[ARCA] ArCoin MIP6 Collateral Onboarding Application

Hello MKR Community,

This is our application for ArCoin, a digital asset created through the first SEC registered fund to issue digital shares on the blockchain, to be used as MCD for MakerDAO.

Who is the interested party for this collateral application?
Arca is an investment management company focused on digital assets and blockchain technology. Since its founding, Arca has focused on building an institutional infrastructure that leverages the highest operational, risk, legal, regulatory and security standards. Within Arca, Arca Labs pioneers innovative, regulated products in a digital structure that aim to revolutionize how we think about investments.

Provide a brief high-level overview of the project, with a focus on the applying collateral token.
ArCoin is the brainchild of Arca Labs, the product development division of Arca. The Arca U.S. Treasury Fund (the “Fund”) is a closed-end fund invested in a portfolio of short-duration U.S. Treasury bills, bonds and notes. The Fund is the first of its kind to be SEC-registered under the Investment Company Act of 1940 (’40 Act). ArCoin are digital securities issued by the Arca U.S. Treasury Fund and by purchasing ArCoin, you are investing in shares of the Arca U.S. Treasury Fund. Arca chose to offer digital shares of the Arca U.S. Treasury Fund in the form of ArCoin because of advantages this innovation offered. First, by using the blockchain ArCoin holders can quickly transfer digital securities between investors (peer to peer) in small increments. Second, the Fund and its transfer agent are able to track transactions that are published on the Ethereum blockchain on a real-time basis allowing for a unique auditing opportunity. Third, by using blockchain the need to go through a brokerage to purchase ArCoin is eliminated.

Provide a brief history of the project.
In late 2018, Arca submitted their first prospectus to the SEC outlining the specifics of the Arca U.S. Treasury Fund. For Arca, it was the highest priority to bring a registered, lower volatility digital security to the blockchain space. In order to meet SEC compliance requirements under the ‘40 Act, Arca was tasked with creating a first of its kind product. ArCoin needed to meet the highest level of securities standards; this process required seven service providers to bridge the gap between traditional finance and crypto. Now, almost two years later, ArCoin has been granted effectiveness by the SEC and is now the first SEC registered blockchain traded fund. The selection of short term U.S. Treasury bills, notes and bonds as the underlying collateral in this blockchain traded fund was extremely intentional. Arca hoped to provide investors with a lower volatility asset when compared to other assets in traditional financial and crypto markets. For Arca Labs, the future viability of ArCoin rests in the many use cases that this coin may offer. For individuals, Arcoin could be an interest-bearing low-volatility investment that mitigates digital-asset market volatility. For clearing and settlement purposes, ArCoin has the opportunity to eliminate intermediaries and reduce risk through the efficiencies of blockchain. ArCoin could streamline internal processes by rapidly and efficiently transferring funds across entities. It has the ability to further offer lenders and borrowers a more secure alternative with interest payments in accordance to the underlying collateral, U.S. Treasuries. ArCoin could prove to be a major insurance tool. It could allow institutions to easily hold funds internally in the event of a distribution/ payout and would offer the same safeguards to individual investors.

Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.
Website
ArCoin Portal: ArCoin may be purchased through the ArCoin portal maintained by TokenSoft, ArCoin’s Service Provider.
Prospectus: All documentation regarding the fund and digitized security structure may be found in ArCoin’s prospectus.
Token Standard: ArCoin operates on the ERC-1404 standard which is an open source standard for security tokens.
ArCoin Contract

Link any available audits of the project. Both procedural and smart contract focused audits.
ERC-1404 Open Source Standard
Procedural: The Fund will report its Net Asset Value (NAV) on a daily basis and will publish the NAV each business day on the Arca Labs website. The NAV of an ArCoin is calculated by taking the total value of all the cash, U.S. Treasury Securities, and any other securities in the Fund’s portfolio, minus any liabilities, and dividing it by the number of ArCoin outstanding to get a per share NAV. The calculation of NAV is conducted by the Fund’s Administrator, Ultimus Fund Solutions. The Fund will also provide each holder of ArCoin with a monthly account statement showing the value of their holdings and will publish and deliver financial statements on a semi-annual basis that show a complete list of all assets held by the Fund. The Fund’s annual report will be audited by an independent registered public accounting firm, RSM US LLP. Although the SEC mandates a minimum set of requirements, the Fund will make best efforts to report as frequently as possible in order to ensure the highest level of transparency into our assets.

