0xd0fe2019…4331sent to0xb024ac5a…a016·#21,797,992·view on Etherscan
# Change Proposal - Update eligible collateral mechanics to support on-chain validation and NAV valuation (version 1.30 of Adopted Guidance)
In November 2024, a proposal was made to M^0 Governance to [add Superstate Short Duration US Government Securities Fund (USTB) as collateral structure for Minters](https://governance.m0.org/proposal/94076058891953421140440107380042033227831317322634932193709118209818379159510) on the network. Such a proposal did not put forward any changes to eligible collateral mechanics, so use of Superstate USTB would still demand off-chain book entries look-through and daily market valuation. That proposal was approved.
In further investigating the innovations brought to market by Superstate, it is clear that there are many advantages in, when possible, supporting validation based on on-chain collateral entries (above and beyond off-chain ledger look-through) as well as third-party NAV based valuation (above and beyond daily market value). The advantages lie in the 24x7 and non-intermediated nature of these mechanics, which allow for more efficient and available minting of $M.
In order to incorporate those advantages, the present proposal details an expansion of M^0 eligible collateral mechanics. The objective is to pave the way to alternative eligible collateral validation and valuation mechanics that can benefit from innovative US T-bill wrapper products such as Superstate USTB and others.
For any questions, please contact [joao.reginatto@m0.org](mailto:joao.reginatto@m0.org).
## Change #1
### Section: 2.1. Actors
**Old:**
Validator: The Validator independently verifies that the amount of collateral to be published on-chain appropriately exists and is compliant with appropriate eligibility criteria. While, in the current construct and based on the Adopted Guidance, existence means physical existence in the accounts at the custody bank in the name of the SPV, we expect the role of Validator to evolve jointly with the evolution of the nature of the underlying available collateral (e.g. appropriate tokenization).
**New:**
Validator: The Validator independently verifies that the amount of collateral to be published on-chain appropriately exists and is compliant with appropriate eligibility criteria. We expect the role of Validator to evolve jointly with the evolution of the nature of the underlying available collateral (e.g. appropriate tokenization).
## Change #2
### Section: 2.2. Mandatory Contracts
**Old:**
With Collateral Storage we identify the collection of venues such as Securities and Cash Accounts, as well as digital asset accounts, held by the SPV.
**New:**
With Collateral Storage we identify the collection of venues such as Securities and Deposit Accounts, as well as digital asset accounts, held by the SPV.
## Change #3
### Section: 2.4.1. Update Collateral Process
**Old:**
Some key financial definitions are outlined below:
- Cash Equivalents are amounts, denominated in the Reference Currency, held in either Cash Accounts or in the form of so-called stablecoins (including M) in wallets.
- Cash Account is the cash account held by the SPV with the Account Bank.
- Account Bank is defined as any entity appointed by the SPV to act as an account bank.
- The Reference Currency throughout this document is USD (United States Dollar).
An example collateral update flow is shown in the picture below:
**New:**
Some key financial definitions are outlined below:
- Deposit Equivalents are amounts, denominated in the Reference Currency, held in either Deposit Accounts or in the form of so-called stablecoins (including M) in wallets.
- Deposit Account is the demand deposit account held by the SPV with the demand deposit providers.
- Custody Account is the securities account or digital asset account held by the SPV with custody providers.
- The Reference Currency throughout this document is USD (United States Dollar).
An example collateral update flow, assuming a look-through validation of the collateral, is shown in the picture below:
## Change #4
### Section: 2.4.1. Update Collateral Process
**Old:**
4. Validator verifies the existence of the Collateral (e.g. via its read access to the depository account), verifies the compliance with the eligibility criteria and, potentially, verifies the implementation of Mandatory Contracts.
**New:**
4. Validator verifies the existence of the Collateral (e.g. via its read access to the depository account or, in case of eligible tokenized collateral, via observation of distributed ledger entries), verifies the compliance with the eligibility criteria and, potentially, verifies the implementation of Mandatory Contracts.
## Change #5
### Section: 3.1. Criteria for Eligible Collateral
**Old:**
i. Criteria for the Eligibility of Assets:
- United States Treasury Bills with a remaining time to maturity of 180 days or less.
- Wrappers of United States Treasury Bills such as money market fund units that comply with the above mentioned remaining time to maturity criteria - subject to specific definition of the financial product in scope.
