "pull to par" effect that bonds encounter as they near maturity, offering upside convexity and capital appreciation to the overall return profile. The overall portfolio stats will look as follows: - ***Portfolio Average Credit Rating:*** A flat - ***Minimum Credit Rating:*** BBB- - ***Yield to Maturity:*** 4.5-7.0% (Gross) - ***Modified Duration:*** 1.5-2yrs - ***Max Maturity/Weighted Average Life:*** 3.5yrs **Investment Thesis** While 2023 has been a challenging macro environment, it has opened the door to attractive risk-adjusted opportunities for experienced buyers of fixed-income securities, especially those with cross-sector underwriting capabilities. With a looming recession, general corporate downsizing, and a slowly but surely weakening labor market, we are likely to have neared the peak of this Fed rate hiking cycle. As such, with limited upside in short-term rates, we believe now is the best time to be entering the front end of the bond market where returns are attractive both from a risk-adjusted perspective but also objectively, as 2yr treasury yields are the highest they've been since 2007 before the Fed implement unprecedented QE. We believe this allocation is a sound and sustainable approach to managing treasury assets and will resemble the allocation made by most large corporate treasuries. The portfolio will seek to invest in Investment-Grade Corporate securities, Asset-Backed securities, ESG/Green securities, and Government securities, focusing on the relative value between sectors, issuers, and individual securities. XBTO’s issuer exposures will be reviewed by XBTO’s team of Credit Analysts, who are assigned by sector to assist the Portfolio Management team in selecting the best-in-class issuers and securities. **Process** Relative Value focused approach in selecting sectors, issuers, and securities to construct an all-weather, high-quality portfolio with low relative overall risk and diversified exposures. The Portfolio Management team will focus on building a laddered maturity portfolio, providing consistent and predictable cash flow, and offering flexibility to reallocate across sectors based on the opportunity set. The team will be Cross-Sector and Investment Grade agnostic, allowing allocation to the most attractive risk-adjusted opportunities while abiding by concentration constraints. **Investment policy** - ***High-Quality Credits:*** 100% Investment Grade (BBB- and above) - ***Short Duration (low sensitivity to interest rate moves):*** Combined overall duration target of 1.5-2yrs, with a max maturity or WAL (Weighted Average Life) of 3.5yrs - ***Highly Liquid:*** Benchmark ($300mm+) deals that are either On-The-Run or actively traded and quoted. - ***New Investments and Redemptions:*** Funds can be invested or redeemed within 3-4 business days (which includes T+2 settlement times that are standard in TradFi Fixed Income). **Constraints** The portfolio will adhere to construction constraints expected for an institutional grade portfolio and broadly resemble a breakdown between the 1-3yr Bloomberg Credit/Treasury Index and 1-3yr Bloomberg Corporate Index. - ***Average Position Size:** 2.5% average (Generally 1.5%-4.0% per position)* - ***Max Corporate/ABS Issuer Exposure:** 5.0% per security* - ***Max Sector Exposure:** 25.0% (Unless Gov't bonds)* - ***Average Portfolio Rating:** A flat* - ***Minimum Security Rating:** BBB* - ***Max BBB Exposure:** 20.0%* **Portfolio Management Team Profile** ***Behzad Taufiq - Lead Portfolio Manager & XBTO Global Head of Credit and Fixed Income*** Behzad has extensive experience in the credit and fixed-income markets, dating back to 2005 and having worked through numerous periods of market dislocation or distress - such as the 2008 Great Financial Crisis, the 2013 Taper Tantrum, the 2016 Hedge Fund exodus, and the 2020 COVID-induced sell off - and market strength, such as the longest bull market ending in 2020. Prior to entering the digital assets sector in 2020, Behzad was the Head of Credit Trading and Managing Director at Hudson Advisors (asset manager of Lone Star Funds, a global private equity firm with $86Bn in capital raised since inception). At Hudson Advisors, Behzad was responsible for the Trading, Underwriting, and Analytics teams that managed Lone Star Funds’ fixed-income and loan assets, which had a peak market value of +$50Bn. Before Hudson Advisors, Behzad was on the original fixed income and credit team at Cerberus Capital Management, a global private equity firm with $60Bn