Link to any active communities relating to your project.
Due to the high level of regulatory compliance surrounding ArCoin any communities resulting from this project are not under the purview or maintained by Arca.

How is the applying collateral type currently used?
ArCoin can be used for multiple purposes. For individuals, ArCoin could potentially be a useful and productive digital asset while limiting volatility inherent with many other digital assets. For financial institutions and digital-assets enterprises, ArCoin could potentially be used in the following scenarios: clearing and settlement, lending, treasury management, payments, and industries where banking has created friction.

Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?
Arca is an advisor to the fund while the fund itself is classified as a Trust. The Trust bears responsibility for the collateral of ArCoin overseen by the United States Securities and Exchange Commission (SEC). The SEC verifies reporting which Arca is mandated to produce. This reporting most notably ensures that the underlying collateral, or ArCoin, is fully backed and that Arca is following due diligence regulations.

Where does exchange for the asset occur?
ArCoin is currently offered through the ArCoin Investor Portal. ArCoin may also be exchanged in a peer to peer fashion pending KYC/AML registration of the receiving wallet.

(Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

(Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.
Arca’s Form ADV is mandated by the SEC along with state securities authorities and stands as an investment disclosure document.
Once again, the regulatory parameters of ArCoin can be found in the prospectus.

(Optional) List any possible oracle data sources for the proposed Collateral type.

(Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

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An investor should carefully consider the investment objectives, risks, charges, and expenses of the Arca U.S. Treasury Fund before investing.

This and other information is available in the Fund’s prospectus, which should be reviewed carefully prior to investing. To obtain a prospectus, please call 1-800-445-3148.

The Funds Annual Operating Expense Ratio, as reflected in the current prospectus is 3.22%, however Management has agreed to an expense cap of .75% through an expense limitation agreement for the first year after effectiveness of the Fund’s registration statement. For more details relating to the fund’s expenses, please review the prospectus.

No assurance can be given that the Fund will achieve its investment objective, and investment results may vary substantially over time and from period to period.

An investment in the Fund involves risk including loss of principal. An investment in the Fund is suitable only for investors who can bear the risks associated with limited liquidity in the shares and the uncertainty of emerging technologies, and should be viewed as a long-term investment.

Other risks specifically associated with the Arca U.S. Treasury Fund are detailed in the prospectus and include no history of operations risk, conflict of interest risk, interval fund risk, no minimum amount of proceeds risk, fund closure risk, liquidity risk, tax related risks, credit and non-payment risk, interest rate risk, portfolio management risk, market risk, call risk, valuation risk and issuer risk.

The Arca U.S. Treasury Fund will be one of the first registered funds to offer digital securities and there are additional risks associated with this feature of the fund, including regulatory risk, liquidity risk, emerging technology risk, operational and technology risk, and risks specifically associated with the Ethererum blockchain. There is the risk that management may be unable to successfully use blockchain technology to validate ownership and transfer Arcoins.

For details regarding all of the risks described above, please review the prospectus.

Arca Capital Management, LLC “Arca” serves as adviser to the Arca US Treasury Fund, distributed by Ceros Financial Services, Inc., Member FINRA/SIPC “Ceros”. Arca and Ceros are not affiliated.

16 Likes

I’m 100% in the concept but there is one problem, maybe I missed something.

Short term bills are far lower than the (discounted) .75% yearly expenses. We already have USDC or soon PAX that store cash as t-bills and is ERC-20. This collateral is strictly less attractive than USDC or even DAI. Borrowing/minting DAI from ARCA would ensure a liquidation at some point. Of course with t-bills yielding above 3.22% it would be different, but it’s not for the foreseeable future.

4 Likes

I agree with @SebVentures, I don’t think that cash equivalents are going to work if they have additional transfer restrictions and carrying costs compared to USD stablecoins like USDC or TUSD. However I’m very excited about the overall prospects of tokenizing closed end funds. If you have any offerings that target non-cash assets like long duration treasuries, corporate bonds, ABS, MBS, etc, that could potentially be a home run as long as the fees are kept under control.