- List of approved wrappers: Superstate Short Duration US Government Securities Fund (commonly referred to as USTB)
ii. Ancillary Criteria for the Eligibility of Assets:
- So-called In-Transit Cash, defined as Cash Equivalents in an amount equal to placed-and-executed-but-not-yet-settled buy orders for assets defined in (i). In case such orders are ultimately canceled, settled, or never settled, such balances shall no longer be recognized.
- So-called In-Transit Securities, defined as executed-but-not-yet-settled sell orders for assets defined in (i) (at the time of purchase) in case, for the avoidance of doubt, neither the securities nor balances in Cash Equivalents are listed in the Collateral Storage (and more specifically Securities and Cash Account of the SPV).
It is important to highlight that aside from the preceding exceptions, neither Cash Equivalents nor any other type of asset should be considered Eligible Collateral.
**New:**
i. Criteria for the Eligibility of Assets:
- United States Treasury Bills with a remaining time to maturity of 180 days or less.
- Wrappers of United States Treasury Bills such as money market fund units (in so-called tokenized form over appropriate distributed ledgers—such as Ethereum Mainnet—or traditional book entry form) or any other comparable wrapper, that comply with the above mentioned remaining time to maturity criteria - subject to specific definition of the financial product in scope.
- List of approved wrappers: (1) Superstate Short Duration US Government Securities Fund (commonly referred to as USTB)
ii. Ancillary Criteria for the Eligibility of Assets:
- So-called In-Transit Cash, defined as Deposit Equivalents in an amount equal to placed-and-executed-but-not-yet-settled buy orders for assets defined in (i). In case such orders are ultimately canceled, settled, or never settled, such balances shall no longer be recognized.
- So-called In-Transit Securities, defined as executed-but-not-yet-settled sell orders for assets defined in (i) (at the time of purchase) in case, for the avoidance of doubt, neither the securities nor balances in Deposit Equivalents are listed in the Collateral Storage (and more specifically Custody Account and Deposit Account of the SPV).
## Change #6
### Section: 3.2. Valuation Policy for Eligible Collateral
**Old:**
Eligible Collateral shall be recognized at their daily market value (according to the last closing price) published on www.treasurydirect.gov.
It is understood that Validators and Minters might not observe the same market price in case they access the market data at different times. Minters shall consider this when requesting signatures for updateCollateral() calls from Validators. With Signature we refer to the cryptographically hashed meta information of a transaction with the private key of the Validator which allows the Minter to perform a certain Protocol transaction after the Validator has verified that the conditions for such a transaction are met.
In proposing valuation options for Eligible Collateral, the Adopted Guidance document has considered two alternative options: mark-to-market, and at-cost, opting ultimately for a mark-to-market approach. The two options somehow reflect similar accounting methodology for so-called held for trading or available for sale assets, and have a set of pros and cons that have been analyzed when proposing one over another:
- Fair value representation: the current executable market price of an asset remains the most accurate representation of its value at any given time. By opting for a mark-to-market approach Minters would see the immediate benefit of the appreciation of a fixed income asset as it approaches maturity, without having to realize it. Given the eligible instruments, we believe that a mark-to-market approach would allow Minters to operate based on the most accurate level of overcollateralization
- Non-arbitrage: reflecting collateral value fluctuations on-chain can prevent misalignments and unexpected behaviors due to arbitrage opportunities among parties. This is particularly important in scenarios of extreme price movements driven by significant interest rate changes. We are aware that recognizing the mark-to-market fluctuations of fixed income instruments on-chain, even without the obligation for a Minter to redeem those assets at will, could expose the structure to interest rate risk and, in extreme scenarios, bank-run phenomena. While we believe that those effects should be accounted for and mitigated by appropriate levels of overcollateralization, similar to what happens for a bank's core capital, we think that the nature of Eligible Collateral today, as well as the dominant macroeconomic conditions, make those risks manageable.
- Capital efficiency: the continuous increases in Minters' Owed M due to the accrual of Minter Rate introduces natural pressure on the Collateralization Ratio. Valuing collateral at market price can alleviate this pressure, due to the time value of the instruments currently considered eligible.
- Technology agnostic: the valuation of Eligible Collateral is independent from the technological wrapper it is stored in, assuming this wrapper does not insert additional risk layers for the holder. This means that, for instance, in case of an explicitly approved investment in fund units, the NAV calculation of the fund is ignored and a look-through approach is applied to evaluate the value of the underlying assets. In case additional risk layers are instead added by the wrapping technology, appropriate haircuts should be defined as part of this document.
