Hashnote USYC STEP Application

Applicant information

Name:

Hashnote International Short Duration Yield Fund Ltd (iSDYF)

Address (Headquarters): 407 Lincoln Road, Suite 6H PMB 1146a
City, State, Postal Code: Miami, Florida, 33139
Country: USA
Website:usyc.hashnote.com

Primary contact

Name: Gabriel Coleman
Title: Head of DeFi
Country: USA
Email, Telegram, Forum, & other methods of contact: gc@hashnote.com, @gabriel_hashnote on telegram

# Key Information

Expected Yield

~4.709%% net of fees. USYC is a repo based product whose underlying yield will vary based on the United States bank overnight financing rate. Please review the historical data to understand the appropriate return expectations relative to the market environment in the United States.

Below is the Historical graph representing the benchmark index from April 2021 - April 2024:

Expected Maturity

Hashnote benefits from T + 0 redemption with immediate liquidity found in United States repo markets.

Underlying asset

A reverse repurchase agreement (RRP), or reverse repo, is the sale of securities with the agreement to repurchase them at a higher price at a specific future date. A reverse repo refers to the seller side of a repurchase agreement (RRP), or repo. At present moment, iSDYF’s portfolio is made up 100% of RRPs. Reverse repo is largely considered the safest way to keep cash in traditional finance, more safe than direct purchase of treasury bills.

iSDYF may also purchase short-dated U.S. Treasury securities. iSDYF may also hold stablecoins or cash for liquidity management.

Minimum/Maximum transaction size

Hashnote can exit or enter a position with billions of dollars without incurring slippage costs. The minimum initial subscription amount is $100,000, thereafter you can have transaction sizes of any amount.

Current AUM for product

USYC holds approximately ~$47,000,000

Current AUM for issuer

Hashnote manages approximately $60,000,000 as of the publication of this application

Volume of transactions LTM

135 transactions LTM

Source of first-loss capital

Not Applicable

Basics and background

USYC delivers uncorrelated returns leveraging short duration assets in an institutional product represented on the Ethereum blockchain as an ERC - 20 token.

Hashnote is an investment manager making transparent, secure, and simple blockchain-based investments available to institutions. Hashnote’s principals are professionals with a combined 50+ years in traditional finance/banking, options trading, software engineering, and blockchain technology at global trading and investment companies. Hashnote’s team has been an active participant and pioneer in the institutional digital asset markets. Our mission is to build what finance will look like in ten years.

We adhere to strict regulations set by the CFTC and CIMA, ensuring our operations meet institutional investment standards. Assets are protected through segregated custodial accounts at BNY Mellon. This straightforward and secure approach gives investors the confidence to focus on their investment goals. Trust and transparency are the pillars of our service, making us a dependable partner for the Arbitrum DAO.

How will this investment improve Arbitrum’s RWA ecosystem?

USYC has been designed to be a money-market-like product for capital efficiency and trading. Not only is it a fully compliant token governed under strict regulatory regimes, and available globally, it will be available widely in centralized finance in digital assets. As Arbitrum looks to position itself as the hub on onchain DeFi, housing USYC as a flagship asset only adds value to the ecosystem. USYC will be used in the onchain and offchain financial ecosystem alike. Engaging USYC is a staple of an onchain DeFi ecosystem competitive with traditional finance as Arbitrum looks to become.

The stated goal of the STEP program is for the DAO to diversify its treasury and deploy into assets that are uncorrelated with the broader digital asset ecosystem. Hashnote believes in fully tokenized products being composable with the broader DeFi ecosystem which we are committed to doing with Arbitrum.

Hashnote plans to launch additional products in the coming months with different underlying investment strategies and asset classes that benefit from the advantages. Our team has deep experience in traditional finance, and is committed to bringing more RWAs and investment strategies to the ecosystem, ensuring Arbitrum One is a top destination for tokenized assets.

Identify key management personnel and individual experience. Also include third parties utilized for managing assets and their qualifications.

