Arbitrum Treasury Diversification RFP (Submission)
Applicant Information
- Company Name: Frictionless Markets
- Address: 2C, Parc d’activités, L-8308 Capellen Grand duchy of Luxembourg
- Website: https://frictionless.markets
- Primary Contact: Kazuhiko Yasuda, Head of Institutional Sales
- Email: kaz@frictionless.markets
Key Information
The Frictionless Institutional Cash U.S. Treasury Fund (fsISTUSTD) is a digital investment fund exclusively invested in Underlying BlackRock Institutional Cash Series US Treasury Funds. Frictionless Institutional Cash Funds generate daily yield paid by default in US$ Cash Deposit tokens. Investors may alternatively elect to receive their yield in Stablecoin (USDC) or Bitcoin. For Bitcoin yield elections, overall returns will be influenced by Bitcoin price movements, potentially enhancing or reducing total performance.
Expected Yield
The expected yield for our Frictionless Institutional Cash US Treasury Fund is benchmarked against the Secured Overnight Financing Rate (SOFR), which serves as the primary reference rate for USD derivatives and financial contracts. The Frictionless Institutional Cash US Treasury Fund is a tokenized issuance of the BlackRock Institutional Cash Series US Treasury Fund (Distributing)
As of March 17, 2025, the current annualised return (1-Day rate) is gross 4.37% before fees as published by the underlying manager BlackRock Institutional Cash Series PLC whilst maintaining daily liquidity, daily distributions and capital preservation.
Our fund maintains a maximum total expense ratio (TER) of 0.45%. Therefore, the expected net yield of the fund will be approximately 1-Day rate minus 0.45% This translates to an expected net yield of approximately 3.92%. Specifically, for this STEP 2 program a discounted pricing scheduled is offered in section on Pricing
Please note that:
- Money market yields fluctuate daily based on changes in the SOFR benchmark
- Historical performance indicates our fund has consistently tracked within 10 basis points of the SOFR benchmark
- The fund’s actual yield is updated daily and published on our client portal
- Our investment strategy emphasizes capital preservation and liquidity while optimizing yield within regulatory constraints
- In case you choose to receive yields in Bitcoin, the overall return would be influenced by Bitcoin price movements, which could enhance returns during price appreciation or reduce them during price declines.
For the most current SOFR rates, please refer to the Federal Reserve Bank of New York’s official website: https://www.newyorkfed.org/markets/reference-rates/sofr
The rates for the underlying BlackRock Institutional Cash Series fund are delivered at https://www.blackrock.com/cash/en-ie/products/228412/blackrock-ics-us-treasury-core-dis-fund, please note the quoted rates are net of 20bps BlackRock management fee, therefore to calculate the true gross 1-Day rate, simply add 20 bps to the quoted 1-Day return.
Expected Maturity
Our Frictionless Institutional Cash US Treasury Fund is structured as an evergreen investment vehicle with no fixed maturity date. This perpetual structure allows investors to maintain their capital investment for as long as they wish while still enjoying high liquidity.
For investors wishing to redeem their investment, the fund offers exceptional liquidity with a streamlined withdrawal process:
- Withdrawal requests received by 23:00 CET (Luxembourg) on any business day will be processed the same day
- Funds will be available in the client’s designated account by the end of the next business day (T+1 settlement), although FIAT settlement occurs intra-day if processed before 15:00 CET (Luxembourg)
- No minimum holding period or early redemption penalties apply
- No advance notice period beyond the standard one business day settlement is required
This redemption flexibility is a core feature of our fund design, ensuring that investors can access their capital efficiently when needed without compromising on yield or security. Our investment strategy specifically accounts for this liquidity requirement by maintaining appropriate cash reserves and laddering maturities within the portfolio.
While the fund itself has no maturity date, the underlying portfolio maintains a weighted average maturity (WAM) of 40-60 days and a weighted average life (WAL) of no more than 120 days, in accordance with regulatory requirements and conservative risk management practices.
This combination of evergreen structure with next-business-day liquidity provides investors with both long-term stability and short-term flexibility to meet their cash management needs.
Underlying asset
The Fund follows an investment approach typical of institutional-grade money market funds, investing in a diversified portfolio of high-quality, short-term money market instruments denominated in US Dollars. The fund is designed to provide investors with a combination of security of capital, liquidity, and competitive money market returns.
Principal Investment Strategy
The fund primarily invests in the following instruments:
- US Treasury Bills, Notes, and Obligations: Government securities issued by the US Treasury
- US Government Agency Securities: Debt instruments issued by US government-sponsored enterprises and federal agencies
- Repurchase Agreements (Repos): Short-term agreements collateralized by US Government securities
- Commercial Paper: Short-term, unsecured promissory notes issued by corporations with high credit ratings
- Certificates of Deposit (CDs): Time deposits issued by highly-rated domestic and foreign banks
- Time Deposits: Interest-bearing bank deposits with specific maturity dates
- Corporate Notes and Bonds: Short-term debt securities issued by high-quality corporations
- Asset-Backed Securities: Securities backed by pools of assets such as credit card receivables
- Municipal Securities: Short-term obligations issued by state and local governments
Investment Guidelines
The fund adheres to strict guidelines to maintain high credit quality and liquidity:
- All securities purchased carry high credit ratings from major credit rating agencies
- The fund maintains a weighted average maturity (WAM) typically between 30-60 days
- Maximum final maturity for any security is 397 days (13 months)
- Daily liquid assets comprise at least 10% of the portfolio
- Weekly liquid assets comprise at least 30% of the portfolio
The investment manager employs a disciplined approach to security selection, emphasizing fundamental credit analysis, yield curve positioning, and sector allocation to construct a diversified portfolio designed to preserve capital while providing liquidity and competitive yields.
The fund’s investment strategy complies with applicable regulatory requirements, including SEC Rule 2a-7 standards for money market funds. The fund seeks to maintain a stable $1.00 per share Net Asset Value (NAV), although as with all money market funds, there can be no assurance that this objective will be achieved.
Minimum/Maximum transaction size
Our Frictionless Institutional Cash U.S. Treasury Fund is designed to accommodate a wide range of investor needs with flexible transaction parameters:
Initial Investment
- Minimum Initial Investment: $1,000.00 USD (One thousand U.S. Dollars or equivalent in local supported currency or digital asset, including ARB). Investments made using ARB or any listed USD denominated pair are converted to US. Dollars through our Coinbase Prime Broker account.
- Maximum Initial Investment: No upper limit (Note lower tiered pricing applies at higher investments, see Pricing for more information)
Subsequent Transactions
- Minimum Additional Investment: $0.01 USD
- Minimum Withdrawal Amount: $0.01 USD
- Maximum Additional Investment: No upper limit
- Maximum Withdrawal Amount: No upper limit (up to the investor’s total holdings)
Transaction Processing
- All transactions are processed at the fund’s next calculated Net Asset Value (NAV).
- For same-day processing, transaction instructions must be received by 23:00 CET (Luxembourg) on business days.
- Instructions received after the cut-off time will be processed on the next business day.
- Electronic funds transfer and stablecoin are accepted for subscriptions.
- Electronic funds transfer, stablecoin and Bitcoin are offered for daily yield distributions.
- Electronic funds transfer and stablecoin are offered for redemptions.
Account Maintenance
- No minimum balance requirements after the initial investment.
- Accounts may remain open with any positive balance.
- No transaction fees for standard subscriptions or redemptions.
This flexible structure allows institutional investors to manage their cash efficiently, whether deploying large capital reserves or executing precise cash management strategies that require penny-precision transactions. The absence of maximum limits and the minimal incremental transaction size provide optimal liquidity management for our clients.
Current AUM for product
Current AuM for the product can be viewed at https://frictionless.markets/fsistustd
As of 16th of March 2025, total capital currently deployed in the tokenized fund is $420,292.51 USD
Current AUM for issuer
The total AuM for the underlying fund for this share class can be viewed at https://frictionless.markets/fsistustd.
