Investment firm nabs SEC registration for U.S. Treasury fund built on Ethereum

Source: The Block 2020-07-07

Quick Take

After two years of work, investment firm Arca has registered the Arca U.S. Treasury Fund with the Securities and Exchange Commission
The fund is invested in short term treasury securities but investors hold their shares in “ArCoins,” an ERC-1404 token
This is the first in a coming portfolio of SEC-compliant products with a blockchain bent

Digital asset-focused investment firm Arca has obtained a registration with the Securities and Exchange Commission (SEC) for a fund invested in U.S. Treasury securities that pays out in a digital share — and shareholders are protected from the woes of losing their private keys.

After nine submissions over two years, the Arca U.S. Treasury Fund is now available for investment as an SEC-registered closed-end fund that will issue its shares in the form of ArCoin, an ERC-1404 token that can trade on the Ethereum blockchain.

The Arca U.S. Treasury Fund has been registered under the Investment Company Act of 1940, which mandates that investment companies and funds register with the SEC and provide sufficient disclosures and requirements for investment products.

Why register?

Registration with the SEC under the 1940 Act means Arca U.S. Treasury Fund investors will get their money back in the event of problems with the bonds’ utility, thanks to the Act’s bankruptcy protections and other assurances, including UMB as the fund’s custodian.

The fund itself operates like any other Treasury securities-based fund, with an added blockchain layer in the delivery of the shares. Investors aren’t putting their money in digital securities, but they are receiving their shares via digital tokens issued on Ethereum.

Eighty percent of the fund will be invested in “interest-bearing, short duration, U.S. Treasury securities,” according to the firm. Investors will receive one ArCoin for each share they hold, and accrued interest is paid to ArCoin holders each quarter.

Digital shares

While ArCoins have utility and leverage Tokensoft’s technology — they can be used by financial institutions for clearing, settlement, lending, trading and payments, according to Arca — they are termed “digital shares” rather than tokens or digital assets since they represent a share in the fund. Essentially, Arca has merged the capabilities of a crypto token with a paper share to make a so-called digital share.

Digital shares enable more accurate record-keeping for the fund, although Arca stores its records off-chain, according to Jerald David, president of Arca Capital Management LLC.

“ArCoin offers enterprises the opportunity to manage their business operations, treasury management and payments with greater efficiency, less cost, faster settlement times and direct tracking of all transactions,” David said in a statement.

That record of ownership also plays a role in protecting investors’ holdings, even from their own mistakes. The ERC-1404 framework only allows holders of whitelisted addresses, as opposed to other protocols like the popular ERC-20. Investors will access their ArCoins through a user portal with Know-Your-Customer and anti-money laundering protections, but they may hold ArCoins in their own wallets, accessible by private keys. This means that holders have some say in who holds their shares, even though UMB maintains custody of the Treasuries.

Usually, lost keys usually mean lost crypto. However, Arca has included a legal structure to its fund that allows shareholders to apply to have ArCoins representing their shares replaced. If one loses their private key, they can apply to the transfer agent, DTAC, for replacements. The blockchain records can prove those ArCoins are sitting in an inaccessible wallet, the shares are voided and reissued.

This product marks the first in a coming portfolio of 1940 Act-compliant financial products, according to the firm. Future offerings and innovations of the existing ArCoin will be based around offering SEC-compliant digital asset products.

ArCoin

Investment firm nabs SEC registration for U.S. Treasury fund built on Ethereum

Quick Take

Why register?

Digital shares

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