of capital raised since inception. ***Karim Dandashy, CFA - Treasuries & Corporates PM/Trader*** Karim worked at ***Goldman Sachs Asset Management*** as a Portfolio Manager on the Corporate Fixed Income desk, working on a small team of three managing over $20 billion of Separately Managed Accounts (primarily short duration) for Goldman's Ultra High Net Worth and Quasi-Institutional clientele. ***Sundeep Gokaraju - Structured Products PM/Trader*** Sundeep has 16 years of experience in trading and structuring, including overseeing a $30 billion Legacy Non-Agency RMBS portfolio and underwriting sectors such as CLOs, CMBS, Autos ABS, Student Loan ABS, European RMBS, Credit Card ABS, and Aircraft ABS. Sundeep was a Director at **Hudson Advisors** (asset manager of **Lone Star Funds)** from 2014-2020. ***Spencer Forrest & Mohammad Danial - Credit Underwriting & Monitoring*** Spencer worked at **Fortress Investment Group,** providing analytical and asset management support on a diverse portfolio of debt investments, including senior and junior commercial mortgages, mezzanine debt, bonds, and collateralized loan obligations (CLOs). Mohammad worked at **Bank OZK - Real Estate Specialties Group** originating and underwriting +$1Bn in development and acquisition senior debt annually across various real estate asset classes. Before his origination and credit underwriting experience at Bank OZK, he specialized in acquisitions and asset management for a middle-market hospitality REIT. ### MIP120c4: Terms for Adding and Withdrawing Liquidity XBTO proposes implementing a set of smart contracts accessible only by authorized persons at MakerDAO, simplifying the flow-of-funds process and eliminating possible intermediaries and fees between XBTO and MakerDAO. This set of smart contracts will be used to perform fund transfers between MakerDAO and XBTO. The smart contract will be executable by MakerDAO, which will be able to recover the necessary amounts on demand. The technical implementation will follow specifications defined in [MIP21](https://mips.makerdao.com/mips/details/MIP21). XBTO will work with Collateral Engineering Services (CES-001) and community members to ensure that best practices around wallet security and separation, transparency, and auditability are followed in implementing MIP120. With regard to the transfer of interest income, XBTO will automatically convert the proceeds from its fixed income portfolio into USDC, which will then be deposited in the smart contract. ### MIP120c5: Transparency and Monitoring Like what XBTO provides to their current clientele, and like what other institutional TradFi asset managers provide to their clientele, XBTO proposes to give the Maker community a monthly and quarterly remittance report on the status of the volume of assets managed by them. Considering that regular communication is key to such a partnership, XBTO suggests creating a dedicated Discord channel where members of the Maker community can regularly ask questions to XBTO’s Credit and Fixed Income team. The XBTO team pledges to hold a quarterly public AMA session via the Discord channel. During these sessions, the team will discuss the current state of the traditional fixed-income markets, provide valuable perspectives on the positioning of the MakerDAO/XBTO off-chain credit portfolio, and outline XBTO’s upcoming portfolio management plans for subsequent quarters. ### MIP120c6: Proposed Legal Structure **Dedicated smart contract** The desire for disintermediation and a direct relationship between the Maker community and XBTO is reflected in the establishment of a smart contract serving as a receptacle for funds and the ability for MakerDAO to recover its funds on-chain. **Bankruptcy remote framework** MakerDAO assets will be segregated from XBTO’s current accounts into a newly created special purchase vehicle (SPV) account held at their custodian, Stablehouse, and/or at one of their prime brokers in a way to minimize financial risk. **Fiat/Stablecoin conversion** Stablehouse will ensure all conversions from USDC to fiat and vice versa. ### MIP120c7: Custody Stablehouse, a Bermuda-regulated institution, offers full-service, fully-customizable custody solutions tailored to their client’s specific needs. Stablehouse offers segregated custody solutions to clients, giving them security, transparency, and exclusive access to their crypto. Furthermore, through their partnership with XBTO, Stablehouse provides trading solutions to clients, allowing them to execute