As of 16th of March 2025, total underlying fund for this share class is 25.7 billion U.S. Dollars or $25,773.65 (Millions) USD
Volume of transactions LTM
As of March 16th 2025, Frictionless Institutional Cash US Treasury Fund has:
- Issued 272 continuous days of daily yield to Investors, representing ~4000 daily yield token issuances to Investors.
- Transacted approx 2 Million USD in investment, distributions and redemptions, including daily yield distributions, monthly auto-compounding
- Returned an average of 4.8% (Net) to Investors since launch on 17th June 2024.
- Operated 24/7 without any failures or service interruptions.
- Operated the BTC yielding (Inflation Resistant Strategy) since October 26th 2024, a 141 day continuous strategy, enabling Investors to accept daily yield in BTC, opening a risk free Bitcoin Treasury to Investors using dollar cost averaging from the US Treasury fund yield.
The entire on-chain trading history of this fund for investments, auto-compunding and redemptions is located on the AVALANCHE C-Chain at:
https://43114.snowtrace.io/token/0x6Ac2Bb4b20Bf7f5351B4Ac1D87eDF233367fE926.
The token is also fully launched on Arbitrum. It is our desire to drive volume on the Arbitrum chain similar to the Avalanche chain.
The Arbitrum contract is:
https://arbiscan.io/address/0x2d1bb131e26c689c092edede3290be533c810ad2
The list of all daily distributions are published on our site at https://frictionless.markets/transparency
Each monthly distribution contract settles on the first day of each month.
The transparency of the fsBTC fund is delivered in partnership with ChainLink and can be viewed at:
https://data.chain.link/feeds/avalanche/mainnet/fsbtc-reserves
Source of first-loss capital:
Our Frictionless Institutional Cash US Treasury Fund is a direct investment vehicle, not a structured product such as a Collateralized Loan Obligation (CLO) or other credit tranched instrument. As such, the concept of “first-loss capital” or credit subordination does not apply to this fund.
Basics and background
How will this investment improve Arbitrum’s RWA ecosystem?
Frictionless Markets’ investment offering significantly enhances the Arbitrum RWA ecosystem by introducing high-quality U.S. Treasury-backed assets. These assets provide a reliable source of liquidity and stable income, independent of the volatility of the broader crypto market. Furthermore, by integrating institutional-grade financial instruments into the Arbitrum ecosystem, the proposal strengthens treasury diversification, mitigating risks associated with purely digital assets.
Frictionless Markets was awarded a 25K ARB grant by the foundation in August 2024 to deploy our financial instruments on Arbitrum, since then we have deployed all our instruments on Arbitrum and completed the cross chain settlement in partnership with ChainLink, which enables stablecoin holders on any other supported chain to settle their investments into the Frictionless Institutional Cash US Treasury Fund and Bitcoin Treasury Fund directly on Arbitrum without the need for bridges.
Identify key management personnel and their experience.
Pat Hourigan
CEO & Founder
Pat Hourigan is a seasoned industry leader with a proven track record of driving growth and innovation in the technology and financial markets sectors. With 20+ years of expertise in both technology and digital markets, Mr Hourigan leads Frictionless Markets as group CEO.
Kazuhiko Yasuda
Head of Institutional Sales
Kaz Yasuda is a veteran of the capital markets, he joined Frictionless from FIRSTavenue Partners, a global placement agent with a track record of over 30 billion U.S. dollars of capital raising for institutional clients. Mr Yasuda has global responsibility for all institutional sales at Frictionless Markets.
Paul Buckley
Chair & Head of Capital Markets
Paul is FIRSTavenue’s Managing Partner and CEO. Paul founded FIRSTavenue in 2006 and enjoys 18 years of experience advising GPs in the private funds market. Under his leadership, FIRSTavenue has been an early mover in private infrastructure, private credit, real estate debt and energy transition. From 1987 to 2006, Paul worked in the European debt capital markets principally at Credit Suisse First Boston in London where he trailblazed in the securitized product, CLO, structured credit, and leveraged finance markets.
Brendan Flanagan
Head of Legal & Regulatory Affairs
Brendan Flanagan is an accomplished legal professional with a diverse background in corporate and IT law in the regulated aviation and financial sectors. In this capacity at Frictionless Markets, he holds the pivotal role in shaping the innovative regulatory posture of Frictionless Markets within Luxembourg and the EU.
Describe any previous work by the entity or its key personnel similar to this request.
Frictionless Markets has a proven track record in developing institutional-grade tokenized money market funds. These products have been successfully integrated with leading asset managers and custodians, reinforcing the company’s ability to deliver efficient and compliant financial solutions.
As of 16th of March, 2025, the Manager (Frictionless Markets) and its fund structures (Frictionless Markets Securities) has:
- Issued Institutional Deposit Tokens in 5 currencies (USD, GBP, EUR, HKD, JPY)
- Issued Institutional Cash Funds in US Treasury, Sterling Gov and Euro Gov Funds
- Transacted approx 2 Million dollars across our cash management solutions
- Distributed 272 days of daily yield without any failures or break
- Distributed 141 days of Bitcoin yield for US Treasury funds in partnership with Coinbase Prime without any failures or break.
Has your entity or its key personnel been subject to enforcement action, criminal action, or financial default?
The company operates with full legal and financial integrity, with no pending legal actions and strict compliance with Luxembourg’s Financial Collateral Act and MiFID II regulations.
Along with this application, we attach a letter from our certified chartered accountants on the financial status and good standing of the funds and the Manager.
Describe any conflicts of interest for your entity and key personnel.
No conflicts of interest have been identified concerning Arbitrum governance or its treasury working groups.
Provide details on insurance coverage, guarantees, and backstops.
Given the Frictionless Institutional Cash US Treasury Fund is exclusively and fully invested in BlackRock Institutional Cash Series and given that Investors through the securitization structure hold the tokens as legal financial instruments and collateral, see our appendix Legal opinions, the additional overhead of a backstop is not required.
For INvestors who choose the invest their daily yield into the Frictionless Bitcoin Treasury Fund, all Bitcoin within the fund is securitized so token holders have a legal claim on the Bitcoin held in secure custody with a 350M USD insurance policy with Coinbase Custody International and fully collateralized 1:1 with the matching Bitcoin as declared on the fsBTC circulation.
Provide historical tracking error data.
Attached is the historical performance and the tracking error data of the Frictionless Institutional Cash US Treasury Fund, which illustrates the fund has outperformed the SOFR rate since its inception on 17th June 2024. The annualised tracking error of the fund since inception is 1.00% p.a.
The data is provided in the supplemental fund comparison model.
Brief reason for above tracking error
The fund has historically outperformed SOFR. This is due to the Weighted Average Maturity of the portfolio being maintained longer than SOFR in the declining rates environment.
| Metric | Value |
|---|---|
| Std Dev (Frictionless Institutional Cash US Treasury Fund Rate): | 0.38 |
| Std Dev (SOFR Rate): | 0.42 |
| Covariance (Fund vs SOFR): | 0.16 |
| Std Dev of Differences: | 0.06 |
Figures are on daily data
Annualised Tracking Error: 1.00%
Key Takeaways from the Data:
-
Fund Rate Std Dev (0.3823) vs. SOFR Std Dev (0.4198)
- The fund rate is less volatile than SOFR, suggesting stability in returns over time.
- This aligns with the idea that a fund with a weighted maturity will smooth out short-term rate fluctuations.
-
Positive Covariance (0.1594)
- The positive covariance indicates that the fund rate moves in the same direction as SOFR but with a buffered effect due to WAM.
-
Standard Deviation of Differences (0.06 daily / 1.00 annualised)
- The tracking error is on the high end for a U$ Money Market Fund benchmarked against SOFR
- This is due to the fund maintaining 40-60 days Weighted Average Maturity in a declining rate environment, which strategically positioned the portfolio to benefit from falling rates
Describe any experience working with decentralized organizational structures.
Frictionless Markets has actively engaged in partnerships with DAOs and decentralized governance frameworks, facilitating seamless integration of tokenized assets into treasury management strategies.
We filed for the Spark Grand Prix, which can be viewed at
In September 2024, we received a grant of 25K ARB from the Arbitrum foundation to port our financial instruments to Arbitrum and complete the build of our cross chain settlement solution.