Leo Mizuhara | CEO

Leo Mizuhara is the Founder and CEO of Hashnote, an institutional DeFi asset management company regulated by the CFTC and registered with CIMA. Prior to founding Hashnote, Leo ran Systematic Trading Desk for FICC Options at DRW for five years… He also spent 12 years at Bank of America as a managing director and senior portfolio manager in the Corporate Investments Group in New York, managing fixed income securities and derivatives exposures on the bank’s balance sheet.

David Shapiro | CTO

David has been an entrepreneur for the past 12 years. Before Hashnote, David Co-founded and led product and engineering as CTO of Scout Security (ASX), a security-focused IoT firm. Later he served as VP of Engineering at Latch Inc (NASDAQ). David has also developed hybrid-chain protocols to optimize yield farming and execute arbitrage between decentralized exchanges.

Andrew Ridenour | Chief Regulatory Officer

Experienced regulator and in-house counsel, with an emphasis on derivatives and blockchain incubation as Special Counsel to the CFTC Chair, General Counsel at Cumberland Labs, and Institutional Counsel at Coinbase.

For more information on Dave Shapiro, Andrew Ridenour, and Leo Mizuhara, please see their CVs attached hereto. [attach CVs]

Describe any previous work by the entity or its officers/key contributors similar to that requested. References are encouraged.

Please see the attached CVs on Leo Mizuhara, Andrew Ridenour and David Shapiro, and let us know if you have any questions.

Has your entity or its officers/key contributors been subject to an enforcement action, criminal action, or defaulted on legal or financial obligations? Please describe the circumstances if so.

Hashnote and its officers have never been subjected to a criminal or legal enforcement action.

Describe any conflicts of interest for your entity and key personnel.

Ergonia, through its subsidiary Ergonia Associates LLC, employs Andrew Ridenour as General Counsel. Ergonia, through its subsidiary Cumberland Innovations LLC (“Cumberland Labs”), is an investor in Hashnote. Cumberland Labs’ investment into Hashnote includes, among other things, the provision of regulatory, corporate, and management services. Ergonia wishes to provide to Hashnote, and Hashnote wishes to receive, the services of Andrew Ridenour.

Insurance coverages, guarantees, and backstops

Assets held by iSDYF represented by USYC are held in BNY Mellon, bankruptcy remote via our broker which is Marex.

Name of insurer or guarantor: N/A
Per incident coverage: N/A
Aggregate coverage: N/A

Historical tracking error in your proposed product, or similar to that being proposed

Product

USYC which typically tracks the overnight funding rate. Since tracking began on July 10th, 2023, the product on average deviates from the SOFR published by the New York Federal Reserve on a daily basis by -2% and approximates the funding rate curve above that percentile.


USYC Historical Returns

Brief reason for above tracking error

Tracking error of the total yield is related to the management fees associated with issuing USYC. Furthermore SOFR is a theoretical target rate.

Please describe any experience your firm has in working with decentralized organizational structures?

Hashnote has created a unique framework to be able to support onboarding by the DAO. Furthermore, Hashnote consults DAOs to help facilitate treasury management.

What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

As of April 24th, 2024 Hashnote manages approximately $60,000,000 in AUM.

How many of these assets held are present on Arbitrum One, if any?

None at the moment.

Plan design

Please describe your proposed product, including a description of the underlying assets and, if more than one asset, the proposed allocation among assets and general investment guidelines. Where appropriate, include targeted maturity mix and credit quality. Attach supplementary documents as appropriate.

Hashnote Short Duration Yield Fund Ltd invests in short-term U.S. Treasury Bills and performs repo / reverse repo activity as the underlying asset of the USYC token. USYC earns short-term risk-free rate returns. Our clients can mint or redeem in USDC, Fiat, USDT, and PYUSD with the minting process being atomic and instant on the blockchain. Hashnote guarantees T + 0 redemptions. Our platform offers institutional investors a secure environment free from the everyday risks linked to credit intermediaries because we do not provide loans. Hashnote US and offshore funds are regulated by the CFTC and CIMA, respectively, and Hashnote Management is a member of the National Futures Association.

