[SIXS/RWA-001] 6S Preliminary Contracts Assessment

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6S Preliminary Contracts Assessment

This is a preliminary contract assessment for the 6S Trust Structure. Overall, no critical issue was found but the contractual documents might deviate significantly from what one could have understood last year.

We want to have a law firm review those contracts but this might take a while. Therefore, here is a preliminary assessment to provide early answers.

Some definitions for this document:
Delaware trust = the Trust, RWA Senior Lending Trust
Cayman entity = RWA International Ltd, Tax Favorable Entity (TFE), Trust Sponsor, Depositor
Trustee = WSFS, Wilmington Savings Fund Society

On the power of the Trustee

The Trust Model assumes that the trust is managed by a respectable and regulated trustee which acts as a third party. In this case, it is WSFS.

This is mitigated by the fact that the Trustee (on behalf of the trust) doesn’t sign a lot of the contract and doesn’t get notice of much of what is happening anyway.

Actually, the Cayman entity is running the Trust and making the calls.

While presented as a purely administrative piece of the proposed project and of no importance, the study of the documents shows that the Cayman Entity is the centerpiece of the whole scheme.

The Cayman Entity is the beneficiary of the Delaware Trust and makes most decisions of the Delaware Trust. Most (all?) Trust contracts are signed by the Cayman Entity as the Trust Sponsor.

More specifically, all powers fall on a person called “Maarten”, which is presented as @maarten

It is unclear at this stage what would happen if Maarten disappears.

It is unclear if the Cayman Entity owners (Crestbridge Cayman Limited) would accept directions from anyone and specifically from MakerDAO. And if they would accept direction from a third party, what is the limitation of the directions they would accept from this person?

It should be noted as well that the Trust Sponsor can be changed by MakerDAO, but that seems to require an act of the Trust Sponsor.

Secure conduit

Per MIP21, a secure conduit is created on the blockchain that funnels the DAIs from the Maker Vault to the Delaware Trust. The secure conduit has one hop to an address owned by the Tax Favorable Entity (in Cayman Island). The process is gated so the DAI can’t go outside of the conduit at this step. This was called the secure conduit which was on-chain.

This is no longer the case after inspection of the contracts provided. Indeed, there is now an Escrow agreement between the Cayman entity and the Delaware trust. Genesis (the DAI<->USD broker) will transfer the converted DAI to the escrow account of the Cayman entity located at WSFS.

The Cayman Entity is needed to trigger the money movement. MakerDAO has no control over this entity.

While it seems unlikely at this stage that the money can be transferred to another third party, the money might get stuck in this escrow account if the Cayman Entity fails to act.

Maker representatives

There was a signal request to set up a group of Maker Representatives. They had some special rights and a duty to monitor the lending, described as follow:

No trace of those Maker Representatives exists in the documents. Those actions will probably not be done by the Trustee but by the Cayman Entity and, more specifically, “Maarten”.

During the risk assessment, we agreed with Matthew on the following part.

Notice that there is no need to have documentation for that. If there is a breach or no willingness to satisfy it, the Maker Governance can simply shut down the vault.

Alternatively, @mrabino1 appointed @g_dip RWA Co. to do the reporting. Unsure at this stage if it’s a replacement or addition.

RWF can’t monitor something without having access to underlying information and should not be expected to if this is the case.

Preliminary conclusions

It seems to the author that there are more similarities than not between the Trust Model and the Centrifuge Model.

In the Centrifuge model, the SPV is managed by the asset originator This can cause a conflict of interest, which is why we have a legal audit and will add Independent Directors. The financial audit is done by the RWF Core Unit off-chain (using an audit right letter). The Tinlake pool enforces the flow of money.

In this Trust model implementation, the Trust is managed by the Trust Sponsor which is chosen by the Asset Originator. The Trustee is some kind of guardrail. The Maker Representatives will have some audit rights (while no contract is signed, Maker can shut down the vault). The escrow account and the verification agent enforce the flow of money.

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Let’s get this moving it’s taking way too long.

Adding to the previous article, there are 2 more issues with the Cayman part of the 6S structure. While the first part was serious but not critical (if you trust Maarten), those ones could be criticals taken together.