What are your entity’s current assets under management, and how much is held on Arbitrum One?
The entire AuM at present across all currencies (Institutional Deposit Tokens), cash funds (US Treasury, Sterling Gov Liquidity Fund) and Bitcoin Treasury Fund is 500k USD.
All instruments were deployed on Arbitrum as per our grant agreement awarded through Arbitrum Foundation and Areta in September 2024. Each financial instrument product page on our site contains the Arbitrum smart contact and token block explorer URL.
Plan Design
Describe your proposed product, including underlying assets, allocations, and investment guidelines.
Overview
The Frictionless Institutional Cash US Treasury Fund (fsISTUSTD) is a Luxembourg-based tokenized fund that offers investors exposure to the BlackRock Institutional Cash Series (ICS) US Treasury Fund. This underlying fund is a public debt constant net asset value (CNAV) short-term money market fund that aims to maintain a stable net asset value of 1.00 USD.
The fund’s primary objective is to preserve principal and provide same-day liquidity to USD by maintaining a portfolio of high-quality, short-term government debt and repurchase agreements. It invests in US Treasury bills, notes, and other obligations guaranteed by the US Government, as well as repurchase agreements collateralized by these securities. This strategy ensures increased liquidity and aims to offer investors a stable and secure investment option.
Structured as a floating rate note, the fsISTUSTD Fund is tokenized using ERC-20/ERC-3643 standards, allowing for permissioned trading on various blockchain networks including Avalanche, Ethereum, and Base.
The fund offers daily dealing with a minimum investment of USD 1,000 and a minimum redemption of just USD 0.01. It provides daily distributions and monthly coupon redemptions, catering to investors seeking regular income. The fund is rated by major agencies including S&P, Moody’s, and Fitch, reflecting its commitment to maintaining high standards of quality and stability.
Managed by Frictionless Markets S.à.r.l and domiciled in Luxembourg, the fund operates under the Securitisation Law of 22 March 2004. It’s important to note that this fund is exclusively available to accredited (professional client) investors in compliance with MiFID II regulations.
In summary, the Frictionless Institutional Cash US Treasury Fund represents an innovative blend of traditional money market fund stability with the advantages of blockchain technology, offering professional investors a unique option for managing cash holdings in the evolving digital financial landscape.
The underlying asset
The BlackRock Institutional Cash Series (ICS) US Treasury Fund is the underlying asset/fund for the Frictionless Institutional Cash US Treasury Fund (fsISTUSTD).
Frictionless Markets publishes its daily attestations of the fsISTUSTD tokenized fund on our site at https://frictionless.markets/transparency including:
Trading Reports: Daily activity summary statements contain the record from the order book-entry system for the given date range. These include all buy (investment), sell (redemption) and accrual (daily distributions) for the specified fund.
Holdings Reports: Daily holdings reports define what exposure investments have to underlying assets, such as government bonds, repurchase agreements or cash. These holdings contain the weighted balance of investments in each specific asset as % of the whole portfolio for the specified fund.
1. Classification:
It’s classified as a “Short Term Public Debt Constant Net Asset Value Money Market Fund” according to EU Money Market Funds Regulations.
2. Objective:
The fund aims to generate a moderate level of income while maintaining capital and ensuring underlying assets remain liquid under normal market conditions.
3. Investment Strategy:
- Invests in a diverse array of government fixed-income securities (bonds), money market instruments (short-term debt securities), reverse repurchase agreements and cash.
- At least 99.5% of the fund’s assets are securities, instruments, or obligations issued or guaranteed by the United States government or another sovereign government, reverse repurchase agreements referencing such assets, and cash.
- All assets are denominated in US Dollars.
4. Duration of invested treasuries:
- Invests only in assets with 397 days or less remaining until full principal repayment.
- Maintains a weighted average maturity of up to 60 days.
- Maintains a weighted average life of up to 120 days.
5. Active Management:
The fund is actively managed, with the investment manager, BlackRock, having the freedom to choose investments without being limited by any benchmark.
6. Valuation:
Uses the amortised cost method for valuation, with a comparative NAV calculated daily using either mark-to-market or mark-to-model methods.
7. Performance Benchmark:
Investors can use the Secured Overnight Financing Rate (SOFR) to compare the fund’s performance.
8. Risk Profile:
Rated as 1 on the Synthetic Risk and Reward Indicator (SRRI), indicating lower risk but also potentially lower rewards.
9. Inception:
The fund was launched in 2008.
10. Key Risks:
Include counterparty risk, credit risk, and sensitivity to interest rate changes.
11. Liquidity:
Offers daily dealing with same-day liquidity under normal market conditions.
This fund is designed to provide a stable, liquid investment option for institutional investors seeking exposure to US government securities while aiming to preserve capital and generate moderate income.
Products with which subscription and redemption can be made
Subscriptions and redemptions for the fsISTUSDT Fund (‘the Fund’) can be made using a diverse range of currencies, including traditional fiat currencies, stablecoins, and major cryptocurrencies, offering investors extensive flexibility in their transactions.
For fiat currencies, the Fund accepts a variety of major global currencies. These include the US Dollar (USD), Euro (EUR), British Pound Sterling (STG), Hong Kong Dollar (HKD), Japanese Yen (JPY), United Arab Emirates Dirham (AED), and Singapore Dollar (SGD). This wide selection of fiat currencies enables investors from various regions to easily participate in the Fund without the need for currency conversion.
Frictionless Markets operates an on-chain FX spot and forward service enabling Investors to invest and/or settle in any supported currency into any fund. For example, this novel approach enables Japanese Investors to invest using JPY in the higher-yielding US Treasury products with daily distributions and the massive liquidity of the BlackRock Institutional Cash Series funds.
The Fund also embraces the growing importance of digital assets by accepting certain stablecoins for subscriptions and redemptions, the Fund extends its flexibility to major cryptocurrencies, accepting Arbitrum(ARB), Bitcoin (BTC) and Ethereum (ETH) for transactions. This inclusion of leading cryptocurrencies demonstrates the Fund’s commitment to embracing digital assets and catering to crypto-native investors.
This comprehensive approach, accommodating fiat currencies, stablecoins, and major cryptocurrencies, reflects the Fund’s progressive stance and its aim to cater to a wide range of investor preferences. It provides traditional investors with familiar options while also appealing to those more comfortable with digital currencies and crypto assets, thus broadening the Fund’s accessibility and appeal in an evolving financial landscape.
What rights do investors have?
Tokenholders of the Frictionless Institutional Cash Funds enjoy a comprehensive set of rights and protections, underpinned by robust Luxembourg and European Union legislation. These rights are designed to ensure that tokenholders have equivalent protections to traditional securities holders, while also benefiting from the advantages of blockchain technology.
The rights of token holders are protected under several key pieces of Luxembourg legislation:
- The Luxembourg Securitization Law of 2004 (as amended)
- The Financial Collateral Act 2005 (as amended)
- The Blockchain Acts I, II, III & IV (as amended)
These laws collectively ensure that tokenholders have the same legal and economic rights as traditional investors in orphan entities, and bankruptcy-remote securitization compartments. This means that token holders can expect:
- Clear ownership rights of their tokens, legally recognized and protected.
- The right to receive any distributions or interest payments associated with their tokens.
- The ability to transfer their tokens, with such transfers recognized as valid and binding.
- Protection of their assets from potential bankruptcy of the fund issuer or service providers.
- Equal treatment among all token holders of the same class.
- The right to access relevant information about their investment.
- Legal recourse through the Luxembourg legal system if their rights are violated.
It’s important to note that the Luxembourg Securitisation Law of 2004 was recently amended, with changes coming into force in March 2022. These amendments were specifically designed to provide enhanced investor protection, further strengthening the rights of tokenholders.
By leveraging Luxembourg’s position as the world’s dominant securitization location, tokenholders benefit from the legal protections of both Luxembourg and the broader European Union. This dual layer of protection provides a robust framework for safeguarding investor interests in the evolving landscape of blockchain-based financial instruments.
