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.
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.
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.
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.