7 Likes

I do not think that this is a concern that should prevent an asset from being approved. The use case for this kind of collateral would more likely be for short term cash flow, which is still very valid.

Please know that our response lag is due to a need to clear communications with compliance before we respond (this is due to our regulatory standing). We’re looking forward to engaging shortly and addressing all comments from the community in due time.

6 Likes

Not legal advice, but there are some obvious regulatory questions posed by using an asset that has registered with securities regulators.

Hello @blairb and thank you for this highly interesting collateral application. Reading your SEC registered prostectus I have three questions:

  1. ARCA is a closed-end fund registered for USD100 million. In the world of US Treasury Bills, this amount is to put it mildly not very large so I must assume you have expansion plans. Why don’t you tell us a little bit more about that? After all ARCA is making a huge leap here - straight from the conservative world of Treasury Bills to the cutting edge of Defi. This is a huge step for many traditional buyers of T-Bills and opens up a whole range of intermediate investment possibilities in the terms of advice, staking and risk management.

  2. In the ARCA FAQ section you mention ArCoin being peer-to-peer transferable. Basically meaning it can be bought and sold. The same page also mentions all ArCoin holders will have to undergo AML/KYC. How do you plan to enforce this? (EDIT: sorry forgot it was ERC-1404) Would it be possible for non-KYC’d individuals to hold ArCoin but not be able to redeem them?

  3. As T-Bills are considered extremely safe investment objects, the largest uncertainty for Maker will most likely be the counterparty risk of Arca. What are the steps for winding down Arca and how would this affect ArCoin?

3 Likes

There are differences between PAX, USDC and ArCoin that should be considered when making this comparison. PAX and USDC are not backed by U.S. Treasuries, they are backed by USD. ArCoin is the digital share representation of the Arca U.S. Treasury Fund (the “Fund”), a fund composed mostly of short duration U.S. Treasuries. The total return of the Fund is determined by the change in price of the underlying securities, the interest paid minus expenses and liabilities. This would be in addition to any interest distributed through the MKR system. You are correct in that there is an expense cap for the Fund.

When considering the return of treasury instruments, it is important to consider the yield, the potential for the change in the price of the security, as well as some of the unique properties of treasuries when compared to USD.

1 Like

The transfer restrictions require that the Transfer Agent of the Fund has conducted AML/KYC on any ArCoin holders and that they provide the Fund with a wallet address. The ETH address can be changed at any time after the initial registration. There is a cost associated with owning this token, but there are no creation or redemption or Exchange fees. In addition, any interest payments from the Fund’s portfolio will be distributed to ArCoin holders. Please also note that all investments include risks, there is no guarantee that the fund will meet its investment objectives, please see our prospectus for more information.

1 Like

Hello @Planet_X

1.1 You are correct, we registered the Arca U.S. Treasury Fund (the “Fund”) for 100m dollars. As this is the first fund that issues digital securities (“ArCoin”) through the use of blockchain technology, we set the fund size a lot lower than traditional U.S. Treasury funds and may have the ability to amend the fund size pending approval from the SEC at a later date.

1.2 In terms of our plans, Arca set out to create the Fund using blockchain technology two years ago under the premise that a lower volatility coin, created under the Investment Company Act of 1940 would be a powerful advancement for the entire digital asset community. In creating ArCoin and the Arca U.S. Treasury Fund, we’ve also created a wrapper that can be used for a variety of different assets, similarly to what @monet-supply suggested above. Our plans are to continue to develop and launch an innovative family of products under the nomenclature Blockchain Transferred Funds (BTF).

1.3 Finally, we agree with your assessment that ArCoin opens up a whole range of investment opportunities which is why we have been speaking with Maker since January 2020.