Describe the legal and contractual structuring of the product.
The issuance of the fund tokens qualifies as a financial instrument under the Securitization Law, Financial Collateral Act and Blockchain Laws of Luxembourg. A robust legal opinion which has been vetted by the CSSF (Luxembourg regulator) can be provided as a supplement to this application.
All fsISTUSTD Fund tokens are issued by the FRICTIONLESS MARKETS SECURITIES Securitisation Fund RCSL O46, organised under the laws of Luxembourg and represented by FRICTIONLESS MARKETS Sàrl its Management Company, RCSL B272278 with the Legal Entity Identifier LEI, 213800PVGXAUM7KDT872 within the bankruptcy remote and orphan-entity protected compartment with the name fsISTUSTD.
The fund is an Article 19 fund under the provisions of the CSSF (Luxembourg) and the EU MiFID II Prospectus Regulation.
Investors sign a subscription agreement to subscribe to the tokens, the tokens are the certificate of the investor’s subscription under the laws of Luxembourg.
The documentation of the fund describes the legal structure, issuances and key investor terms, namely:
Additionally, the Fund documents are provided in the following Private Placement Memorandum
In the case where the daily yield is paid out in Bitcoin, the yield is held in our 1:1 backed Bitcoin Treasury Fund as described at https://frictionless.markets/fsbtc
The Factsheet, Final Terms and DDQ for fsBTC can be located on the product page above.
Would Arbitrum’s assets be bankruptcy remote?
All Frictionless Markets Securities funds, including the fsISTUSTD Fund (‘the Fund’) establishes bankruptcy remoteness for its assets through independent, bankruptcy remote and orphan entity protected compartments as provided by the Luxembourg Securitisation Law.
This legal framework effectively separates the securitised assets, including those in digital format, from any insolvency risks of the securitisation vehicle, the Issuer, service providers, and all other parties involved in the transaction.
In the event of bankruptcy of the originator or the servicer responsible for collecting cash flows from the assets (including digital assets and digital securities), the Luxembourg Securitisation Law ensures that the securitisation vehicle can claim ownership transfer of the securitised assets and any cash collected on its behalf before liquidation proceedings begin. This provision safeguards the Fund’s assets from being included in the bankruptcy estate of these entities.
The Securitisation Law further strengthens the Fund’s bankruptcy remoteness through three key provisions:
-
Subordination Provision: This allows investors and creditors to subordinate their payment rights to other creditors or investors, which is crucial for structuring the securitisation transaction.
-
Non-recourse Provision: Investors and creditors may waive their rights to request enforcement. For instance, if an interest payment defaults, investors can agree to defer payment without initiating legal action, accommodating known or temporary situations.
-
Non-petition Provision: This allows investors and creditors to waive their rights to initiate bankruptcy proceedings against the securitisation vehicle, protecting it from individual investors who might have an interest in such proceedings.
Regarding multiple products, the issuer, FRICTIONLESS MARKETS SECURITIES Securitisation Fund, utilises a compartment structure. The fsISTUSTD Fund operates within its own bankruptcy-remote and orphan-entity-protected compartment. This structure allows the issuer to have multiple products, each in its own compartment, without risking cross-contamination of assets or liabilities between different products.
For detailed legal opinions and supplementary documents regarding the structure of the Fund, these can be provided separately upon request. These documents offer a comprehensive legal analysis of the Fund’s structure and its compliance with the relevant provisions of the Luxembourg Securitisation Law, Financial Collateral Act and MiCA.
Provide a cash flow diagram.
We hereby provide explanation of execution of subscription order, yield distribution and redemption with respective diagrams.
Order execution into the funds is described on our public-facing materials at:
This includes the dealing cut-off times. Orders are accepted 365/24/7, once the settlement (USDC or Deposit Token clears (step 3/7), Frictionless Markets automatically books the order with the underlying fund via our CacheMatrix integration. Note that orders placed outside dealing hours (weekends) will result in the Daily Distribution Tokens being delayed issuance until the underlying fund’s transfer agent has booked the order on the next open day of trading.
For transparency, Frictionless Markets publishes its order book daily at:
- Order sent to Frictionless Markets, aggregate order can be composed of N walletAddress:amount pairs, note each entry must meet the minimum subscription amount of the fund.
- Frictionless Markets validates that the order.
- USDC/FIAT or DAI sent to Frictionless Markets and Frictionless Markets will credit fsUSD (Frictionless’s USD Deposit token) on the DAO’s master wallet, registering its legal claim on the cash until the complete order is settled.
- In the case of USDC, the Circle Mint facility is used to convert USDC to FIAT for transfer to the underlying fund (BlackRock) transfer agent (JP Morgan).
- Frictionless Invests into BlackRock ICS
a. Frictionless send order to purchase BlackRock’s USD MMF (BlackRock ICS)
b. Frictionless credit BlackRock’s account with JP Morgan - Frictionless mints the principal token of fsISTUSTD (MMF)
- Frictionless execute the token swap fsISTUSTD (MMF) using the fsUSD held in the DAO’s master wallet
- Optionally if the DAO wishes to redistribute the tokens to sub-wallets (permissioned) a batchTransfer can be called, Frictionless can also execute these batchTransfers if required.
- Balances are available on the tokens for addresses.
Yield distribution
Daily yield tokens are issued each day in batch mint at or before 12:00 CET (Luxembourg). The Daily yield tokens are calculated on the distribution from the Underlying Fund less the Underlying Fund Management Fee per Investor principal invested. Daily yield tokens mature on the 1st business day of the following month, at redemption daily yield tokens are charged the redemption fee. Fees are deducted from daily yield tokens, principal investment tokens are not subject to fee deductions.
- BlackRock CacheMatrix reports daily accrual, 365 days per year.
- Issuance of the daily yield token
a. The Frictionless Treasury executes a batchMint of the yield token per Investor for the daily distribution, directly transferring to specific wallet addresses.
b. Frictionless Markets notifies the minting of yield tokens via our OTC server & webhooks. - Balances are available on the tokens for addresses
Where Investors have chosen the BTC yielding Money Market Fund or Inflation Resistant Strategy the yield distribution is automatically order-executed on Coinbase Prime to purchase the USD equivalent of Bitcoin using either Market price, or TWAP. This enables investors in the Frictionless Institutional Cash US Treasury Fund to utilize dollar cost averaging to build exposure to Bitcoin on the balance sheet as a tax optimized permanent capital security without risking principal or having to time the market to acquire Bitcoin.
Redemption
Redemption requests are processed daily, on Luxembourg business days. Redemption requests are entered into the underlying fund order book before the trading cut-off time will be processed that day, redemptions entered after the trading cut-off time will be processed on the next business day. Settlement is in Frictionless Institutional Deposit Tokens of the same base currency. Redemption of Frictionless Institutional Deposit Tokens are subject to their specific terms and conditions.
Redemptions of fsUSD are supported to USDC and other digital assets via our Circle and Coinbase Prime/Exchange integration.
- Order sent to Frictionless Markets, aggregate order can be composed of N walletAddress:amount pairs.
- Frictionless Markets validates the order.
- Tokens will be exchanged from fslSTUSTD to fsUSD
a. Frictionless Treasury sends sell order to BlackRock
b. Frictionless Treasury exchanges fsISTUSTD for fsUSD on the DAO master wallet or directly with the sub-wallets, if they exist. This fsUSD serves as the DAO’s legal claim on the cash until the complete order is settled. - For settlement in USDC, Via our Circle Instant Mint facility, Frictionless can settle the fsUSD for USDC via our audited smart contracts.
Describe the anticipated tax consequences of transacting in the underlying asset.
The Luxembourg-based fund structure offers significant tax efficiencies, including exemption from withholding tax for non-resident investors.
The taxation directives of the Fund are described in the PPM here for non-resident investors (Non-Luxembourgish Investors)
Under Luxembourg general tax laws currently in force, there is no withholding tax on payments of principal, premium or interest made to non-resident token holders, nor on accrued but unpaid interest in respect of the tokens, nor is any Luxembourg withholding tax payable upon redemption or repurchase of the tokens held by non-resident token holders.
