Legal risks if Circle blacklist any USDC held at Maker

Writing an article about MakerDAO and flagging the > 60% of assets held with Circle as a risk. With the dissolution of the Maker Foundation, what will the legal situation be if a dispute arises between MakerDAO and Circle?

I would appreciate if the following points could be addressed:

  1. Legal personality
    Whom would be the party to Circle’s “USDC User Agreement” if any USDC held by Maker was blacklisted?

  2. Possible unlimited liability
    In the event of litigation between the beneficiaries of Maker and Circle, are the assets of Maker’s beneficiaries held in a limited liability structure, or could the DAO be considered merely an unincorporated association with unlimited liability?

  3. Authority to instruct counsel
    Outside of the RWA unit, do any of the MakerDAO contributors have experience instructing attorneys in banking / finance context? Who has authority to give instructions to a law firm on behalf of the DAO and what is the basis for this authority?

  4. Origin of funds
    If there is an allegation that funds held by MakerDAO (in Circle/USDC or otherwise) are commingled with the proceeds of crime, what procedures does the DAO have in place to satisfy any third party (including legal representatives) of the origin of funds? Is there a ring fenced pool of funds to pay legal expenses which has a demonstrably “clean” origin?

  5. In the event that some or all of the USDC is frozen, it does not seem that the market cap of MKR would support sufficient new MKR token issuance to restore full backing to DAI. As any freeze could result in protracted negotiations and a prolonged period of uncertainty, what approach would the DAO take to maintain the DAI peg in the interim?

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The short answer is that Circle is unlikely to blacklist us on their own. Maker holds enough of their float that it would almost certainly be a major credit event for them. Simultaneously, if we asked them to redeem the USDC we hold, they almost certainly would be unable to meet the obligation in a timely manner.

The real danger is if they are forced to freeze the USDC due to a legal request like a subpoena. That would be unlikely to be permanent, but would certainly be bad.

Functionally, that only matters if DAI were consistently under peg and those USDC reserves were required to maintain the peg.

Note that diversification of these dollar-proxy reserves is a high priority — MakerDAO recently opened a similar arbitrage facility (peg stability module) for the Paxos stablecoin. More are envisioned for the future, as well as alternatives in the fixed income markets when we figure out how to do that. Other forms of reserves may also be proposed in the future.

Hope that helps and happy to chat generally. I’m sure others are as well.

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Thank you for your reply.

As it is inexpensive to generate a large number of wallet addresses, would it mitigate the risk somewhat to spread the USDC reserves over a few thousand wallet addresses, as it seems any freeze request would be directed against a wallet linked to suspicious activity.

My understanding is that currently there are only a few Ethereum addresses controlling MakerDAO’s USDC reserves.

My direct, anecdotal conversations with regulators and policymakers lead me to believe a legal action would not be against a wallet address but against something like “the Maker Protocol.” They lack the technical expertise or interest that would allow us to “hide out” that way.

Even if they did, that would be 1) a game of whack-a-mole that would surely lead to individuals here at Maker being hit, and 2) would demonstrate bad faith and an intention to skirt laws that can’t lead to good outcomes.

Remember that much of XRP’s legal woes likely stem from their head guy flaunting regs at Prosper, winning, and then doing the exact same playbook at XRP. Memories are long, and the staff in compliance agencies are typically not ones to let a bad reputation go unpunished.

There is no reason to pick a fight we cannot finish, and Maker is well positioned to project an image as the professional, adult crypto protocol.

Note that these views and opinions are my own, and it is impossible to predict what the DAO would choose to do.

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I’m not a lawyer, but from what I’ve seen of asset forfeiture cases (jurisdiction in rem), the action is against the asset. See e.g. United States of America v. $124,700 in U.S. Currency, 458 F.3d 822 (8th Cir. 2006)

This isn’t about hiding. It is about making it easier for the issuer to freeze funds which are associated with suspicious activity while protecting funds not so commingled from being temporarily frozen. As far as I know, the USDC smart contract only allows blacklisting at the address level.

Therefore a question might be why is Maker appearing to taking a little additional risk by keeping all funds in a small number of addresses when creating more addresses is nearly free? Tainted funds could then presumably be locked while affecting only a subset of Maker’s total USDC assets. This guarantees the tainted funds are frozen while not affecting the rest of the protocol.

There is no skirting or hiding as Circle need a list of wallets which hold their ERC-20 token in order for USDC to function, and the addresses controlled by Maker would be public.

Can I ask what else, aside from offering other assets in the PSM, is being done to address the USDC issue? Not being combative, genuinely interested in how we solve a decentralized asset being majority backed by a centralized one.

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Thank you for your reply. There are a few points from my initial post still unanswered, will someone from Risk be able to comment in the not too distant future so I can better understand how Maker handle this risk before publishing the article?

@Risk-Core-Unit tagging y’all here.

Note that legal risks are unlikely to be ones they weigh in on, but will leave it to the Risk CU to respond definitively.

Best of luck, and let us know if there’s anything else we can provide that’s public information.

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How is it different from Uniswap, Compound, or Aave where USDC is stored in one or few places?

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Will you share a copy of this article pre-publication, so to the extent there are errors or misrepresentations (however unintinded), the Maker community has the opportunity to correct?

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Hey! What a coincidence that you’re here — I was thinking about how Crypto needs to focus on solving Real World Problems instead of shilling jpegs of penguins, apes, and like yours, Iguanas :lizard:. And since you’re a journalist—can you write article on how we should get crypto to focus on solving Real World Problems instead of writing about the same old boring stuff, like another USDC article—its yesterday’s news (crypto moves quickly) and quite frankly, pretty boring IMO.

Let’s be honest—flexing a jpeg of an ape, penguin, and iguana is cool and cute—but there’s no way jpegs takes crypto to $40 Trillion in market cap (S&P is currently at $36 Trillion).

Instead we need to focus on solving Real World Problems. As an example—I have a friend who’s a journalist and they get paid by the number of clicks they get from their write-ups. Therefore, my friend writes 20+ articles per month to pay the rent and has to pray to God :pray:t3: that folks click on her articles. Thats bananas! There’s gotta be a better way.

I believe a great article would be on how blockchains can help journalist like my friend stop writing click-bait articles just to pay the bills. I truly believe DeFi + Cryptography + social tokens, etc., can pave the way to solve Real World Problems.

So, I ask that you instead focus on writing an article on how swapping jpegs between each other is not going to take us to $100 Trillion. Solving Real World Problems is what we as a community of DeFi + journalist like yourself need to focus on. Writing about USDC is kind of like yesterday’s news to be honest. Let’s take it to another level! We can make it happen.

And always remember, the most successful people in the world live in the future @BowTiedIguana

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