Connect Financial March Update
Welcome to this month’s community update! I want to take a quick moment to Congratulate Atul, one of our senior developers who has been with Connect since nearly the beginning on the recent birth of his and his wife's first born. They were originally scheduled for a few weeks out but someone had other plans. Atul, mother and baby are all doing wonderful and enjoying being home together this week.
After (another) tumultuous few weeks in the world as a whole, and particularly in banking I’ll side step posting any broad commentary and instead spend a few moments to reassure the community and address some important matters:
- Connect Financial had no direct exposure to any of the “Si” banks (Signature, SVB and Silvergate). While some of our partners have had varying levels of exposure, I can safely categorize the impact to Connect Financial to ‘minor inconvenience’.
- Signature and Silvergate both operated as large bank service providers for Crypto based companies. Their closure has actually provided more opportunity for Connect to fill some of the product gap left in the market now.
- Similarly, despite it being a fascinating pass-the-popcorn moment, the USDC depegging presented no adverse impact to the company, and we remain directly integrated into the Circle ecosystem with unwavering confidence in their corporate strength.
- Connect Financial remains liquid and well funded. We are looking to finalize the seed funding round in the next couple of weeks. The influx of new capital remains provisionally allocated towards future capital expenditure, team expansion and GTM activities, and is independent of the current runway.
In another milestone, the staking contract is paused to tick over to 23 million sCNFI in the 420 days the contract has been on Arbitrum.
Development Update
They say that “no plan survives first contact with the enemy” and this sentiment carries over to software development as well. A number of things have cropped up this month that have affected the provisional timelines indicated earlier in the year.
After some vigorous internal testing, we’ve had to implement a few changes into the backend database structure and the way we deliver data to the user. We spent a considerable amount of time looking for reasons to not make the change, but the improved security and future scalability impacts were too great to ignore. This piece of work has been nearly completed, but it did create some additional work that the team was not able to anticipate originally.
As I’ve mentioned several times in the past, we are building a system that takes best practice transaction auditing to the next level. While some of our competitors operate a black-box accounting system where auditing stops at “we have more than we owe”, Connect Financial traces every transaction through each step, providing a complete audit trail of each action that takes place on the site. The testing process for this is, in a word… painstaking. We are making good progress, and we are resolute in standing firm… this is definitely a hill worth fighting for. The reasons are more apparent after the next section.
Segregation of user funds
Post the collapse of FTX, there has been well deserved scrutiny into the role and responsibility of crypto custodians. There is currently little rock-solid guidance from any official monetary policy body, but the SEC put out a statement on February 15 that directly talks to crypto and strongly implies that what the industry is currently doing is insufficient in the eyes of the Securities and Exchange Commission:
In some of the details that have come out from recent collapses including FTX and Celsius, it has become apparent that the standard operating procedure was to have a big pot of co-mingled funds with little to no clarity or transparency with regards to how exactly the pot was made up:
From day one, Connect Financial has been built on a segregated omnibus model. An omnibus is a bundle of one or more wallets, accounts and/or vaults that is designated for a particular purpose.
This simplified image shows Connect Financial’s omnibus custody model:
Based on the directional advice from Gensler and the SEC, we have made an important change to the way that we segregate user funds. Previously, we swept user funds into an omnibus dedicated solely to hold all user funds under custody that were unallocated (not assigned as Collateral, Staked or otherwise put towards any other product on platform). Now, every user receives their own unique omnibus, and funds under custody are never co-mingled between users.
As well as sitting at the bleeding edge of custody best practice, this custody model has some important implications and tradeoffs.
- The assets that you deposit into your wallets are your assets. Although Connect Financial holds the keys, we do not hold title or ownership over your assets (until you allow us to do so, for example by committing your funds to a collateral account).
Our only conditional ability to assert control over the funds is by court order (i.e. law enforcement or Estate Probate) or by our AML policy. These conditional parts are typically not discussed as it goes against the traditional crypto feelings of no government, not my keys not my coins. They are a significant part of reality and needs addressed as much as anything else. Just know that we will always lean towards protecting the rights of the user over the control of agencies. - In the case of trades, this model will require some of the more exotic assets to be settled to our platform from the liquidity provider before they will be available to be withdrawn off platform. The standard service level agreement in our industry is that withdrawals will be processed within 24 hours and our model will still fit into that.
Since we do not pool users funds, we cannot take someone else’s tokens and use them to fund your withdrawal, as we would not hold a 1:1 relationship anymore on platform even though we’d have those funds being delivered back to us from the liquidity side eventually.
Connect Financial will provide a segregated corporate warehouse of funds for the more common on-platform assets to support access to instant withdrawals. - Originally, we had planned for out-of-the-box network bridging, allowing you to deposit assets in on one chain (e.g. Arbitrum) and withdraw out on another (e.g. Ethereum). We will still be offering this solution though it will not be fully available on day one of launch unless the counter funds are provided in the corporate warehouse.
The important thing to take away from this change is that we are developing a platform where resilience and longevity is built right into the codebase. This is more than just a technical decision — we have worked closely with our product, compliance and legal teams to determine the best solution that weighs customer experience, compliance, protections and security appropriately.
So where does that put us today? We are finalizing the updates to the last modules over this upcoming week and expect all platform systems to be back online and testable. As such we’ll do a quick cursory internal testing round to make sure nothing unexpected was introduced with the update while we formalize our user testing onboarding process.
Initial testers will have access to the majority of the platform as a whole, though some modules will be purposefully taken offline at times to allow focused testing periods of specific functions and processes. More specifics will follow via a google doc along with processes for reporting issues, suggestions and everything else.
We will announce to the community when invites are sent out and how to request access for testing.