Note: Should the community vote to accept our offer, there is an option for Frictionless Markets to create a bespoke structure for the Arbitrum Foundation community, known as a SOPARFI. In general, there are several advantages to utilising this structure considering the scale of investment the Arbitrum Foundation community can leverage in Frictionless Institutional Cash Funds.
A Luxembourg SOPARFI (Société de Participations Financières) is a holding and financing company that offers several key advantages, especially for investors looking to optimise tax efficiency, financial structuring, and operational flexibility, such as:
Tax Efficiency
- Participation Exemption: SOPARFIs can benefit from the participation exemption regime, which allows for tax exemptions on dividends received and capital gains from qualifying holdings. This can significantly reduce or eliminate taxes on income generated from investments in subsidiaries.
- Interest Deduction: Interest payments made by a SOPARFI can generally be deducted from its taxable income, lowering its effective tax rate.
- No Withholding Tax on Liquidation Proceeds: Distributions made during the liquidation of a SOPARFI are generally free from withholding tax, making it an attractive structure for exit planning.
- Favourable Double Tax Treaties: Luxembourg has an extensive network of double tax treaties that can reduce withholding taxes on dividends, interest, and royalties paid to or by a SOPARFI in cross-border transactions.
Flexible Corporate Structure
Although primarily used as a holding company, a SOPARFI can engage in various financial activities, including holding shares, granting loans, financing activities, managing intellectual property rights, and even real estate investments.
No Specific Regulatory Supervision
A SOPARFI is not considered a regulated entity like an investment fund or financial institution, meaning it is not subject to the direct supervision of Luxembourg’s financial regulator, the CSSF (Commission de Surveillance du Secteur Financier). This makes the setup and ongoing operation simpler and less costly in terms of regulatory compliance.
Efficient Holding Structure
SOPARFIs are ideal for international holding structures, enabling investors to manage and consolidate their global investments under one umbrella. They can hold interests in both EU and non-EU companies, providing flexibility for cross-border operations.
Luxembourg’s stable and business-friendly environment ensures legal certainty and an attractive framework for managing complex financial structures.
Attractive Capital Gains Treatment
In addition to the participation exemption on capital gains, Luxembourg also offers favourable conditions for individuals holding shares in a SOPARFI, with low capital gains tax rates for residents under certain conditions.
VAT Exemptions
A SOPARFI can benefit from VAT exemptions on financial services it provides, such as granting loans or managing subsidiaries, which further enhances its cost-effectiveness.
Confidentiality and Investor Protection
Luxembourg provides strong investor protection laws and respects confidentiality regarding financial matters, ensuring that investors’ privacy is maintained while enjoying the benefits of this corporate structure.
Attractive Exit Opportunities
Given the participation exemption and the favourable tax treatment of liquidation proceeds, SOPARFIs offer attractive conditions for investors looking to exit their holdings through liquidation, M&A transactions, or divestitures.
In summary, by utilising a Luxembourg SOPARFI, Arbitrum Foundation can benefit from a combination of tax efficiency, flexibility, and international legal frameworks, for holding and financing activities into any tokenized asset class or fund issued by Frictionless Markets.
What amount of first-loss equity will the sponsor provide, and what is its source?
Our Frictionless Institutional Cash US Treasury Fund is a direct investment vehicle, not a structured product such as a Collateralized Loan Obligation (CLO) or other credit tranched instrument. As such, the concept of “first-loss capital” or credit subordination does not apply to this fund.
In the structure of our Money Market Fund:
- All investors hold the same class of shares with identical rights
- Investment returns and potential losses are shared proportionally among all shareholders
- There is no subordination of capital or waterfall payment structure
- No third-party provides credit enhancement or loss absorption
The fund invests directly in high-quality, short-term money market instruments such as US Treasury securities, government agency securities, commercial paper, certificates of deposit, and other permitted investments under applicable money market fund regulations. The value of an investor’s holdings fluctuates directly with the performance of these underlying assets.
Risk mitigation is achieved through:
- Stringent credit quality standards for all investments
- Diversification across issuers, sectors, and maturities
- Professional portfolio management and ongoing credit monitoring
- Maintaining high levels of portfolio liquidity
- Adherence to regulatory requirements for money market funds
While the fund maintains a conservative investment approach focused on capital preservation, it is important to note that money market funds are investment products, not bank deposits, and are not guaranteed by any entity. Each investor bears investment risk in proportion to their ownership stake in the fund.
Describe the liquidity and stability of the proposed underlying assets.
Underlying Asset Structure
Our Frictionless Institutional Cash US Treasury Fund is composed exclusively of high-quality, short-term fixed income instruments managed by BlackRock. The portfolio consists primarily of US Treasury securities, government agency debt, top-tier commercial paper, certificates of deposit, and other highly-rated money market instruments with short maturities. This composition ensures both stability of principal and ready liquidity.
Liquidity Profile
USD Liquidity
- Settlement Timeline: T+1 (next business day) settlement for redemptions into USD
- Guarantee Status: Near-guaranteed liquidity under normal market conditions
- Contingency Planning: Even during periods of market stress, the high quality and short duration of the underlying assets provide robust liquidity protection
- Exception Scenarios: Only in cases of extreme market dislocation or extraordinary events would USD liquidity be impaired
Major Fiat Currency Liquidity
- Available Currencies: EUR, GBP, JPY, and HKD
- Settlement Timeline: Typically T+1, consistent with USD redemptions
- Conversion Mechanism: Combination of direct currency holdings within the portfolio and institutional FX conversion of USD proceeds
- Risk Factors: Subject to standard FX market liquidity and normal settlement procedures
Digital Asset Conversion
- Available Cryptocurrencies: ARB, BTC, USDT, USDC
- Liquidity Provider: Coinbase serves as our exclusive liquidity provider for digital asset conversions
- Settlement Timeline: Variable, dependent on Coinbase’s liquidity and processing capacity
- Risk Disclosure: Cryptocurrency conversions are subject to:
- Coinbase’s available liquidity at time of request
- Blockchain network congestion and confirmation times
- Potential delays during periods of high market volatility
- Applicable regulatory compliance procedures
Stability Assurance
- The fund’s assets are managed by BlackRock, a global leader in asset management with robust risk management protocols
- Portfolio weighted average maturity (WAM) is maintained between 30-60 days to enhance liquidity while preserving yield
- Daily and weekly liquid asset minimums exceed regulatory requirements
- Stress testing is regularly conducted to ensure resilience during various market scenarios
Summary
Investors can expect reliable T+1 liquidity for redemptions into USD and major currencies under normal market conditions. Conversions to cryptocurrencies and stablecoins are facilitated through our partnership with Coinbase, with settlement times subject to their operational capacity and prevailing digital asset market conditions. The fund’s conservative investment approach prioritizes capital preservation and liquidity, making it suitable for investors seeking stable value maintenance with ready access to their funds.
What are the blockchain-related risks and their mitigations?
Our tokenized Frictionless Institutional Cash US Treasury Fund incorporates comprehensive risk management strategies to address blockchain-specific vulnerabilities. As detailed in our security documentation and Due Diligence Questionnaire (DDQ), we have implemented multi-layered safeguards to protect investor assets and ensure platform integrity.