Further documentation on the product can be found at usyc.hashnote.com/docs

Do investors have any shareholder, investor, creditor or similar rights?

Investors holding USYC are shareholders in the iSDYF and have redemption rights to the underlying share of iSDYF under Caymans law. Investors subscribe into the iSDYF for participating shares at that day’s current price. Shareholders, including the DAO, would have rights under Cayman’s bankruptcy law to assets of the fund.

Describe the legal and contractual structuring for your product including regulatory bodies overseeing your business and the product and identifying all legal jurisdictions interacting with your product. Attach supplementary documents as appropriate.

Hashnote International Short Duration Yield Fund Ltd (iSDYF), the entity providing the USYC product, is domiciled in the Cayman Islands and managed by its investment manager, Hasnote Management LLC, a United States limited liability company formed in Delaware. iSDYF is a CIMA regulated mutual fund.

Hashnote Management LLC is a registered commodity pool operator (operating one exempt pool) with the Commodities Futures Trading Commission (“CFTC”) via the Natural Futures Association (“NFA”). Hashnote Management also operates three funds registered as mutual funds with the Cayman Islands Monetary Authority (“CIMA”).

● (Hashnote Management LLC) NFA ID: 0552867
● (Hashnote International Feeder Fund LP) CIMA Mutual Fund Registration #:
● (Hashnote Master Fund LP) CIMA Mutual Fund Registration #: 2052960
● (Hashnote International Short Duration Yield Fund Ltd) CIMA Mutual Fund Registration #: 2055432

Would Arbitrum’s assets be bankruptcy remote from your own entity and its officers/key contributors? If so, please explain the legal and contractual basis. On a confidential, non-reliance basis, provide any third party legal opinions to support the conclusions.

All investments in iSDYF are held bankruptcy-remote at our custodian, BNY Mellon, via primebroker, Marex. iSDYF is a Caymans mutual fund and resolution of the iSDYF fund would be independent of any resolution or bankruptcy of Hashnote. Substantially all assets of iSDYF are held in its prime brokerage account at Marex Capital Markets, a registered broker-dealer.

How are Arbitrum’s assets protected vis-a-vis the bankruptcy of the brokerage or applicable financial institution (e.g., bank deposit insurance, securities insurance, etc.)?

All investments in iSDYF are held bankruptcy remote via broker-dealer in Bank of NY Mellon. BNY Mellon is a custodian of funds in this manner.

Does the Issuer issue more than one asset? If so, what is the priority relationship between different asset classes?

Yes, Hashnote offers a suite of institutional-grade fund products. USYC is issued through investment in iSDYF. All other products that Hashnote issues are issued under master-feeder fund structure(s). All funds and Hashnote products are managed by Hashnote Management LLC, the investment manager and general partner of the Hashnote funds. USYC has no exposure to other Hashnote offerings.

Provide a detailed cash flow diagram that shows the flow of funds from ARB/Fiat conversion, investment in underlying asset, payment of expenses, sale of underlying asset, and repayment (Fiat/ARB conversion), including the counterparties and legal jurisdictions involved.

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Subscription:

Once the DAO finishes onboarding, Hashnote will display an address for the DAO to deposit funds. Hashnote will accept pyUSD, USDT or USDC as subscription assets. Once Hashnote receives the subscription stablecoins, Hashnote will leverage trade desks and stablecoin issuers to convert the stablecoins into fiat currency which will then be deposited into the Marex Prime Brokerage account (UK jurisdiction) owned by iSDYF (Caymans jurisdiction). Via our prime brokerage, Hashnote will enter into reverse repo agreements and houses collateral in Bank of New York Mellon. Hashnote will then mint USYC as the DAO’s ownership representation in the DAO treasury’s multi-sig.

