Translucent Finance – Off-chain lenders

In the course of ordinary business, many companies come in contact with "confidential" information. Being a Lender the in the Credit Tenant Lease space is no different. In addition to reviewing the lease and the financial statements from credit worthy tenants, the financial costs to do a specific projects, or even the personal financial statements from the Borrowers (and their principals), a Lender comes in contact with a litany of confidential information. Further this is information that the Lender must guard and possible use should a foreclosure on a BorrowCo be required. 

Thus, the next challenge presents itself of how a Lender can engage with MKR with a credit facility agreement and remain in compliance when MKR is a public project with the stated objective of "transparent" finance? 

I believe the best path to address this critical concern follows a similar notion to how MKR governance has already had to address "dark fixes" that cannot be made public as they would be exploited. 

To that end, for any off-chain real-world lender to function, it can only disclose information to parties that are under a similar non-disclosure construct as LendCo itself.

Every Lender wants (or should want) to remain fully compliant with its agreements. For a revolving credit facility agreement, LendCo will needs to disclose and demonstrate compliance with the agreement to MKR governance. The conflict comes in how to do so in a confidential way when MKR is public.

Enter the "Maker Representative"

While this person (or people or legal entity) could be a part of the official "Risk Teams" as an appointed role, this person / people / entity would be nominated by the community to review the required reporting from the RWA lender to provide a report whereby the Maker Representative attests to compliance of the following reporting areas (just to start, not comprehensive)

  • Independent Financial Statements Delivered
  • No operations outside of approved scope
  • No loans above portfolio threshold issued
  • Equity Requirements for all loans in compliance
  • All loans issued are either performing or under construction

LendCo has certain confidential rights it must retain, but by allowing the MKR community to nominate certain individuals or an entity to an Attestation role (which the community may change at its sole discretion), the community can get comfort that LendCo is and remains in compliance with the credit facility agreement while retaining the confidential nature of the information.

Parallel for reference

The above is the business version of how classified information from intelligence agencies function in a democratic government. Those agencies routinely disclose their operations / objectives / weaknesses / advantages in both an open and closed setting with elected representatives that are on a select committee specific to receive such information. 

The public setting is typically quite generic but still informative with the closed setting allowing detailed inspection and oversight.

Thus the public (via their elected representatives) know what is going on and have oversight mechanism in place.

The proposed Maker Representative would have this oversight role to report and Attest back to community as a whole the status of compliance for a given off-chain lender.


Full Disclosure:

I am presently advancing a real world assets structure for consideration by the MKR community. Regardless, the points above hold true for any real world assets onboarded correctly and safely.