Complicit breach of duty from the Trustees

The Cayman Trust is acting for the benefit of charities. But in reality, it works for the benefit of MakerDAO (something @g_dip even made clear in the Deleware Trust Agreement). This would lead to a complicit breach of duty from the Cayman Trust Trustees.

This fact is even worse as the documents are public. The charities will most likely be aware of it at some point.

The irrevocable transfer instruction might not be irrevocable

There is a Irrevocable Transfer Instructions for the Genesis account. But there seems to be no reason the Cayman Company couldn’t change the instructions.

Assessment

If correct, taken together, the risk is critical as charities could be able to force the Cayman Trust to funnel the cashflows to them. This is even more so as MakerDAO is not lending to the Cayman Company but making a contribution, so there are no obligations regarding the protocol to start with.

@g_dip @mrabino1

Given the current state of affairs with the Centrifuge model…why are we not getting a lawyer with domain expertise to evaluate and report on the 6S trust structure? If the answer is only time is of the essence for BD purposes…we may need to reevaluate whether the material risk of something occurring 6 - 12 months from now was worth not delaying it a non-material amount of time to get a proper evaluation from a professional…

I think I ask this before – can the Community appoint more than 1 individual? Maybe 3, 4 or even 5? And yeah, what ever happened to the Maker Representatives that were voted-in, On-chain? Did that ever go to an Exec. Vote? @LongForWisdom

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As reported, RWF CU is contracting with law firms (both US and Cayman), we are getting progress but KYC of a DAO is making things harder. There were plans for a legal CU, but this was delayed sine die. So there were delays and my initial budget wasn’t planed for legal expenses. We should be full speed on that this summer.

MKR token holders are the ones making the call on prioritizing business vs safety.

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From my understanding…and @mrabino1 spoke of this on the AMA…the DAO can appoint, but the directors of the Cayco have the sole discretion to appoint authorized reps. As of this moment, the DAO has put forth 5 or so potential candidates to be authorized reps, but Crestbridge Directors have yet to approve those members, only Maarten at this point in time.

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Understood. Thank you for the quick turnaround on a response. I am +1 for safety. This is a novel concept. Let us not be the means of self-destruction because crypto works at speeds that are different than regular business hours

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Telegram stopped being updated with info. Kind of went nowhere since.

Can you please tell us what law firms the RWF CU has contracted with? I think it would behoove all of us to have a legal eye conduct some analysis and review here.

And Seb, that statement is not entirely true – we did not have the ability to make the call with New Silver after they changed a material term with their vault, as others have commented.

The only way, in my opinion, to overcome this apparent impasse is for a reputable law firm to provide analysis on the 6S structure. As an MKR holder, I think that is the least we deserve with regard to the 6S option and especially given the amount of collateral affiliated with Centrifuge’s structure coming down the pipe.

So…they aren’t “irrevocable”? It seems to me that if Genesis – a highly reputable B/D with multiple US state and federal regulatory overseers – states that its transfer instructions are irrevocable, it will not abide by any attempt by anyone, including the Cayman Company, to change those rules. If the Cayman Company were to try that, I believe the structure would fall apart (but from a common sense perspective, that just seems absolutely unlikely). Again, we really need some legal expertise here, calling all lawyers!

The Cayman Company could sign an agreement with a third party that the Irrevocable Transfer Instruction will never be changed. They could even make an NFT out of it.

It’s in the works, and I report monthly on the process, see this.

I can’t share more publicly with respect to our partners as contractual documents are still not done yet, but I hope to be able to share a memo.

I would agree with you but I’m not a lawyer. This is why we are working with lawyers.

Indeed, that seems to be the solution that is usually used for those cases. But getting a proper answer will have a cost.

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Great. Thank you.

I keep telling the same to the guys at @Protocol-Engineering, but those lazy-os insist on crushing bugs and moving at a safe pace.

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As others have said legal review is appropriate, but I also add to not assume this is a 3-alarm issue. It looks bad on its face but it wouldn’t be the first time lawyers have successfully, legally used a trust in a “broken” fashion or for a purpose that on its face doesn’t appear correct. Google Crummey Trust.

By the way, Matt provided a more thorough reply to this concern (among others) in this post: 6s and related matters

Apologies for not linking it here sooner.

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Please find below the legal review of Ogier regarding the Cayman part of the transaction. There is nothing really new, it’s just for completion.







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