July 6, 2020
Jerald David
Blog

The Journey to Launching the Arca U.S. Treasury Fund and ArCoin

Today may be a day that changes financial services forever. Arca team members have been lucky enough to launch two regulated 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 is registered under the Investment Company Act of 1940 ('40 Act) 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 regulated by the U.S. Securities and Exchange Commission (SEC) under the '40 Act 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 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 backed by the full faith and credit of the U.S. Government, 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
  • Use of blockchain technology in connection with the ‘40 Act structure, allowing for peer-to-peer transferability
  • Transfer of ArCoin peer-to-peer on the blockchain
  • Investment in U.S. Treasuries, offering investors interest-bearing securities with a quarterly yield
  • Transparency and bankruptcy protection

Why should anyone care about this? By using blockchain technology, we believe that ArCoin's peer-to-peer transferability can enable a fund registered under ‘40-Act to have greater utility than previous financial instruments. No longer are investment products defined by their investment goals, but 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 a volatility and trust problem. 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, many of these tokens are not subject to regulatory oversight, making it impossible for regulated entities to hold them, and they do not offer the type of investor protections (regulated custodians, regular and transparent audits, an independent fund board, etc.) that funds registered under the ‘40-Act typically include.  

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 and are backed by the full faith and credit of the U.S. Government
  • The potential for the Fund to earn and distribute income to investors
  • Registered under the Investment Company Act of 1940
  • Fund assets held in custody by a bank custodian, as required by the Investment Company Act of 1940
  • 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 to 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.

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