Bluechip - STEP Program Manager

I. Applicant information

Name – Bluechip Ratings Inc.

Address - 254 Chapman Road

Ste 208 #11690

Newark, DE 19702

United States

Website – www.bluechip.org

Disclosure: We are in the process of transitioning from a US non-profit corporation to a for-profit LLC structure in Europe. This transition is expected to be completed by June 2024.

Primary contact Name - Vaidya Pallasena / @Deathereum

Title – Cofounder & Ratings Director

Country - Portugal

Email – vaidya@bluechip.org

Telegram - @deathereum

Signal - @deathereum.08

II. Applicant Details

1. Please describe your company

Bluechip was founded in August ’22 as the first stablecoin rating agency and formally launched its ratings in July ’23 at StableSummit. The idea was born from the Luna crash in May ’22.

We launched with the mission to provide unbiased evaluations to make crypto and stablecoins safe for millions of users, small or big – as evidenced by some of our unpopular ratings of popular stablecoins. Our stablecoin ratings are free for all – now and forever – and our rating and scoring methodology are fully open-sourced to enable anyone to challenge our work and hold us accountable.

As part of our transparency and willingness to embrace feedback, we regularly engage with stablecoin issuers and prominent participants in the crypto space.

Our advisory board, and supporters consists of leading economists from George Mason University and other notable crypto entrepreneurs (see Disclosure | Bluechip)

Bluechip not only provides detailed explanation of stablecoin risk, but also provides simple and easily digestible outputs in the form of letter grades.

Our stablecoin ratings API is used by crypto products such as rwa.xyz (RWA Analytics), Reserve (protocol to create stable assets), 3cities.xyz (Payment protocol) and Mt Pelerin (Fiat on/off-ramp)

In addition to our ratings, we also publish a free, weekly roundup of everything fresh and interesting in stablecoin land.

Bluechip is now expanding beyond stablecoins ratings and can bring its safety-focus to other verticals.

2. Please give a bio of key team members and their relevant experience. Also mention the name and bio of the point of contact that will engage with Arbitrum DAO if selected. References are encouraged.

Vaidya Pallasena (primary contact)

Vaidya is the Ratings Director of Bluechip and formulated the SMIDGE rating framework. He is a Chartered Accountant and a former auditor from EY, a Big4 accounting & audit firm. With a career spanning over 10 years in finance, he has a background in M&A, venture/private equity investing and auditing.

Garett Jones

Garett is the Chief Economist of Bluechip. He is a Professor of Economics at George Mason University. His scholarly research has spanned monetary policy, corporate finance, and institutional economics.

Benjamin Levit

Benjamin is the CEO of Bluechip. He discovered crypto, as a professional poker player, in 2016 and applied his risk management skills to the world of digital currencies. Before Bluechip, Benjamin founded a successful e-commerce business and led operation, finance, and brand building functions within the organization.

References:

3. Total team size – 4

4. Number of Years in Operation – ~2

III. Applicant Performance

5. Past experience if any for performing each of the roles and responsibilities described in the appendix (Divide your answer into three sections corresponding to the 3 parts in the appendix).

This proposal marks Bluechip’s diversification beyond stablecoin ratings. However, our stablecoin rating framework can naturally be extended to evaluate the safety of tokenized stable-asset ETFs and treasury asset funds, which are materially similar to stablecoins.

Additionally, our Cofounder & Ratings Director, Vaidya, has prior experience performing the same or similar roles in other capacities. He is a Chartered Accountant (CA) by qualification and a former auditor from EY, a Big 4 accounting and audit firm. He has performed financial, process & control audits of public listed and private corporations across industries spanning financial services, real estate, healthcare, and energy.

Also, a former M&A / Corporate Development professional, his responsibilities included
(a) financial, commercial, and legal due diligence of financial service companies engaged in lending, venture debt and treasury management,
(b) acquisitions, and divestments of regulated, non-banking lending companies and loan portfolios and
(c) managing stakeholder relationships (at regulatory, board and execution levels) & deal operations.