Redemption:

Once the DAO wishes to redeem, Hashnote will redeem the underlying in BNY via Marex, convert the fiat to stablecoins, and send the stablecoins to the same address the DAO subscribes with. Investors in iSDYF can receive the redemption in pyUSD on the Ethereum Mainnet with an instant redemption free of charge for up to 20% of Hashnote’s AUM in USYC at any time into pyUSD. Manual redemptions requested before 2pm ET are processed T+0. Manual redemptions after 2pm ET are processed for T + 1 redemption.

Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.

HASHNOTE DOES NOT PROVIDE LEGAL, TAX, OR FINANCIAL ADVICE TO ITS PROSPECTIVE BUSINESS PARTNERS, LIMITED PARTNERS, OR INVESTORS. EACH PROSPECTIVE BUSINESS PARTNER, LIMITED PARTNER, OR INVESTOR SHOULD CONSULT THEIR OWN PROFESSIONAL ADVISORS AS TO: (A) THE LEGAL REQUIREMENTS WITHIN THE COUNTRY OF THEIR RESIDENCE FOR THE PURCHASE, HOLDING OR DISPOSAL OF ASSETS, AND (B) ANY FOREIGN EXCHANGE RESTRICTIONS WHICH MAY BE RELEVANT AND THE INCOME AND OTHER TAX CONSEQUENCES WHICH MAY BE RELEVANT TO THE PURCHASE, HOLDING, OR DISPOSAL OF ASSETS.

Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.

The Arbitrum DAO or a DAO Facilitator may redeem by submitting a signed message request to accounts@hashnote.com. The DAO may also redeem using a smart contract redemption transaction via a multi-sig transaction. Regarding specific timelines associated with liquidation of assets, this may vary depending on the strategy and asset you may choose to invest in.

What amount of first-loss equity will Sponsor provide to ensure over-collateralization, how is the first-loss equity denominated, and what is the source of capital?

This is not relevant to USYC, which is a registered mutual fund.

Describe the liquidity and stability of the proposed underlying assets, including anticipated settlement times from the sale of the underlying to the repayment of ARB.

If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.

Hashnote will work with centralized exchanges and market makers to support the redemption process from USYC to ARB tokens. Hashnote will be able to redeem in T + 0 for pyUSD in partnership with Paxos. pyUSD is a well-regulated stablecoin with ample off-ramps. RRPs are considered to be one of the most liquid in the overall market for US short duration assets.

Does the product rely on any derivative product (swaps,OTC agreements?)

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.

The fund does not engage in derivatives in iSDYF.

Custodian
Bank of NY Mellon
240 Greenwich Street
New York, NY 10286, United States

Liquidity Provider
Cumberland DRW LLC
540 W Madison Street
Chicago, IL 60661
United States

Prime Broker:
Marex Capital Markets Inc.
140 East 45th Street
New York City NY 10017
United States

Fund Administrator; KYC Services:
NAV Fund Services (Cayman) Ltd.
103 South Church Street
Harbour Place, 5th Floor
P.O. Box 30464
Grand Cayman KY1-1202
Cayman Islands
(transfer.agency@navconsulting.net)

AML Service Provider:
LMO Consulting Pte. Ltd.
12 Marina Boulevard
#17-01, Marina Bay Financial Centre Tower 3
Singapore 018982
(jgan@lmoservices.com.sg)

Wallet Screening Services:
Godwin Austen Advisory Pte. Ltd.
237 Pandan Loop
#08-10, Westech Building
Singapore 128424
T: +65 9848 0545
E: jgan@godwinausten.com.sg

Auditor:
Cohen & Co International (Cayman)
Cayman Corporate Centre
27 Hospital Road
P.O. Box 1748
Grand Cayman KY1-1109
Cayman Islands

Can you explain how is risk management (inv and operational) being done? Can you provide a copy of your risk management policy?

Please review the “Hashnote Management LLC Risk Management and Internal Controls Policy” attached and sent to the DAO.