trades competitively across spot and derivative markets and complete large orders rapidly and reliably. Lastly, Stablehouse offers a white label custodian and trading platform, allowing partners to host a full-service, fully-customizable custody, and trading platform tailored to their specific needs. The Bermuda Monetary Authority (BMA) is Stablehouse’s regulator. Under BMA regulation, Stablehouse provides digital asset opportunities in one of the world’s most secure environments. Bermuda is a global leader in digital-asset law with a robust legal and regulatory framework under the "DABA Act" 2018. Bermuda upholds strict international standards to prevent money laundering and terrorist financing. The Bermuda Monetary Authority has active oversight and supervision over every product Stablehouse brings to market. With regards to the custody and securities held on behalf of MakerDAO, they will be under the custody of Tier 1 Financial Services Institutions. Stablehouse will work directly with Circle to convert USDC into fiat to invest in traditional fixed-income assets. ### MIP120c8: Collateral Onboarding **Legal & Governance Verification** A community member with legal credentials must publicly affirm, through a forum post confirmed by at least one Facilitator, that the legal and governance structure is suitable for XBTO to hold a large amount of low-risk RWA asset collateral on behalf of MakerDAO. **Investment Program Verification** A Facilitator or member of the Strategic Finance Core Unit must make a public forum post to confirm, regarding MIP120c3, that the tools implemented by XBTO provide secure guarantees for low-risk RWAs and that XBTO’s management service for MakerDAO is high quality. **Technical Verification** The technical implementation will follow specifications defined in [MIP21](https://mips.makerdao.com/mips/details/MIP21). XBTO will work with the Collateral Engineering Service (CES-001) to ensure technical implementation. ### MIP120c9: Fee Structure 0.85% of AUM annually, paid quarterly alongside interest distributions. ### Closing Remarks Now is the best moment we’ve seen in years to generate premium risk-adjusted yields on short-duration fixed-income credit products in decades. As there may be forthcoming economic upheaval, it is crucial to have a proficient traditional credit team to navigate through these turbulent and rapidly evolving markets. The global head of XBTO’s Fixed Income and Credit division possesses extensive experience in the fixed-income sector, having weathered through all market conditions throughout the past 15+ years, including the depths of the Great Financial Crisis. If ratified, MIP120 will help MakerDAO generate meaningful yield for the Surplus Buffer, provide a liquid and diversified investment profile, diversify Maker's fixed-income credit holdings, and reduce counterparty risk in off-chain asset managers. This proposal is well-founded with the backing of an established crypto company (XBTO) combined with the traditional finance expertise of the Credit and Fixed Income team. In the wake of the collapse of CeFi yield products in 2022, MIP120 provides a scalable solution to generating attractive risk-adjusted returns on stablecoin holdings through the acquisition and active management of short-duration fixed income, US Treasuries, Investment Grade Corporate and Structured Credit Securities, and ESG/Green Bonds. ### Legal Disclaimer The information should not be construed as legal, tax, financial, or other advice or as a recommendation to purchase any securities. **NOT A SOLICITATION OR OFFER** This presentation is not an offer to sell or the solicitation of an offer to purchase any securities. This presentation is not to be relied upon in any way by any person in evaluating an investment decision. **NO RELIANCE ON PAST PERFORMANCE** XBTO recommends that the prospective investor consult an independent professional advisor in assessing the merits and risks of investing in our products. **XBTO’S OBJECTIVES AND STRATEGY** No representations or warranties of any kind are intended or should be inferred with respect to the economic returns or tax consequences of an investment. **FORWARD-LOOKING STATEMENTS** No representation or warranty, express or implied, is made by the Firm, in respect of the products and services, or as to the accuracy or completeness of the information contained herein, and nothing contained herein is, or shall be relied upon as, a promise or representation as to the future performance of XBTO.