Q&A: Reserves, Lending, and Risk Framework
A breakdown of how Coinshift’s stablecoin stack combines regulated reserves, yield distribution, and onchain lending.
Custodian & Reserve Structure
Q: What exactly backs each USDL token? A: Each USDL token is backed 1:1 with USD-denominated assets held in segregated accounts with qualified financial institutions approved by FSRA. The reserves include cash deposits, U.S. Treasury Bills, and U.S. Government Money Market Funds.
Q: How are the USDL reserves currently allocated? A: Based on the February 2025 attestation, the allocation is approximately:
22.7% direct cash deposits
7.9% U.S. Treasury Bills
69.4% Government Money Market Funds
Q: Are customer funds segregated from Paxos operational accounts? A: Yes, customer funds are legally segregated in dedicated reserve accounts for the benefit of token holders, creating bankruptcy remoteness from Paxos' operational finances.
Q: Which banking partners support USDL? A: Paxos has a public partnership with Standard Chartered Bank (SCB) who serve as the on/off ramps for USDL in a Paxos mint account. All financial partners have been approved by the FSRA and comply with their regulatory framework. More information on the Paxos-SCB partnership is available here.
Government Money Market Funds Composition
Q: What specific assets comprise the Government Money Market Funds that hold 69.4% of USDL reserves? A: These are Institutional Stable NAV USD Government Money Market Funds consisting of:
Cash
U.S. Government securities (USGs)
Overnight repurchase agreements overcollateralized by USGs
Q: What safety measures govern these money market funds? A: Key requirements include:
Domiciled in non-US jurisdictions
Weighted average maturities (WAMs) ≤ 60 days
Weighted average lives (WALs) ≤ 120 days
FSRA-approved credit ratings
Value limits agreed with the FSRA
FSRA Regulatory Framework for Stablecoins (FRTs)
Q: How does Abu Dhabi's stablecoin regulation compare to other jurisdictions? A: The FSRA framework under Waiver and Notifications Notice 102/2024 is among the most robust globally, requiring:
Strict 1:1 backing with reserve assets
Third-party custodians for all reserves
Regular stress tests and independent audits
Prohibition of algorithmic stablecoins
Minimum capital requirements of $2M or annual expenditure (whichever is higher)
Q: Can yield generated from reserves be distributed to token holders? A: Yes. Unlike some jurisdictions, the ADGM framework explicitly allows yield distribution to token holders, provided this is clearly disclosed—this is a key differentiator of USDL.
Q: What redemption standards are mandated by FSRA regulations? A: FSRA rules require redemption within T+2 (two business days), though USDL's standard is T+5 with most redemptions processed within hours.
Business Continuity in Insolvency
Q: What happens to USDL holders' funds if Paxos becomes insolvent? A: Paxos stablecoins are completely bankruptcy remote, and a Paxos bankruptcy would not affect the redemption process. FSRA regulations mandate a clear liquidation priority:
USDL holders receive 1:1 USD redemption (first priority)
Yield owed to holders is paid on pro rata basis from remaining reserves (second priority)
Other creditors may claim remaining reserves (third priority)
All holders would be able to redeem 100% of their stablecoin balance without going through a creditor process. The detailed insolvency protection framework is outlined in the USDL Whitepaper.
Q: Would yield distribution continue if Paxos faced financial difficulties? A: Yes, the yield is programmatic on USDL, so the distribution of the yield (currently 3.7% APY) would continue in the event of a bankruptcy. This is because the yield mechanism is built into the smart contract and operates independently of Paxos' operational status.
Q: Who would oversee the process in an insolvency scenario? A: The FSRA of Abu Dhabi Global Market would directly oversee this process, ensuring compliance with the regulatory framework and protection of token holders' interests.
Q: What happens to revenue sharing agreements in case of insolvency? A: Revenue sharing arrangements would be subject to legal review in insolvency, but the priority order ensures customer principal is protected first before any other obligations.
Reserve Reporting & Transparency
Q: How can the backing of USDL tokens be verified? A: Verification is provided through:
Monthly attestations by independent accounting firm Crowe Mak LLP
Real-time USDL supply monitoring on blockchain explorers (Etherscan)
Detailed monthly reserve composition disclosures by asset type
Public reserve information published at liftdollar.com/transparency
Q: Are there more frequent monitoring mechanisms beyond the monthly public attestations? A: Yes, the FSRA has oversight to ensure that USDL is always backed 1:1 with cash equivalents, requiring very close to real-time internal reporting. While this monitoring isn't publicly shared, the FSRA's active supervision provides continuous assurance of reserve adequacy.
Q: Can institutional partners receive more frequent reserve updates? A: Paxos can explore additional reporting arrangements for institutional partners. While the public report is shared monthly, more detailed or frequent reporting options may be available for key partnerships upon contractual agreement.
Banking Partnerships & Redemption Process
Q: Which banking partners hold USDL reserves and handle redemptions? A: Paxos' financial partners have been approved by their prudential regulator (FSRA) and are consistent with the regulatory framework. Paxos has a public partnership with Standard Chartered Bank (SCB) who serve as the on/off ramps for USDL in a Paxos mint account, enabling unlimited size create/redemptions with T+1 maximum processing time.
Q: How fast can large-scale redemptions be processed in practice? A: For institutional clients, Paxos can redeem up to 100% of USDL holdings at any time and provide USD, typically within T+1. This is Paxos' legal obligation to clients under the prudential regulation of the FSRA. Most redemptions are processed within hours.
Q: Where can public information about USDL reserves be found? A: Detailed reserve information is published and regularly updated at liftdollar.com/transparency, including the monthly attestation reports from the independent accounting firm.