Hashnote Risk Management Policy

Performance reporting

What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why.

Investors of the fund receive monthly statements from our Fund Administrator, NAV, detailing their investments and holdings. These reports show the investors MTD, QTD and YTD income, with a % ROR for each period.

Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.

For the cadence and preparation please see above. For the content/format, other than what is mentioned above, the investor statement also details additions, redemptions, and beginning/ending balance for the investor, in both $ value and share total.

Who provides the performance reports in respect of the underlying assets?

NAV Consulting provide the monthly investor statements, and Hashnote publishes the price of USYC on a daily basis and publishes the historical track record online at usyc.hashnote.com

Describe any formal audit process and timing of such audits.

Hashnote is audited annually by its Audit Partner, Cohen & Co International. Hashnote may, from time to time, also be audited by the the United States CFTC

Cohen & Co International (Cayman)
Cayman Corporate Centre
27 Hospital Road
P.O. Box 1748
Grand Cayman KY1-1109
Cayman Islands

Pricing

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

Pease see the attached PPM/Offering Memorandum, Amended and Restated Memorandum and Articles of Association, and the subscription document(s) of Hashnote International Short Duration Yield Fund Ltd.

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)

Hashnote’s iSDYF will charge a performance fee of 10%. At a 5% APR, this will approximately 50 bps per year. If the DAO wishes for an instant redemption at more than 20% of Hashnote’s AUM, there will be an additional 50 bps redemption fee.

Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)

Fees are taken on a daily basis. Fees taken will reflect in the NAV and token price of USYC. Holders of USYC are able to review the price less fees every day calling the custom logic of the USYC smart contract or by viewing our website: usyc.hashnote.com

Smart Contract/Architecture

How many audits have you had and name of auditors?

Please provide a copy of reports.

USYC was last audited in March, 2024. We have contracted sophisticated engineering talent to review the code. Please see audit information sent separately.

Is the project permissioned? If so, how are you managing user identities? Any blacklisting/whitelisting features?

Whitelisting is gated by Hashnote. A user cannot send or receive USYC between networks unless they are whitelisted. Wallets are screened for compliance and activity on OFAC sanctions lists.

Is the product present on several chains? Are there any cross chain interactions?

We are available on Canto, and will be on Cosmos chains via Noble, and many more chains to be announced. Hashnote comes to chains with novel use cases and a clear path to demand and expects to significantly expand EVM native chain deployments this year.

Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem

The tokens are currently available in lending markets at a 99% CR ratio as collateral against which stablecoins are borrowed, and as collateral for derivatives markets both offchain and onchain. Hashnote has partnered with Copper Custody, BitGo and Komainu to enable USYC in their custodial product.

How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

USYC has been designed to reflect the robust regulatory risk controls to be better than that of traditional finance. Every redemption is reflected onchain, and holders of USYC are able to verify the price value of their asset at any time onchain. Holders of USYC and investors into SDYF trust the fiduciary responsibilities of Hashnote staff in the management of the fund as the collateral is centrally managed. Hashnote Holdings implements a rigorous standard to any withdrawal via wire from internal systems.

All outbound transactions require 3 of 6 signatures of senior Hashnote management.

Is there any custom logic required for your RWA token? If so please give any details.

USYC is an ERC-20 token. Hashnote will need to whitelist the Arbitrum DAO treasury as an address to hold USYC once the DAO approves the allocation.

Supplementary

Please attach any further information or documents you feel would help the screening committee or ARB tokenholders make an informed decision.

Regulatory information about USYC:
Hashnote International Short Duration Yield Fund Ltd (“HISDYF”) is a mutual fund registered with the Cayman Islands Monetary Authority (CIMA) (CIMA Registration #: 2055432) that deploys investment strategies to earn approximately the effective Federal funds rate and provide intra-day liquidity. HISDYF invests in short-dated U.S. Treasury securities and repo/reverse repo transactions through its U.S. prime broker.