Key Risk Areas and Mitigations
Smart Contract Vulnerabilities
- Risk: Programming flaws or vulnerabilities in smart contracts could lead to exploitation or asset loss
- Mitigation:
- Rigorous third-party security audits conducted by leading blockchain security firms, most notably Hacken.io, which awarded our protocol a perfect 10/10 security rating (https://hacken.io/audits/frictionless-protocol/)
- Implementation of formal verification processes for all critical smart contracts
- Multiple rounds of testing in controlled environments before deployment
- Ongoing security monitoring and regular re-auditing of deployed contracts
Private Key Management
- Risk: Compromise of private keys could lead to unauthorized transactions
- Mitigation:
- Multi-signature authorization requirements for all administrative functions
- Hardware security modules (HSMs) for secure key storage
- Cold storage solutions for majority of assets with strict operational security protocols
- Key sharding and geographic distribution of key components
Blockchain Network Risks
- Risk: Network congestion, high gas fees, or consensus failures on the underlying blockchain
- Mitigation:
- Implementation of gas optimization strategies for critical functions
- Ability to pause operations during extreme network conditions to prevent failed transactions
- Continuous monitoring of network health with automated response protocols
Oracle Vulnerabilities
- Risk: Manipulation of price data or other external inputs
- Mitigation:
- Use of decentralized oracle networks with multiple data sources
- Time-weighted average price (TWAP) mechanisms to prevent flash loan attacks
- Circuit breakers for extreme price movements
- Redundancy in data provision systems
Regulatory and Compliance
- Risk: Evolving regulatory landscape for tokenized securities
- Mitigation:
- Ongoing legal counsel engagement across relevant jurisdictions
- Modular contract design allowing for regulatory upgrades without disruption
- Robust KYC/AML procedures integrated with on-chain identity solutions
- Regular compliance reviews and adaptation to emerging regulations
Operational Security Framework
Our operational security framework, as documented in our security write-up, includes:
- Defense in Depth: Multiple layers of security controls throughout our infrastructure
- Principle of Least Privilege: Access controls limiting system access to minimum necessary permissions
- Segregation of Duties: No single individual has end-to-end control of critical processes
- Regular Security Assessments: Penetration testing and vulnerability scanning on a scheduled basis
- Incident Response Plan: Detailed procedures for responding to security incidents, including communication protocols
Ongoing Risk Management
As outlined in our DDQ, our risk management approach includes:
- Real-time Monitoring: Continuous surveillance of blockchain activity related to fund assets
- Governance Procedures: Transparent governance framework for addressing vulnerabilities
- Insurance Coverage: Specific coverage for blockchain-related risks through specialized providers
- Third-Party Verification: Regular verification of on-chain assets against off-chain records
- Upgrade Mechanism: Time-locked, governance-approved process for implementing smart contract upgrades
For a comprehensive understanding of our security posture, we encourage reviewing our detailed security documentation (https://docs.frictionless.markets/developer/smart-contracts/audit-and-security) and our full DDQ (https://143746732.fs1.hubspotusercontent-eu1.net/hubfs/143746732/FRICTIONLESS_MARKETS-fsISTUSTD-DDQ-v1.5.pdf), which provide in-depth analysis of our approach to blockchain security.
Does the product rely on any derivative product (swaps,OTC agreements)?
The fsISTUSDT Fund (‘the Fund’) does permit the use of hedging and derivatives in its underlying portfolio, but this is managed within a strict risk management framework. The Portfolio Manager employs a comprehensive risk management process to monitor and measure the risk associated with all open derivative positions and their impact on the overall risk profile of the Fund’s portfolio.
This process is designed to be continuous, allowing for real-time monitoring of the Fund’s exposure. The Portfolio Manager specifically uses a methodology known as the Commitment Approach to measure and manage the global exposure from Financial Derivative Instruments (FDIs). This approach aggregates the underlying market or notional values of FDIs to determine the degree of global exposure of the Fund to these instruments. Importantly, there are regulatory limits in place to control the use of these instruments. In accordance with the requirements of the Central Bank of Ireland, even if a Fund uses leverage through FDIs, the global exposure for such a Fund must not exceed 100% of that Fund’s Net Asset Value. This ensures that the use of derivatives and hedging strategies does not lead to excessive risk-taking. The Portfolio Manager maintains the flexibility to employ new techniques and instruments as they become available, subject to regulatory approval and proper risk management protocols. This approach allows the Fund to potentially benefit from financial innovations while maintaining a strong focus on risk control.
It’s worth noting that while these tools are permitted, their use is closely monitored and controlled to ensure alignment with the Fund’s investment objectives and risk profile. The ultimate goal is to use these instruments, when appropriate, to enhance the Fund’s ability to meet its objectives while carefully managing associated risks.
List all the third party counterparties linked to your assets including and not restricted to prime broker if any, custodian, reporting agent, banks for derivatives or loans and provide primary contact details for the third party counterparties
Counterparties
| Counterparty | Roles |
|---|---|
| Frictionless Markets Sàrl | Fund Manager Paying Agent Settlement Agent Transfer Agent Fund Registrar |
| BlackRock Institutional Cash Series PLC | Underlying Fund Manager Portfolio Manager |
| Citibank International Limited | Cash Custodian for U.S Dollars, British Pounds Sterling, Euros |
| Barclays Bank (Germany) | Cash Custodian for Japanese Yen, Hong Kong Dollars |
| Alpha Group (Alpha FX) | Spot & Forward FX provider (Regulated in EU under the Investment Services Act and EMI & Provision of Payment Services of Malta) |
| JP Morgan | Underlying Fund Transfer Agent |
| Coinbase Prime/Exchange | Institutional exchange partners facilitate the exchange of digital assets required in any investment/redemption into Frictionless Institutional Cash Funds or white-labelled versions of these funds. |
| Circle | USDC/U.S Dollar mint/redemption EURC/Euro mint/redemption |
| Creatrust Sàrl | Fund Admin Calculating Agent Structuring & Fund Formation Advisors |
| Audit Conseils Services Sàrl | Fund Auditor |
Can you explain how risk management (inv and operational) is being done? Can you provide a copy of your risk management policy?
Our comprehensive risk management framework addresses both investment and operational risks through a structured, multi-layered approach as detailed in our Private Placement Memorandum (PPM).
Investment Risk Management
Our investment risk management is built on several key pillars:
Portfolio Construction and Oversight
- Credit Quality Assessment: Rigorous evaluation of issuer creditworthiness through both quantitative metrics and qualitative analysis
- Concentration Limits: Strict issuer, sector, and geographic diversification requirements to prevent overexposure
- Maturity Management: Active management of portfolio duration with weighted average maturity (WAM) targets between 30-60 days
- Liquidity Requirements: Maintenance of daily liquid assets (minimum 10%) and weekly liquid assets (minimum 30%) exceeding regulatory requirements
Monitoring and Controls
- Daily NAV Calculation: Independent calculation and verification of fund Net Asset Value
- Stress Testing: Regular scenario-based stress tests examining interest rate shocks, credit events, and liquidity scenarios
- Limit Monitoring: Automated systems for pre-trade and post-trade compliance with investment guidelines
- Escalation Procedures: Clearly defined protocols for addressing limit breaches or unusual market conditions
Governance Structure
- Investment Committee: Oversight body that meets weekly to review portfolio positioning and risk metrics
- Risk Management Committee: Independent committee with authority to implement risk reduction measures
- BlackRock Portfolio Management: Leveraging BlackRock’s institutional-grade risk management infrastructure for the underlying assets
Operational Risk Management
Our operational risk framework addresses the unique challenges of a tokenized investment vehicle:
Smart Contract Security
- Multi-layered Audit Process: All smart contracts undergo rigorous security audits by leading firms, including Hacken.io which awarded our protocol a perfect 10/10 security rating
- Formal Verification: Mathematical proof techniques applied to critical functions
- Bug Bounty Program: Ongoing incentives for responsible disclosure of potential vulnerabilities
- Upgrade Controls: Time-locked, governance-approved process for implementing any protocol changes
Custody and Key Management
- Multi-signature Authorization: Multiple authorized signatories required for administrative functions
- Cold Storage Protocol: Majority of assets secured in air-gapped storage with defense-in-depth protection
- Key Sharding: Implementation of Shamir’s Secret Sharing for critical private keys
- Hardware Security: Use of specialized hardware security modules for transaction signing
Business Continuity
- Incident Response Plan: Detailed procedures for responding to security incidents
- Disaster Recovery: Geographically distributed redundancy for critical systems
- Service Level Agreements: Formal arrangements with all key service providers
- Regular Testing: Scheduled drills and exercises to validate continuity plans
Risk Governance and Reporting
Our risk management governance structure includes:
- Board Oversight: Regular risk reporting to the fund’s Board of Directors
- Independent Risk Function: Segregation of duties between portfolio management and risk monitoring
- Third-Party Validation: Independent verification of risk models and methodologies
- Investor Reporting: Regular risk reporting including metrics on credit quality, liquidity, and blockchain-specific risks
A complete copy of our Risk Management Policy is available upon request and subject to the execution of a Non-Disclosure Agreement. Our policy document is comprehensive and follows industry best practices while incorporating specialized controls for digital asset custody and blockchain operational risks.
