FX Risk

Definition

FX risk (foreign exchange risk, or currency risk) is the potential financial loss caused by fluctuations in exchange rates between currencies.

For a USD-pegged stablecoin like USD0, any unhedged exposure to non-USD currencies can reduce the USD value of the collateral backing user deposits.

Note (KB alignment): The parameters and controls below should be periodically checked against the internal Knowledge Base (KB) to ensure they reflect the most current risk settings and operational procedures.

Impact on Usual’s Collateral

USD0 is designed to maintain a strict 1:1 peg with the US Dollar. If the protocol’s collateral portfolio were to include non-USD-denominated investments, exchange-rate movements could materially change the USD value of USD0’s backing.

FX fluctuations can be driven by factors such as:

• Macroeconomic indicators

• Geopolitical events

• Interest-rate differentials

• Shifts in investor sentiment

Because USD0 holders expect each token to be redeemable for exactly $1 of collateral at all times, even small FX-related losses could threaten the peg and undermine confidence. For this reason, Usual enforces an absolute prohibition on unhedged currency exposure across its collateral portfolio.

Risk Policy: Zero Tolerance

Usual maintains a zero tolerance policy for FX risk. The protocol only accepts Real World Assets (RWAs) that:

• Exclusively invest in USD-denominated assets, or

• Are 100% FX hedged to eliminate currency exposure

This policy applies to all collateral types accepted by the protocol, including Hashnote USYC, M by M0, USTBL, and any future collateral providers onboarded through governance.

By restricting collateral to US Treasuries, US government securities, overnight repos with USD-denominated counterparties, and cash equivalents, the protocol eliminates direct FX risk from the reserve portfolio by design.

Risk Monitoring and Management

Usual uses a multi-layered defense framework to maintain continuous compliance with its zero-FX-risk policy.

First Line of Mitigation: Strict Collateral Eligibility

• FX risk is addressed at onboarding: only RWAs that invest solely in USD assets or maintain 100% FX hedges are eligible.

• All collateral must pass rigorous due diligence prior to onboarding, including verification that underlying investments are denominated solely in USD.

• This requirement is defined in the protocol’s collateral policy and enforced through the tokenizer evaluation process.

Second Line of Mitigation: Asset Selection and Management Oversight

• Usual selects tokenized RWA products with strict limitations on holding non-USD-denominated assets. Accepted tokenizers’ investment policies must explicitly restrict or prohibit non-USD holdings.

• The tokenizer’s asset management team is responsible for day-to-day compliance with Usual’s FX constraints within fund operations.

• During due diligence, Usual evaluates each tokenizer’s:

  • Investment policy

  • Custody setup

  • Asset management practices to confirm that FX exposure does not exist and cannot be introduced.

Third Line of Mitigation: Enhanced Dual-Layer Monitoring

• Beyond the tokenizer’s internal monitoring, Usual performs regular independent reviews of holdings within accepted RWAs.

• This dual-layer monitoring (tokenizer oversight + Usual verification) is designed to detect and prevent deviations from the zero-FX-risk policy.

• On-chain verifiability of collateral composition adds transparency, enabling Usual and the community to audit reserve holdings in near real time.

Non-Compliance Management

Usual maintains a defined escalation path if any deviation from the FX policy is detected.

Initial Response to Deviations

• Usual will promptly engage the tokenizer’s asset management team to:

  • Identify the root cause

  • Resolve discrepancies

• Corrective actions may include immediate rebalancing of the affected portfolio back to USD-only assets.

Escalation of Persistent Deviations

If a deviation persists after initial corrective efforts, Usual escalates the issue through protocol governance (the Usual DAO) to determine the appropriate response. Potential actions include:

• Reducing exposure to the non-compliant collateral provider by adjusting portfolio weights via the Multi Collateral Controller

• Removing the RWA from the eligible collateral list

• Pausing minting against the affected collateral until compliance is restored

• Increasing insurance fund allocations to offset potential losses from temporary exposure

Relationship to the Broader Risk Framework

FX risk is one component of Usual’s broader financial risk policy:

Risk Type	Policy	Duration / Threshold
FX Risk	Zero tolerance	USD-only or 100% hedged
Credit Risk	Zero tolerance	US Treasuries, quasi-government debt, or cash only
Interest Rate Risk	Controlled	Portfolio average duration ≤ 0.33 years; individual RWAs < 0.5 years
Liquidity Risk	Controlled	Redemption within 5 days with minimal slippage

Together, these constraints aim to keep USD0 collateral concentrated in the safest, most liquid, USD-denominated, short-duration instruments available—such as US Treasury Bills and overnight reverse repos—thereby eliminating FX risk by design.