Today may be a day that changes financial services forever. Arca team members have been lucky enough to launch two futures exchanges, many derivatives contracts, and an ETF company, just to name a few. While each of these initiatives forever impacted the landscape of finance, our current launch of the Arca U.S. Treasury Fund (“Fund”) and ArCoin may be more transformative. It is not often that you get to work on a project with the potential to change the way we do business, but we believe we are launching such a product today.
Over the course of the past 24 months, we took an 80-year-old financial product structure and integrated it with emerging technology—blockchain. The result is the first fund that offers digital shares.
The Arca U.S. Treasury Fund employs a well-understood structure from the traditional fund world as its foundation. It is a closed-end fund that is invested in a portfolio of short-duration U.S. Treasuries. Where it gets interesting is how we use blockchain technology to streamline the backend mechanics to create a digital security. In other words, instead of issuing traditional shares, the Fund will issue ArCoin, which are digital securities. Put another way, by purchasing ArCoin, a person will be investing in the Arca U.S. Treasury Fund.
Blockchain technology allows for the facilitation of the peer-to-peer transfer of ArCoin, which aims to offer greater transparency, traceability, speed, and a reduction in costs. Through peer-to-peer transfers, investors in the Arca U.S. Treasury Fund can send ArCoin from their wallet directly to any other ‘whitelisted’ wallet, eliminating the need for brokers and other financial intermediaries. We’ll provide the option to create a wallet for those who do not have an Ethereum wallet. This is a real-world example of a new technology being used to create efficiencies in the way we conduct financial transactions.
When designing the Fund, we deliberately selected U.S. Treasuries for the portfolio. We wanted ArCoin to be backed by a portfolio of instruments that are interest-bearing, historically considered less volatile, and with the potential to provide varying degrees of yield. U.S.Treasuries, are widely used and offer varying degrees of yield, which made them the obvious choice for us.
Some of the innovations that the Arca U.S.Treasury Fund offers include:
● Issuance of ArCoin, which are digital shares of the Arca U.S. Treasury Fund
● Transfer of ArCoin peer-to-peer on the blockchain
Investment in U.S. Treasuries, offering investors interest-bearing securities with a quarterly yieldWhy should anyone care about this? By using blockchain technology, we believe that ArCoin's peer-to-peer transferability can enable a Fund to have greater utility than previous financial instruments. Through blockchain, investment products are defined not only by their investment goals but also by what is able to be done with the structure. Working in conjunction with 18 leading companies within the digital assets space, we identified five potential use cases in which ArCoin could address enterprise challenges currently present in the industry.
These include:
● Clearing and settlement
● Lending
● Treasury management
● Payments
● Insurance
How would this work? Let's examine the "treasury management" use case as an example. Corporate treasurers currently use low-risk financial instruments (e.g. municipal bonds, money market funds, treasuries, etc.) to manage their corporate reserves and the flow of funds between their different international corporate entities. Often this is a tedious process, requiring treasurers to work with a bank or financial institution to invest on the behalf of the company. Additionally, there are important timing considerations (such as standard banking hours) and costs (using FedWire), which result in delays.
Using ArCoin instead offers two advantages to the Treasurer:
1. Elimination of the financial intermediary due to direct access to ArCoin
2. Ability to use the blockchain to transfer ArCoin to subsidiaries and other corporate entities with a keystroke
When we were creating this financial product, we knew that the digital assets ecosystem had volatility and trust problems. Because of the nascent state of the ecosystem, we’ve seen wild swings in the prices of digital assets. In response, “stablecoins” were created as a potential safe haven to crypto volatility—often pegged 1:1 to a fiat currency. However, stablecoins have varying oversight, making it difficult for many corporate entities to hold them. Additionally, a lack of investor standards in the crypto ecosystem (regulated custodians, regular and transparent audits, an independent fund board, etc.) makes ArCoin stand out.
ArCoin was conceived in an effort to solve these problems. Although ArCoin is not a stablecoin, it does offer holders certain advantages:
● A fund invested in a managed portfolio of short-duration U.S. Treasuries, which have historically been considered less volatile.
● The potential for the Fund to earn and distribute income to investors
● Fund assets held in custody by a bank custodian
● Peer-to-peer transfer
Closing Thoughts
We cannot express enough gratitude to the visionaries that believed in Arca when this project was in its infancy. While this product was initially conceived by Arca Chief Legal Officer and Co-Founder Phil Liu, many have contributed to its genesis along the way—this includes law firm Morrison & Foerster LLP and our partners Ultimus Solutions, TokenSoft, DTAC, LLC, Ceros Financial Services Inc., Member FINRA/SIPC, UMB, RSM and Arca Capital Management. Working with a completely new type of product and technology required a heavy lift by our entire team and partners. It was not an easy task to understand the essence of the product we were trying to build and integrate it into the incumbent financial system. Thank you all for your incredible hard work and dedication. We could not have launched this product without each and every one of our team members and service providers.
Every member of the Arca Labs team looks forward to what lies ahead. As we enter into this new phase of our business, we are invigorated to work with industry leaders to incorporate ArCoin into your workflows and take one step toward creating a stronger, faster, and more efficient global financial system.
"At Arca Labs we're breaking through the current limitations, we're developing cutting-edge solutions, and really we're accelerating the evolution of finance."
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Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, legal advice, tax advice, a research report, or a recommendation. Any decision to invest or take any other action with respect to any investments discussed in this commentary may involve risks not discussed, and therefore, such decisions should not be based solely on the information contained in this document. Please consult your own financial/legal/tax professional.
Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.
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