For additional details on our risk management approach, please refer to Section 7 of our Private Placement Memorandum, which provides a more detailed discussion of our risk management framework and procedures.
Performance Reporting
What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why
Our Frictionless Institutional Cash US Treasury Fund uses the Secured Overnight Financing Rate (SOFR) as its primary performance benchmark. SOFR is the preferred reference rate for USD-denominated derivatives and financial contracts, having largely replaced LIBOR as the market standard benchmark for short-term interest rates.
Primary Benchmark
- Benchmark: Secured Overnight Financing Rate (SOFR)
- Publisher: Federal Reserve Bank of New York
- Frequency: Published daily
- Access: Publicly available at https://www.newyorkfed.org/markets/reference-rates/sofr
- Relevance: Directly reflects the cost of borrowing cash overnight collateralized by Treasury securities
Performance Objectives
- Net Return Target: SOFR minus our total expense ratio of 0.45%
- Tracking Error Goal: Minimal tracking error to SOFR before expenses
- Consistency: Stable performance relative to the benchmark across market cycles
Secondary Comparative Metrics
While SOFR serves as our primary benchmark, we also monitor performance against:
- ICE BofA US Treasury Bill Index: To evaluate performance against a broader Treasury-only portfolio
- Peer Group Analysis: Comparison to similar Frictionless Institutional Cash US Treasury Funds based on Lipper/Morningstar classifications
- Historical Performance Analysis: Rolling 30-day, 90-day, and 1-year yield comparisons
Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.
Reporting Framework
Performance against these benchmarks is:
- Calculated Daily: NAV and daily yields are computed each business day
- Reported Monthly: Comprehensive performance metrics provided in monthly statements
- Reviewed Quarterly: Detailed attribution analysis comparing fund performance to benchmarks
- Audited Annually: Independent verification of performance calculations
Performance Attribution
Our performance attribution methodology analyzes differences between fund returns and benchmark returns across multiple factors:
- Interest Rate Positioning: Impact of duration/maturity decisions
- Credit Exposure: Contribution from credit spreads versus Treasury securities
- Sector Allocation: Effect of allocations across money market sectors
- Security Selection: Value added from specific security choices within sectors
We believe the SOFR benchmark provides the most transparent and relevant measure of our fund’s performance in the current market environment. This benchmark aligns with market practices for institutional cash management and provides a clear, objective standard against which to evaluate the fund’s success in meeting its investment objectives.
Who provides the performance reports in respect of the underlying assets?
Our Frictionless Institutional Cash US Treasury Fund maintains a comprehensive, multi-layered audit framework that combines traditional financial audits with blockchain-specific security assessments to ensure both financial accuracy and technological integrity.
All Frictionless Institutional Cash Funds carry trading, investment and distribution reports directly from BlackRock CacheMatrix.
Chainlink provides the independent Proof of Reserve for fsBTC, the Bitcoin Treasury Fund by querying the blockchain wallets for the funds via Coinbase Prime and Coinbase Custody APIs.
Our commitment to transparency extends to our audit processes. All our reports are published at https://frictionless.markets/transparency
Pricing
Provide a copy of your standard contract, or one similar to what is being proposed here.
Yes, our subscription agreement to the fund is attached along with this application.
Fee summary
Inclusive of the full scope of services requested. Product Fee schedule If asset based Fee calculation for our plan if asset based Annual fee if flat fee Any other fees (including redemption or minting fees)
Please see the table provided below. We have provided net yield after our fees for illustrative purposes.
| Threshold | Management Fee | Redemption Fee |
|---|---|---|
| > 1 Thousand USD | 0.20% (20 bps) | 0.25% (25 bps) |
| > 1 Million USD | 0.20% (20 bps) | 0.10% (10 bps) |
| > 100 Million USD | 0.15% (15 bps) | 0.10% (10bps) |
| > 250 Million USD | 0.125% (12.5 bps) | 0.07% (7bps) |
| > 500 Million USD | 0.10% (10 bps) | 0.05% (5bps) |
Both Management Fees and Redemption Fees are calculated on an actual/365 day basis, meaning the fees are computed using the actual number of days the investment is held divided by 365 days.
All fees and expenses are clearly detailed in the Final Terms and Fact Sheets of the issuance. Under our strict mandate, the issuer Frictionless Markets can only charge expenses which are met by the redemption fee for fsISTUSTD.
The fee schedule for fsBTC earned via the daily yield Inflation Resistant Strategy is published on our product page at: https://frictionless.markets/fsbtc
Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)
Fee Calculation and Payment Frequency
Management Fees
- Calculation Frequency: Accrued daily based on the fund’s Net Asset Value
- Payment Frequency: Charged monthly in arrears
- Timing: Deducted automatically from the fund on the first business day of each month
- Basis: Calculated using the actual/365 day count convention
Redemption Fees
- Calculation Frequency: Calculated at the time of redemption request
- Payment Frequency: Deducted at the time of redemption settlement
- Timing: Applied to redemption proceeds before distribution to the investor
- Applicability: Only applies to certain share classes or redemption circumstances as specified in the offering documents
Payment Priority in Cash Waterfall
The fund’s expenses and distributions follow a clear payment priority waterfall:
-
Fund Operating Expenses
- Custodial fees
- Administration fees
- Audit and tax preparation expenses
- Regulatory and filing fees
- Other direct fund expenses
-
Management Fees
- Asset-based management fees
- Any applicable performance fees (not relevant for this money market fund)
-
Investor Distributions/Redemptions
- Dividends to investors
- Redemption proceeds (less any applicable redemption fees)
This waterfall structure ensures that all necessary operating expenses are covered first to maintain the fund’s operations, followed by compensation to the investment manager, with remaining proceeds available for investor distributions and redemptions.
Additional Fee Considerations
- Fee Caps: Total operating expenses are subject to a contractual cap as detailed in the fund’s offering documents
- Fee Waivers: The investment manager may temporarily waive or reduce fees at their discretion
- Expense Reimbursements: Any expense reimbursements from the manager flow directly to the benefit of the fund
- Extraordinary Expenses: Certain extraordinary expenses may be excluded from the expense cap and charged separately to the fund
The fee structure and payment priority are designed to align with industry best practices for institutional money market funds while ensuring operational stability and fair treatment of all investors. All fees and expenses are transparently disclosed in the fund’s offering documents and reported in regular investor statements.
Smart Contract and Architecture
How many audits have you had and name of auditors? Please provide a copy of reports.
All smart contracts are provided under the permissive MIT License at:
https://gitlab.com/dfyclabs/protocol/dfyclabs-tokens/-/tree/main
The Frictionless contracts are fully audited by Hacken.io, the most recent audit is 11th December 2023. The underlying technology ERC-3643 has undergone several audits and is actively managed by the ERC 3643 foundation. The comprehensive audit report conducted by Hacken.io is available for review at Frictionless Protocol Audit Results.
Further details on the smart contracts are available on our public-facing documents at https://docs.frictionless.markets/developer/smart-contracts/audit-and-security
Is the project permissioned?
If so, how are you managing user identities? Any blacklisting/whitelisting features?
Permissioning Framework
Yes, all of our tokenized financial instrument issuances are based on a permissioned system to ensure compliance with applicable financial regulations while balancing the benefits of blockchain technology.