Redemption Process & Stress Scenarios
Q: What happens if there's a bank run on USDL? A: There are no predetermined redemption thresholds or limits. Paxos can redeem up to 100% of a client's USDL holdings at any time and provide USD. This is their legal obligation under the prudential regulation of the FSRA. The reserve composition prioritizes high liquidity to handle large-scale redemptions, as detailed in the USDL Whitepaper.
Q: What's the maximum redemption timeframe for institutional clients? A: Through the partnership with Standard Chartered Bank, Paxos enables unlimited size create/redemptions with T+1 maximum processing time. Most redemptions are processed within hours. For institutional clients, the process is typically faster than the standard T+5 business days timeframe.
Q: Under what circumstances might redemptions be delayed? A: Delays may occur only in exceptional circumstances:
Operational issues with banking partners
Enhanced compliance reviews
Legal or regulatory concerns
However, the FSRA framework is designed to ensure that even in stress scenarios, redemptions continue to be processed efficiently.
Morpho Lending: Structure & Roles
Q: Who are the key parties in the USDL lending ecosystem and what are their roles? A: The lending ecosystem involves several distinct entities with different responsibilities:
Coinshift: The primary entity and vault owner who has partnered with others to create this lending solution. Coinshift provides the user interface, access to the lending markets, and leads the overall governance. Importantly, Coinshift also serves as the official distribution partner for Paxos USDL.
Morpho: The underlying permissionless lending protocol that facilitates the lending and borrowing operations.
Steakhouse Financial: Professional curator and risk manager who implements the risk management framework and parameters.
Paxos: USDL issuer responsible for maintaining the stablecoin's reserves and regulatory compliance.
The lending protocol operates independently of Coinshift as a company. In the event Coinshift ceased operations, the lending protocol would continue to function as it's built on Morpho's infrastructure with Steakhouse's risk management.
Q: What is Coinshift's specific role as vault owner? A: As the primary vault owner on Morpho, Coinshift has several key rights and responsibilities:
Leading the governance of the Coinshift USDL Lending Vault on Morpho
Setting strategic direction for the lending markets
Controlling user access and interface to the lending protocol
Managing the partnership with Paxos and Steakhouse
Revenue distribution and management
Coordinating the implementation of risk parameters
Overseeing liquidity management
Driving business development and user acquisition
Serving as the distribution partner for Paxos USDL, bringing the stablecoin to market
Q: What is the collective governance structure of the lending protocol? A: Coinshift has partnered with Paxos and Steakhouse to collectively govern the vault on Morpho. Under Coinshift's leadership, the multi-party structure includes these rights:
Setting and adjusting risk parameters (loan-to-value ratios, liquidation thresholds)
Controlling which assets can be used as collateral
Implementing liquidation mechanisms and procedures
Setting and adjusting interest rates and fee structures
Managing protocol upgrades and improvements
Approving parameter changes during crisis scenarios
Q: What are the specific rights and responsibilities of Steakhouse as the curator? A: Steakhouse Financial as curator has the following responsibilities:
Performing ongoing risk assessment and market monitoring
Recommending risk parameter adjustments based on market conditions
Implementing liquidation mechanisms and overseeing their operation
Conducting stress tests and scenario analyses
Providing technical expertise and security oversight
Coordinating emergency responses during extreme market conditions
Managing relationships with liquidators and market makers
Morpho Lending: Risk Management & Crisis Scenarios
Q: How is risk managed in the lending protocol? A: Risk management is primarily handled by Steakhouse Financial as the curator, with several layers of protection:
Over-collateralization with an 86% loan-to-value ratio (14% buffer)
Automated liquidation mechanisms that trigger when collateral value falls below threshold
Robust Chainlink price oracles, with plans to expand to dual oracle systems
Market monitoring systems that can adjust risk parameters during heightened volatility
Q: What happens if Bitcoin falls by 50% in a matter of minutes? (Crisis situation) A: In such an extreme scenario, liquidations could occur at lower prices than the loan value, potentially causing losses for lenders. To mitigate this specific risk, the protocol implements:
Plans to keep 10-20% in idle liquidity at all times (not available to borrow) to reduce loss during bad debt scenarios
Insurance cover on bad debt scenarios through OpenCover, an onchain insurance provider that partners with Nexus Mutual which has underwritten $5.5B in cover with 18M+ claims paid
Reserve fund development through protocol revenue to cover potential shortfalls in catastrophic scenarios
Q: What specific credit risk mitigation strategies does the lending platform employ? A: For credit risk (potential impairment of deposited assets):
Rigorous asset selection process with suitability assessment for customer profiles
Automated 24/7 solvency and price monitoring systems
Direct connectivity to asset issuers for rapid response to emerging issues
Regular stress testing of collateral under various market scenarios
Q: How does the platform address counterparty risk in the lending ecosystem? A: To mitigate counterparty risk (malicious actors behind deposited assets):
Only lending against sufficiently decentralized or regulated collateral (e.g., staked USDC)
Comprehensive underwriting of issuer teams, signer processes, and operational controls
Implementation of a formal counterparty risk framework for crypto assets
Regular reassessment of counterparty risk factors
Q: How are oracle and smart contract risks addressed? A: For technical risks:
Multiple backup and failsafe oracle procedures to prevent improper price updates
In-house technical expertise for proprietary security audits
Selection of platforms with minimal code surface area for attack vectors
Requirement of multiple third-party auditors (10 separate audits for Morpho & Morpho Vaults)
Implementation of circuit breakers to pause operations if anomalous behavior is detected
Last updated