Compliance Architecture

Why the 1940 Act Registered Fund Structure#

The US GENIUS Act (signed in July 2025) explicitly prohibits payment stablecoin issuers from paying interest or yield to holders. The Act requires stablecoin issuers to maintain reserve assets on at least a 1:1 basis, with reserves limited to US dollars, Federal Reserve notes, funds held by insured depository institutions, specified short-term Treasuries and Treasury-collateralized reverse repurchase agreements, and money market funds.

The GENIUS Act prohibits issuers from paying any form of interest or yield on the holding of payment stablecoins, but does not explicitly prohibit affiliated parties or third-party arrangements from offering yield-bearing products.

USDBOND's legal characterization is that of a registered investment company share under the Investment Company Act of 1940, not a payment stablecoin. Regulatory practice has already validated the viability of this path:

• Through a no-action letter, the SEC permitted a registered fund within the Franklin Templeton complex to use the on-chain BENJI system for cash management, relying on Section 17(f) of the 1940 Act and Rule 17f-2, allowing a registered fund to hold on-chain money market fund shares without satisfying certain physical vault requirements.
• The SEC also recognized Franklin's hybrid transfer agent arrangement — off-chain books combined with on-chain records, with an affiliated transfer agent controlling the private keys, the administrative functions, and the official shareholder register.
• The BENJI/FOBXX funds, as Subchapter M regulated investment companies taxed under IRC §852 with dividend character determined under §854, have already demonstrated the viability of this path in live operation.

Fund Structure#

Compliance Boundaries of the Payment Function#

Because every USDB maintains a constant $1.00 NAV under the Rule 2a-7 amortized cost method and therefore has value stability characteristics, USDB can be used for payments and settlement between eligible whitelisted addresses. USDB's payment function is a secondary application of a security share within a restricted-transfer framework and does not change its characterization as a security.

The statement "because the value is stable, it can also be used for payments" holds technically, but the following constraints must be attached, or regulators may recharacterize the instrument as a payment stablecoin:

Legal Characterization Risk#

The GENIUS Act's definition of a "payment stablecoin" turns centrally on whether the instrument serves as a means of payment or settlement, and whether the issuer promises redemption at a fixed monetary value. If USDB is widely used for public payments and regulators conclude that it in fact constitutes a payment stablecoin, the daily airdrop yield mechanism could be prohibited.

OCC implementation proposal (NPRM): The GENIUS Act implementation rulemaking proposal published by the OCC on February 25, 2026 adopts a broad reading of the GENIUS Act's yield prohibition, taking the view that arrangements in which affiliates or third parties provide yield indirectly are inconsistent with the prohibition and effectively closing the so-called "affiliate loophole." Accordingly, "can also be used for payments" must be designed as a limited, compliant, whitelist-only securities transfer function, not a public, permissionless payment instrument available to everyone.

Definitional uncertainty: The term "holder" is not defined in the GENIUS Act, which leaves uncertainty in regulatory interpretation. A discussion draft of the CLARITY Act proposes a possible compromise: retaining the core prohibition on yield for passive holding of payment stablecoins while permitting rewards tied to specific payment or platform activity. USDBOND must continue to monitor changes in regulatory interpretation closely.

Securities Law Compliance#

USDB shares are registered investment company shares under the 1940 Act and are securities.

• Issuance must comply with the registration requirements of the Securities Act of 1933 or an applicable exemption.
• Transfers must comply with securities law transfer restrictions.
• The whitelist mechanism at the smart contract level is a core component of the Section 5 securities law compliance architecture — permitting transfers only between eligible addresses and enforcing the conditions of the issuance exemption at the protocol layer.
• Tokenized money market funds are generally classified as securities and are subject to securities law requirements including registration, disclosure, reporting obligations, and transfer restrictions.

KYC/AML Compliance#

USDBOND must comply with customer identification program requirements under the Bank Secrecy Act (BSA):

The OCC implementation proposal leaves Bank Secrecy Act, anti-money laundering, and OFAC sanctions requirements to separate rulemaking coordinated by the Treasury Department.

Transfer Agent#

USDBOND must appoint a licensed transfer agent responsible for maintaining the official shareholder register and administering issuance, redemption, and dividend records for shares.

In the BENJI no-action letter, the SEC recognized a hybrid transfer agent arrangement: the transfer agent controls the permission list, the smart contract administrative privileges, and the final records, and can correct erroneous transactions, freeze or migrate wallet records, and restore ownership after the loss of a private key.

BENJI's specific approach is as follows: the transfer agent records transaction activity on public blockchains through a proprietary Benji platform; its internal systems hold private information such as names and dates of birth, while the public blockchain records anonymized data on subscriptions, redemptions, dividends, NAV, and transaction history, and the two parts are linked in real time to form the formal register of holders.

USDBOND's transfer agent must likewise possess the dual capabilities of on-chain recordkeeping and off-chain compliance administration.

Tax Treatment#

As a Subchapter M regulated investment company, USDBOND is taxed under IRC §852, with dividend character determined under §854.

In most jurisdictions, the newly minted USDB from daily airdrops may be treated as a continuing taxable event — each airdrop creates new token units whose value may be treated as taxable income. USDBOND must provide holders with annual tax reporting (such as Form 1099-DA) stating the amount and character of airdrop income.

Note: Holders' tax treatment varies by jurisdiction, and daily airdrops significantly increase filing complexity. Prospective investors should consult a professional tax adviser about their own tax situation.

Technical Enforcement of Compliance#

Compliance requirements are enforced at the protocol layer through smart contracts:

function isEligible(address account) public view returns (bool) {
    // Check whether the address is whitelisted
    // Check whether the address is sanctioned
    // Check whether the address is in a restricted jurisdiction
}

The whitelist is controlled by the transfer agent. Addresses that have not passed KYC, sanctioned addresses, and addresses expressly excluded by protocol governance are not eligible for airdrops and cannot transfer USDB outside the restricted-transfer framework.

Frequently Asked Questions#