KYC/AML Implementation
- Initial Onboarding: All investors undergo a comprehensive KYC/AML verification process before being permitted to interact with the protocol
- Identity Verification Provider: We utilize a combination of in-house compliance specialists and third-party KYC verification services to verify user identities
- Document Requirements: Standard documentation includes proof of identity, proof of address, and source of funds verification depending on investment size
- Entity Verification: For institutional investors, we require additional documentation including certificate of incorporation, beneficial ownership information, and board resolutions
Whitelisting Mechanism
- Smart Contract Access Control: All token transfers are restricted to whitelisted addresses through on-chain permission checks
- Transfer Restrictions: The RWA token implements the ERC-3643 standard, allowing transfers only between compliant addresses
- Tiered Access Levels: Different investor categories (retail, accredited, institutional) have varying access privileges based on their verified status
- Jurisdiction-Based Restrictions: Automatic enforcement of transfer restrictions based on the regulatory requirements of the investor’s jurisdiction
Blacklisting Capabilities
- Compliance Monitoring: Ongoing screening against global sanctions lists and risk databases
- Reactive Measures: Ability to blacklist addresses in response to regulatory requirements, court orders, or detection of suspicious activity
- Circuit Breakers: Emergency pause functionality for specific addresses or the entire protocol in case of detected security incidents
Management of User Identities
- Data Storage: All KYC/AML data is stored off-chain in secure, encrypted databases compliant with GDPR and relevant data protection regulations
- Decentralized Identity Integration: Support for W3C Verifiable Credentials for streamlined verification while preserving user privacy
- Ongoing Verification: Periodic re-verification of user information based on risk profiling and transaction patterns
- Chain Analysis: Integration with blockchain analytics tools to monitor transaction patterns for suspicious activity
Technical Implementation
- Permission Registry: A dedicated smart contract serves as the permission registry, maintaining the status of all verified addresses
- Compliance Oracle: Off-chain compliance service communicates with on-chain contracts through a secure oracle mechanism.
- Multi-signature Governance: Changes to permissioning parameters require multi-signature approval from our compliance committee
- Audit Trail: Comprehensive logging of all permission changes with immutable records maintained for regulatory purposes
Our permissioning system is designed to meet the compliance requirements of the Arbitrum STEP program while providing a seamless user experience. The system maintains the bankruptcy remoteness and security benefits of blockchain technology while ensuring that all participants meet regulatory requirements for participation in a regulated financial product.
Is the product present on several chains? Are there any cross chain interactions?
Yes, as per the Arbirum grant received in September 2024, Frictionless Markets Securities deployed on Arbitrum and BASE, we also support Ethereum and upcoming deployment on the PoW network Quai Network.
Frictionless Markets with the support of the Arbitrum Foundation completed our cross chain settlement technology which enables holders of Frictionless instruments on alternative chains to settle and trade with Arbitrum network participants without the need for intermediary bridges.
Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem
Current Protocol Integration
The fsISTUSTD Fund token is designed to interface with other components of the Frictionless Markets ecosystem while maintaining strict compliance and security standards. Our token is currently utilized in the following ways:
Primary Token Utility
- Direct Investment Vehicle: The primary use case as a tokenized representation of the underlying BlackRock ICS US Treasury Fund
- Secondary Market Trading: Permissioned P2P transfers between eligible investors via our audited smart contracts
- Interchangeable Fund Tokens: Integration with other fund tokens on the Frictionless protocol
Ecosystem Components
Our RWA tokenization ecosystem consists of several interconnected components:
-
Issuance and Settlement Infrastructure
- Permissioned ERC-3643 token standard deployed on Avalanche, Arbitrum, BASE, Ethereum via a Luxembourg-regulated securitization fund structure
- Dedicated settlement agent services for subscriptions and redemptions
-
Compliance Framework
- Identity verification and permissioning system
- Automated compliance checks for all transfers
- Regulatory reporting functionality with FATCA/CRS capabilities
-
Asset Management Integration
- Direct integration with the underlying BlackRock ICS US Treasury Fund via BlackRock CacheMatrix.
- Daily distribution mechanism for yield accrual and distribution.
- Transparent price discovery and NAV calculation.
-
Security and Recovery Systems
- Advanced asset recovery functionality for lost or stolen tokens
- Security features including freeze, partialFreeze, and forceTransfer capabilities
- Multi-layered security model with whitelisting and blacklisting features
-
Financial Use Cases
- Financial collateral functionality (as recognized under Luxembourg’s Blockchain Acts)
- Interoperability with other fund types on the Frictionless protocol
- Potential integration with other Euro/Sterling MMF or private funds
Future Integration Roadmap
While maintaining our security-first approach, we plan to expand the utility of fsISTUSTD Fund tokens in the following ways:
- Expanded DeFi Compatibility: Enabling integration with select permissioned DeFi protocols while maintaining compliance guardrails.
- Multi-Chain Deployment: Extending deployment to other EVM-compatible chains once the market has matured.
- Advanced Collateralization: Enhanced features for using the tokens as compliant financial collateral.
Our ecosystem architecture is designed to maximize the benefits of blockchain technology while ensuring regulatory compliance, investor protection, and operational security. All components maintain bankruptcy remoteness through our Luxembourg securitization structure, providing investors with both technological innovation and institutional-grade protections.
How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?
Governance Structure for Trusted Roles
Our fsISTUSTD Fund implements a robust governance framework for trusted roles and administrative functions that balances security, regulatory compliance, and operational efficiency.
Administrative Roles Hierarchy
-
Security Admin
- Controls critical security functions including emergency pause capabilities
- Manages the global freeze functionality in case of security incidents
- Requires multi-signature consensus from the Security Committee
- Actions are subject to time-locked execution with notification periods
-
Compliance Admin
- Manages the permissioning of wallet addresses following KYC/AML verification
- Implements blacklisting and whitelisting in accordance with regulatory requirements
- Oversees transaction monitoring and suspicious activity reporting
- Limited to compliance-related functions only with full audit logging
-
Treasury Admin
- Handles minting of tokens for verified investors
- Processes redemption requests and burnback operations
- Manages daily yield distributions to token holders
- Operations require dual approvals and reconciliation checks
-
Recovery Admin
- Manages recovery operations for lost or stolen tokens
- Implements forceTransfer and recovery functions when properly authenticated
- Limited to exceptional circumstances with extensive documentation requirements
- Actions require approval from multiple departments and legal review
Multi-Signature Security
All critical administrative functions require multi-signature approval across multiple trusted entities:
- Minimum 2-of-3 signatures required for security operations
- Segregation of duties between teams and departments
- No single individual has access to complete administrative functions
- Time-delayed execution for major system changes with cancellation options
Trust Minimization Approach
While our system requires certain trusted elements due to regulatory requirements, we’ve implemented several mechanisms to minimize trust requirements:
Transparency Mechanisms
- On-chain verification of all token issuance, redemption, and transfer activities
- Public proof-of-reserves with verifiable connection to underlying assets
- Transparent transaction history viewable on blockchain explorers
- Regular independent audits with published results
Aspects Requiring User Trust
-
Custody of Underlying Assets
- Users trust that BlackRock and Citibank properly custody the underlying US Treasury securities
- Mitigated through established institutional counterparties, regulatory oversight, and independent custody verification
-
Identity Management System
- Users trust that permissioning is managed fairly and in accordance with regulations
- Mitigated through transparent criteria, appeals process, and regulatory supervision
-
Administrative Recovery Functions
- Users trust that recovery functions will only be used in legitimate circumstances
- Mitigated through multi-signature requirements, public documentation, and legal frameworks
-
Compliance Operations
- Users trust that compliance activities follow appropriate legal standards
- Mitigated through regulatory oversight, independent audits, and transparent policies
Legal and Regulatory Safeguards
Our trusted roles are further bounded by legal and regulatory frameworks:
- Administrative actions governed by Luxembourg securitization law
- Fiduciary responsibilities codified in legal management agreements
- Regular regulatory examinations and reporting requirements
- Legal liability for administrative misconduct with personal accountability
- Bankruptcy remoteness for all investor assets as required by Luxembourg law
This comprehensive governance structure ensures that while trusted roles exist within our system as required by regulation, their powers are appropriately limited, transparent, and subject to multiple layers of oversight and accountability.
Is there any custom logic required for your RWA token? If so please give any details.
No
Supplementary Materials
- PPM
- DDQ
- Final Terms
- Fact Sheet
- Legal Opinions - Provided confidentially to the committee.
- Subscription Agreements - Provided confidentially to the committee.