APPENDIX B: ACTUARIAL GUIDANCE (DRAFT)

Minnesota Department of Commerce Guidance Note: 2025-01

Authority: Minn. Stat. § 325M.05, Subd. 5

1. PURPOSE

This Guidance establishes the Minimum Capital Requirement (MCR) for Authorized Issuers under the Minnesota Digital Trust & Consumer Protection Act. It provides the standardized formula for calculating the required Solvency Bond, ensuring that capital reserves scale with the Liability Exposure created by the Issuer's credentialing volume.

2. THE SOLVENCY FORMULA

The Minimum Capital Requirement (MCR) for an Authorized Issuer shall be calculated quarterly using the Minnesota Digital Trust Solvency Model (MDTSM):

MCR = max(B_min, Σ(V_i × W_i × λ_rev) + K_tail)

Where:

• B_min is the Statutory Floor ($50,000 for standard issuers).

• V_i is the Volume of active credentials in Class i.

• W_i is the Risk Weight assigned to Credential Class i.

• λ_rev is the Revocation Latency Multiplier.

• K_tail is the Tail Risk Add-on for high-velocity automated issuers.

3. RISK WEIGHTS (W_i)

Issuers must categorize their active credentials into the following risk buckets. The Risk Weight represents the maximum probable loss per credential event.

Note: Class D-2 carries a risk weight identical to Class C. If you give a bot a wallet, you bond it like a banker.

4. THE REVOCATION LATENCY MULTIPLIER (λ_rev)

The greatest risk in digital identity is the "Zombie Credential"—a credential that remains valid after the underlying fact (e.g., employment) has changed. The bond requirement scales up based on how frequently the Issuer forces a status check.

Actuarial Logic: An issuer that allows a credential to live for weeks without checking its status is exponentially more likely to generate a liability claim. This multiplier incentivizes the adoption of "Real-Time Status Lists" (Bitstring Status Lists).

5. THE "FLASH CRASH" SURGE FORMULA (Tail Risk)

For Issuers deploying High-Frequency Automated Issuance (e.g., an AI agent minting credentials at scale), the standard linear model fails to capture "Flash Crash" risks.

Quadratic Surge Model:

If Issuance Velocity (v) exceeds 1,000 credentials per hour, the Tail Risk Add-on (K_tail) is calculated as:

K_tail = $1.00 × ((v - 1,000)² / 100)

Hard Rate Limit:

Notwithstanding the formula above:

(a) If Issuance Velocity exceeds 100,000 credentials per hour, the Authorized Issuer's credential issuance capability shall be automatically suspended pending manual review.

(b) The Authority shall notify the Authorized Issuer within one (1) hour of automatic suspension.

(c) Automatic suspension under this provision is not a revocation and does not trigger Negative List placement.

(d) The Authorized Issuer may petition for reinstatement by demonstrating adequate collateral and operational controls. The Authority shall respond within two (2) business days.

Impact Analysis:

6. ACCEPTABLE COLLATERAL SCHEDULE

Authorized Issuers (and the Authority) may satisfy the MCR using a mix of assets. To protect against volatility, assets are subject to a Haircut (Discount) when calculating recognized value.

Note on Tier 4: Bitcoin and Ethereum are accepted but require 2:1 over-collateralization due to 24/7 volatility. See Section 325M.05, Subd. 5(d) for maintenance margin requirements.

7. THE "PUBLIC OPTION" PRICING (Assigned Risk)

To prevent the Minnesota Digital Trust Authority from becoming insolvent, it must price its bonds using "Last Resort" pricing. The Authority shall charge a premium over the calculated actuarial risk to encourage migration to the private market.

Authority Premium Pricing:

Premium_Authority = (MCR × 0.05) + AdminFee

5% Annual Premium: The Authority charges 5% of the total bond amount annually.

Compare to Market: Private surety markets typically charge 1-3% for standard risk. This ensures the State only insures those who cannot get private coverage (the "lemon" market), but collects a sufficient premium to cover the inevitable losses.

8. TRIGGER EVENTS: WHEN DOES THE BOND PAY?

A "Compensable Liability Event" occurs, and the Solvency Bond becomes immediately callable by the Commissioner, upon the earliest of:

(a) Acknowledged Breach: The Authorized Issuer or Controller admits in writing (or on-chain via cryptographic signature) that a credential was issued in error or fraudulently.

(b) Administrative Finding of Fact: The Commissioner issues a Notice of Determination finding, by a preponderance of the evidence, that:

(1) The Credential contained a materially false Factual Claim at issuance (or was materially inconsistent with the source system under section 325M.01, subdivision 8(a)(1)); AND

(2) A Relying Party suffered quantifiable financial loss due to Good Faith Acceptance.

(c) Insolvency Default: The Authorized Issuer fails to pay a valid judgment within 30 days, or files for bankruptcy protection.

The "Pay First, Sue Later" Rule:

Upon an Administrative Finding under paragraph (b), the Surety must payout to the Consumer Restitution Fund within 14 days.

Safe Harbor for Sureties: If the Controller appeals the finding to State Court and wins, the Fund repays the Surety with interest at the rate specified in Minn. Stat. § 549.09.

Construction: This provision prevents the "Strategy of Delay" where insurers drag out payouts for years. The State seizes the cash immediately upon the administrative finding; the litigation happens over the State's money, not the victim's.