2.1 ArCoin is transferable via the ETH blockchain from one approved wallet to another approved wallet. ArCoin is created using a portal built in conjunction with our partners at TokenSoft. As part of the onboarding process, conducted through the portal, the Fund will conduct AML/KYC on any prospective ArCoin holder. Once approved, a buyer will be required to provide an ETH wallet address that can be whitelisted and associated with that buyer. TokenSoft also created a smart contract that was audited by Quantstamp on Arca’s behalf. As part of the Fund structure, the Transfer Agent to the Fund, DTAC, LLC, monitors the blockchain for any transfers of ArCoin. The smart contract will only permit peer to peer transfers of ArCoin that are associated with a whitelisted wallet address. Under the flows we have created, any individual or entity must undergo AML/KYC in order to possess ArCoin.

2.2 We would encourage any interested participant to undergo the onboarding process through our portal. There is no obligation to purchase ArCoin after completing the onboarding process.

2.3 Please note that the portal has been operational since July 6th, and we have, to date, minted 122,360 ArCoin tokens through it.

3.1 The Fund is a closed-end fund registered with the SEC under the Investment Company Act of 1940. This was done so very deliberately as we wanted to offer ArCoin holders an array of customer protections that exist in the traditional finance world. These protections include, but are not limited to:

  • All assets are held in trust at the Fund’s custodian bank (UMB, N.A.)
  • Periodic Independent Audits by an Independent Auditor (RSM US, LLP)
  • Independent Fund Administrator overseeing daily operations (Ultimus Fund Solutions)
  • Independent Board of Trustees comprised of leading industry veterans
  • Periodic Financial Reporting (Audited Financials, Mandatory SEC filings)
  • Daily publishing of Net Asset Value (NAV) of the fund by an independent 3rd party (Ultimus Fund Solutions)

3.2 Most importantly, under the Investment Company Act of 1940 and as an ArCoin holder you are protected from such fund-company disasters. The Fund is set up as an individual company, separate from the Fund’s Adviser (Arca) and owned only by its shareholders. In the unlikely event that Arca filed for bankruptcy, its creditors would not be able to touch the money in the Arca U.S. Treasury Fund.

3 Likes

Hey - Blair from Arca here.

Monday September 21st ArCoin, digital shares of Arca’s U.S. Treasury fund, is going live for a greenlight vote with the MKR community. I’ve written a blog post sharing my thoughts on using real world assets as MCD and the fusion of CeFi and DeFi this greenlight will enable.

I am hoping to hear the community’s commentary on this. Feel free to reach out to me with your thoughts in this forum or on telegram @digitalblair. Also please stay tuned for updates, we have another blog post coming soon which will dive into our solutions for some of the more technical parts of the integration

3 Likes

In addition, the entities ready to hold / borrow on highly regulated, treasury-backed fund shares will be very different from those who, say, are currently posting USDC as vault collateral. As long as we can find a viable risk premium a comparison with centralised stablecoins doesn’t seem warranted. They cater to different users.

@blairb Do you have any idea of the amount of ArCoin that could be put in a vault to mint DAI? What kind of use case for your customers? What is the expected yield assuming constant interest rates and credit default swap (to have an idea of what we can set as stability fees)? A Maker Vault can indeed bring liquidity to an ArCoin investment.

@swakya That indeed might be a good point. We need to bring in institutional investors.

@SebVentures

  1. We initially set the size of the Fund at $100,000,000 per our prospectus, however, as more ArCoin are issued, we likely will work with the SEC to increase the size of the Fund.

  2. Since we began offering ArCoin and the Arca US Treasury Fund in early July, Net Asset Value (NAV) has not strayed from a dollar. This is largely due to the balance between increasing bond prices and lower interest rates. Yield moving forward is impossible to predict as rates fluctuate based on the Fed. However, any additional yield will be returned to the ArCoin holder. In chatting with members of the Maker community, many have recommended the collateralization ratio which is currently assigned to stablecoins within the MKR system to also apply to ArCoin.

  3. The addition of blockchain technology allows a very traditional and well-known financial product, US Treasury Funds, to have increased utility. Therefore, ArCoin customer’s use cases range from treasury management to insurance to lending and payments.

  4. One objective of Arca, as mentioned by @swakya, is for ArCoin to act as a gateway to bring institutional investors into this space. This was part of our thesis from 2018 - using a regulated structure (‘40 Act Fund) and an underlying instrument (US Treasuries) that institutional market participants are familiar with and would feel comfortable using.