He has hands-on experience in all the areas mentioned below. Some examples are provided.

a) Cashflow & Accrual Monitoring

  • Audits of corporate treasury & cash management portfolios comprising sovereign treasury instruments, debt & money-market funds, corporate debts etc
  • Audits & financial due diligence of lending companies, loan portfolios (retail & corporate)
  • These projects involved verification of PnL & balance sheet values through
  1. reconciliations to underlying investment/loan documents and bank account statements
  2. re-computation of interest, fees and carrying values,
  3. obtaining confirmations from third parties, custodians, borrowers,
  4. ‘cut-off testing’ procedures to ensure receipts & accruals are recorded in the correct period

b) Underlying Asset Monitoring

  • As part of audit engagements highlighted above, he has performed process and control audits to ensure investments/loans are sanctioned in accordance with risk mandates and SOPs and to identify and report deviations therefrom.
  • As an (a) acquirer of lending companies and (b) lender to other lending companies, he has performed portfolio due diligence (risk analysis) and compliance testing for adherence to loan covenants.

c) Operations & Counterparty Monitoring

  • This section includes elements that are substantially similar to Bluechip’s stablecoin evaluation process (i.e, tracking attestation/audit reports, counterparties, terms, and conditions etc), and are a natural extension of Bluechip’s assessment methodology.
  • Process and control audits - These involve the study of functional SOPs, identification of key parties involved in each process, testing of control mechanisms, and reporting findings to a company’s board or audit committee.

Combining our expertise in traditional auditing, M&A & stablecoin ratings, Bluechip can develop a monitoring program applying audit & portfolio risk assessment methodologies/processes and tailor them to the requirements of Arbitrum DAO.

6. Describe any conflicts of interest your entity, its investors or key personnel may have with any potential service providers selected under the program

Neither Bluechip nor its key personnel (a) have a formal relationship with or (b) have equity/governance token holdings in any potential service provider under the STEP program.

We have no relationships with or obligations to third parties that could jeopardize our independence. However, we disclose the following indirect links to potential service providers to prevent any perceived conflicts of interest, now or in the future.

i. Nic Carter, an advisor to Bluechip, is an investor in Mountain Protocol and Ethena through Castle Island Ventures.

ii. ABC Labs has put forward an application on behalf of KNOX Dollar, an independently deployed RToken on the Reserve Protocol. Confusion Capital, the entity that funds the operations of ABC Labs will have a small equity stake in the new Bluechip entity as part of an IP swap arrangement.

Also see Disclosure | Bluechip.

7. Under what situations would you make a recommendation for Arbitrum to withdraw its assets from a selected service provider to fulfill each aspect of the outlined scope in the appendix?

Bluechip will make a withdrawal recommendation if any of the events highlighted below are triggered. Upon the final selection of service providers, appropriate tolerance thresholds will be identified.

a) Repeated instances of delays in payment of accrued interest

b) Repeated instances of payment of interest incongruent with targeted rates

c) Repeated instances of delays in fulfilling reporting obligations

d) Underlying instruments in the service provider’s portfolio differ from mandated instruments/risk exposures, without prior consent of the STEP Committee, DAO or other designated person(s)

e) Repeated failure to adhere to committed redemption timelines

f) Material changes to service provider’s counterparties, without sign-offs from the STEP Committee, DAO or other designated person(s)

g) Material changes to the product’s terms or legal structure, without sign-offs from the STEP Committee, DAO or other designated person(s)

h) Material changes to service provider’s key managerial personnel or risk management team, without sign-offs from the STEP Committee, DAO or other designated person(s)

i) Material regulatory changes pertaining to the service provider, issuer or any counterparty, which may have a direct impact on the STEP portfolio

j) Material observations or remarks in service provider’s audit, attestation and legal reports or opinions, or issuer’s failure to provide such reports within stated timelines without adequate explanation

k) If the STEP portfolio composition appears to be minimally diversified across a spectrum of key risks or violates any diversification guidance laid down, Bluechip will make recommendations to rebalance the portfolio

l) If in the opinion of Bluechip, the funds managed by a service provider are either subject to enhanced risk (more than what was initially accepted) or yield is inadequate to compensate for risk taken

8. Please list any experience your firm has in working with decentralized organizational structures

Bluechip has not directly worked with DAOs. However, the team is familiar with DAO governance practices as part of its evaluation of decentralized stablecoin projects.