**New:**
Eligible Collateral shall be recognized at their daily market value (according to the last closing price) published on www.treasurydirect.gov. Alternatively, for approved wrappers, the recognition of the most recent NAV (net asset value) calculated by a third-party agent and published by the asset manager / fund administrator is admissible.
It is understood that Validators and Minters might not observe the same market price in case they access the market data at different times. Minters shall consider this when requesting signatures for updateCollateral() calls from Validators. With Signature we refer to the cryptographically hashed meta information of a transaction with the private key of the Validator which allows the Minter to perform a certain Protocol transaction after the Validator has verified that the conditions for such a transaction are met.
In proposing valuation options for Eligible Collateral, the Adopted Guidance document has considered two alternative options: mark-to-market, and at-cost, opting ultimately for a mark-to-market approach. The two options somehow reflect similar accounting methodology for so-called held for trading or available for sale assets, and have a set of pros and cons that have been analyzed when proposing one over another:
- Fair value representation: the current executable market price of an asset remains the most accurate representation of its value at any given time. By opting for a mark-to-market approach Minters would see the immediate benefit of the appreciation of a fixed income asset as it approaches maturity, without having to realize it. Given the eligible instruments, we believe that a mark-to-market approach would allow Minters to operate based on the most accurate level of overcollateralization
- Non-arbitrage: reflecting collateral value fluctuations on-chain can prevent misalignments and unexpected behaviors due to arbitrage opportunities among parties. This is particularly important in scenarios of extreme price movements driven by significant interest rate changes. We are aware that recognizing the mark-to-market fluctuations of fixed income instruments on-chain, even without the obligation for a Minter to redeem those assets at will, could expose the structure to interest rate risk and, in extreme scenarios, bank-run phenomena. While we believe that those effects should be accounted for and mitigated by appropriate levels of overcollateralization, similar to what happens for a bank's core capital, we think that the nature of Eligible Collateral today, as well as the dominant macroeconomic conditions, make those risks manageable.
- Capital efficiency: the continuous increases in Minters' Owed M due to the accrual of Minter Rate introduces natural pressure on the Collateralization Ratio. Valuing collateral at market price can alleviate this pressure, due to the time value of the instruments currently considered eligible.
## Change #7
### Section: 4.3. Obligations of SPV Operators
**Old:**
The mandate of the SPV Operator to manage the collateral is intended to have the main objective be to protect the stability of M under all possible circumstances. For this reason, the Adopted Guidance suggests prudence in adopting technological innovation (e.g. in the form of tokenized securities) at this level of the stack.
**New:**
The mandate of the SPV Operator to manage the collateral is intended to have the main objective be to protect the stability of M under all possible circumstances. For this reason, the Adopted Guidance suggests prudence in adopting technological innovation at this level of the stack.
## Change #8
### Section: 4.3.1. Obligations in the Normal Course of Business
**Old:**
To that extent, the SPV Operator shall use most or all available financial resources (including Cash Equivalents) to purchase Eligible Collateral. Some flexibility on reinvestment should be provided to the SPV Operator in order to timely fulfill existing or foreseen Retrieval Requests. It shall do so whenever available financial resources are existing in the Collateral Storage unless such available financial resources are part of a Retrieval Request or the amount is economically negligible. The following chart shows the replenishment of Eligible Collateral in the Normal Course of Business:
[...]
1. Any liquidity event affecting any collateral instrument (e.g. upon maturity of the instrument or as regular interest payment or other cashflow) is paid within the Collateral Storage, or more specifically to the custody bank accounts of the SPV.
**New:**
To that extent, the SPV Operator shall use most or all available financial resources (including Deposit Equivalents) to purchase Eligible Collateral. Some flexibility on reinvestment should be provided to the SPV Operator in order to timely fulfill existing or foreseen Retrieval Requests. It shall do so whenever available financial resources are existing in the Collateral Storage unless such available financial resources are part of a Retrieval Request or the amount is economically negligible. The following chart shows an example of the replenishment of Eligible Collateral in the Normal Course of Business:
[...]
1. Any liquidity event affecting any collateral instrument (e.g. upon maturity of the instrument or as regular interest payment or other cashflow) is paid within the Collateral Storage, or more specifically to the custody accounts of the SPV.
## Change #9
### Section: 4.3.3.3. Maintenance of Administrative Buffer
**Old:**
Administrative Buffer is defined as a reserve of 25,000 worth of Cash Equivalents that the SPV Operator can use to cover possible off-chain administrative costs, such as assisting with the Wind Down of the Minter or resolving legal disputes, according to the rules set out in the Adopted Guidance. Such a buffer should exist within the Collateral Storage in a way considered satisfactory by the SPV Operator, but should not in any case be simultaneously pledged to the system as Eligible Collateral for minting. For the avoidance of doubt, the SPV Operator shall be allowed to use the Administrative Buffer to ensure operations in cases where the Minter is unwilling or unable to cooperate.
**New:**
Administrative Buffer is defined as a reserve of 25,000 worth of Deposit Equivalents that the SPV Operator can use to cover possible off-chain administrative costs, such as assisting with the Wind Down of the Minter or resolving legal disputes, according to the rules set out in the Adopted Guidance. Such a buffer should exist within the Collateral Storage in a way considered satisfactory by the SPV Operator, but should not in any case be simultaneously pledged to the system as Eligible Collateral for minting. For the avoidance of doubt, the SPV Operator shall be allowed to use the Administrative Buffer to ensure operations in cases where the Minter is unwilling or unable to cooperate.
## Change #10
### Section: 5.2. Eligibility Criteria for Permissioned Validators
**Old:**
- Have technical visibility of the Collateral Storage, and specifically the ability to connect to the SPVs bank and securities accounts, e.g. via API, direct observation of a distributed ledger,blockchain inspection or other technical means, as well as to exchange Signatures with the Minter.
**New:**
- Have technical visibility of the Collateral Storage, and specifically the ability to connect to the SPVs custody accounts, e.g. via API, direct observation of a distributed ledger, or other technical means, as well as to exchange Signatures with the Minter.
## Change #11
### Section: 5.3. Obligations of Validators
**Old:**
This requires the Validators to have full visibility on:
- The Minter’s Collateral Storage, including its Cash Accounts.
- All order flows of such accounts.
- The appropriate wallet addresses of a Minter’s Collateral Storage.
**New:**
This requires the Validators to have full visibility on:
- The Minter’s Collateral Storage, including its Deposit Accounts.
- All order flows of such accounts.
- The appropriate blockchain addresses of a Minter’s Collateral Storage.
## Change #12
### Section: 6.3. Obligations of Minters
**Old:**
Administrative Buffer can be made in Cash Equivalents. If the SPV Operator is making use of the Administrative Buffer or parts thereof in accordance with the criteria set out in the Adopted Guidance, the Minter shall replenish the Administrative Buffer so that it meets or exceeds the defined amount for the Administrative Buffer before submitting any further mint proposal.
**New:**
Administrative Buffer can be made in Deposit Equivalents. If the SPV Operator is making use of the Administrative Buffer or parts thereof in accordance with the criteria set out in the Adopted Guidance, the Minter shall replenish the Administrative Buffer so that it meets or exceeds the defined amount for the Administrative Buffer before submitting any further mint proposal.
## Ratification of the Present Proposal
In case executive change proposal "[Approve proposed version 1.20 of Adopted Guidance](https://governance.m0.org/proposal/111598624494659651497171260661592899898519458663128410147749314441996472640492)" is ratified, it is recommended that the execution of the present proposal follow the streamlined Adopted Guidance change process. In such a case - and assuming no other changes to the Adopted Guidance are proposed in this cycle, the changes mentioned above will have resulted in the proposed version 1.30 of the Adopted Guidance document, as found in the link below. Upon approval of the present proposal, the ratified version of the Adopted Guidance will be updated on https://docs.m0.org, and communicated to ecosystem actors.
[https://github.com/m0-foundation/adopted-guidance/blob/main/m0_adopted_guidance_v1.30.pdf](https://github.com/m0-foundation/adopted-guidance/blob/main/m0_adopted_guidance_v1.30.pdf)
New document hash `0b53b0b912540852c87b0ccc3ed58baa4635027f9234a961c54d3ab1337a9ab7`.
In case change proposal "[Approve proposed version 1.20 of Adopted Guidance](https://governance.m0.org/proposal/111598624494659651497171260661592899898519458663128410147749314441996472640492)" is not ratified, or there are additional Adopted Guidance changes proposed in this epoch, such ratification step for the current proposal might be moved to the next voting epoch.
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