9. What is the value of assets monitored by your entity?

Bluechip tracks stablecoin reserve assets through third-party attestation reports, issuer reports and on-chain data, wherever available. To date, Bluechip has detailed coverage of 22 stablecoins, including all the majors.

See https://bluechip.org/

10. Can you explain how risk management (investment and operational) is being done for assets under monitoring?

Bluechip’s role is to provide commentary and ratings on stablecoin risk based on our SMIDGE Rating Framework.

Our overall score & grade for each stablecoin are substantially driven by our assessment of risk associated with the following elements:

a) Quantum and quality of reserves
b) Storage and custody of reserves
c) Segregation of reserve assets and bankruptcy-remoteness
d) Reliability of the stability mechanism
e) Types and extent of third-party oversight that an issuer is subject to, such as audits & attestations
f) Governing regulations and jurisdictions

Our rating framework has been vetted by leading economists and experts from financial and crypto markets.

The full version of our rating framework can be found here and our scoring process is explained in our Scoring Guidelines.

11. Describe the content, format and preparation process of performance reports. This should include details of interest earned and status of total assets. Provide a sample if available.

Bluechip’s reporting obligations to the Arbitrum DAO periodically will include a deliverables package comprising:

a) Fund Flow Tracking
(with transaction-wise fund movements such as investments, redemptions, and interest receipts)

b) Portfolio Tracking
(with summary and detailed information categorized by issuer, strategy, instrument/entity structure, instrument type, weighted average maturity, interest accruals, interest receipts and other relevant analytics)

c) Exception Tracking
(detailed log of all exceptions/deviations from mandates and processes, with service provider explanations and remedial measures taken)

d) Operations Master file
(Compilation of service provider audit, attestation and other reports, counterparty list, key investment terms and other material operational information pertaining to each service provider)

Illustrative samples have been sent over email.

Reporting Process

  1. At the commencement of the engagement, the Treasury Working Group (TWG) shall establish a direct communication channel between Bluechip and each appointed service provider.
  2. As part of the onboarding process, Bluechip shall perform a preliminary study of each issuer to develop a thorough understanding of each issuer, their product, processes and reporting practices.
  3. Bluechip, with inputs from the TWG, shall develop a monitoring program and determine the reporting frequency. The program shall consist of both routine and unplanned checks, subject to appropriate expectation setting between the DAO and service providers.
  4. Based on steps 2 and 3, the reporting template and cadence for each deliverable is finalized.
  5. For each reporting period, Bluechip will engage with the respective POCs of each service provider to obtain documentation, information, or clarifications to fulfil its obligations.
  6. Our monitoring process will involve a combination of substantive testing and analytical procedures as well as randomized process tests.
  7. The findings of each reporting period or any surprise checks, along with our recommendations, shall be made available by Bluechip to the Treasury Working Group, DAO, STEP Committee or any other person appointed by the DAO.

Bluechip is fully committed to the success of Arbitrum DAO and its STEP Program, and will undertake any additional responsibilities as needed.

IV. Applicant Pricing

12. Provide a copy of your standard contract, or one similar to what is being proposed here.

A new contract will have to be drawn up between Bluechip and Arbitrum DAO.

13. Comprehensive pricing breakdown inclusive of the full scope of services requested

In the interest of building a long-term relationship with Arbitrum DAO, we propose a simple and flexible risk-minimized pricing model for a 12-month engagement.

The specifics have been shared over email and can be shared publicly after the application deadline.

14. Terms of fee payment such as upfront vs monthly costs

Shared over email.

15. Approximate percentage of your annual budget that this service contract would constitute ? (eg: if annual expenses are $100 and proposed contract is $10, then 10% is the answer).

Shared over email.

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