ArCoin by Arca: how the first tokenized US government bonds work

By Kluma | InterestingCrypto | 9 Jul 2020

On July 6, Arca's digital asset manager registered its Arca US Treasury Fund closed-end crypto fund with the US Securities and Exchange Commission (SEC). The fund invests most of its funds in short-term US bonds, while the fund's shares are presented in the form of ArCoin Ethereum tokens in the new ERC1404 format, which are fully consistent with securities laws. How the Arca US Treasury Fund and ArCoin are arranged, what their advantages are and how their appearance will affect the cryptocurrency market?

Why SEC registration is important for Arca US Treasury Fund

Arca US Treasury Fund is a closed-type hedge fund owned by Arca, an American digital asset management company. It seeks to combine the regulatory, legal, and operational standards of a traditional financial sector with blockchain efficiency. The company believes that it is actively managed hedge funds that are the best way to solve the problem of volatility, immaturity and the rapidly changing nature of cryptocurrencies as an investment asset.

Registration for the SEC was not easy for the fund - Arca agreed on the form of its digital shares within 20 months. But now the fund’s securities comply with the Law on Investment Companies of 1940, which regulates the operation of investment funds, including those issuing their own securities.

For investors, SEC approval is the opportunity to receive guarantees from the traditional financial market: broker control by the regulator, independent audit and regular reporting, as well as the right to return your money in case of bankruptcy of the broker.

For an investment fund, registration with the SEC imposes obligations to provide information on the financial position of the company, investment policy and current operations, meet liquidity requirements, conduct an independent audit and transfer control of assets to an independent board of trustees. But this is exactly what allowed Arca to release an institutional product.

How does the Arca US Treasury Fund work?

Arca US Treasury Fund invests 80% of its assets in short-term US Treasury bonds. The remaining funds are invested in fixed income debt securities. As the fund plans to invest in low-risk assets, it is expected that the price of ArCoin will be stable.

The fund works the same way as any other fund holding US debt securities, but with the addition of a blockchain for managing shares. Investors do not invest their money directly in securities, but purchase fund shares - ArCoin tokens (ARCT). They were created by a special division of the company - Arca Labs. The technical services provider is TokenSoft, a crypto start-up that helps companies launch and sell tokens.

ArCoin sets the new standard for Ethereum tokens - ERC1404. It is designed specifically to meet regulatory requirements. Unlike the universal ERC20 standard, ERC1404 is controlled more strictly: such a token can be frozen, and the addresses to which users can send it must also be predefined. Such a “white list” of allowed addresses allows the SEC to almost completely monitor and track their circulation and ensures that tokens will not be transferred outside of regulatory supervision.

Each ArCoin grants the right to one share in the fund. The price of the coin is $ 1 with a minimum investment of $ 1000. A total of 100 million ArCoin will be available. Accrued interest is paid directly to ArCoin owners every quarter. You can buy shares directly through the site , having passed the KYC / AML test. At the same time, investors can trade tokens with each other - the blockchain allows you to do without a broker.

The shares of the fund will not be available for trading on stock exchanges and for secondary trading on crypto-exchanges. It is noteworthy that the prospectus filed with the SEC in April 2019 indicates that in future Arca coins “ can be sold on a public decentralized or centralized electronic exchange platform, which is registered with the SEC as an alternative trading system, although there is no guarantee that such systems or platforms will be available . ” But, apparently, this situation did not suit the regulator, and in the latest version of the document it was changed.

The standard commission for investors for managing the fund is 3.22%, but during the first year it will be reduced to 0.75%. Investors can keep ArCoin in their own wallets, but in case of loss of their private keys or their compromise, the fund will replace the lost tokens with new ones. Digital assets are held in the asset-oriented tokenized investment bank DTAC LLC, launched by TokenSoft in December last year.

ArCoin offers companies and investors several options for use and the wide integration of coins into the work of structures. Individuals can use ArCoin as a hedge of their cryptocurrency portfolio against volatility, and financial institutions and other companies - for clearing, settlement, payments and lending “ with greater efficiency, lower cost, faster and with the ability to directly track all transactions ”.

The ability to pay for goods and services with tokens on US Treasury bonds is a revolutionary step that reduces the space between payment and investment funds.

The struggle for a new trillionth market

The US Treasury bonds to which ArCoin is linked are issued by the US Department of the Treasury and are an instrument for financing public debt.

Traditionally, they have a credit rating equal to or close to the maximum AAA, and are considered one of the safest and most reliable assets in the world. This makes US Treasury bonds very popular among central banks, financial companies and private investors from around the world, as they act as a safe haven from instability in the stock and corporate bond markets in times of geopolitical or economic turmoil. Binding ArCoin to US Treasuries with SEC permission makes the asset the safest and most regulated token on the market. This is a great choice in turbulent financial times.

With the launch of the Arca US Treasury Fund, the company has set its sights on one of Wall Street's oldest outposts - investing in the US treasury bond market. According to Brookings, its cost is about $ 18 trillion. ArCoin is a modern alternative to existing methods of investing in treasury securities (buying bonds from a broker or purchasing shares from an investment fund). Obviously, Arca hopes for the emergence and growth of a new market for fully regulated and SEC-approved digital stocks for traditional assets. At the same time, their competitors are not other crypto funds, but traditional exchange funds and ETFs.

The Arca team consists of Wall Street veterans and knows what a product should be like to be successful. The blockchain is designed to show investors that it simplifies, cheapens and speeds up the process compared to the traditional market. On the website, the Arca team describes ArCoin - “Blockchain-Traded Fund”, or BTF.

In a commentary this February on CoinDesk, CEO Ryan Steinberg said Arca hopes to see major institutional investors as the first buyers. It was for their sake that the company struggled for so long and stubbornly for the registration of the SEC - it had to increase confidence in the products. “The answer to the question of why there are so few institutional institutions in the crypto industry is simple: there are no institutional level products on the market ,” said Steinberg, noting that ArCoin just meets the requirements of large investors.

However, the Arca team understands that success is not guaranteed. Digital treasury assets are a new and untested market. In its application to SEC, Arca recognizes potential risks for investors. For example, digital asset markets may not have the proper liquidity currently available to US Treasury investors in traditional markets. “ Using the blockchain is relatively new and untested. Therefore, investors should initially expect more volatility in prices on the secondary market than would be the case if the shares had greater liquidity, ”the application said. Other risks include overloading the Ethereum network and “the possibility of breakdowns and trading stops as a result of undetected technological flaws .”


SEC-registered crypto-investment products are not new. The Grayscale Investments cryptocurrency investment fund , for example, is one of the largest bitcoin funds that regularly undergoes SEC checks. But the fact is that Arca offers its own cryptocurrency, not Bitcoin.

ArCoin should be just the first asset in the portfolio of SEC-approved financial products that Arca is planning to release. An increase in the number of such initiatives can convince the SEC that launching them does not carry enormous risks. For several years, this regulator has refused to launch Bitcoin ETFs, arguing that there is no legal environment in the market, manipulation of asset prices, difficulties with liquidity, storage and arbitration, and non-compliance with the rules of the regulator. Now, with the advent of products such as ArCoin, the SEC may also reconsider its opinion on Bitcoin ETFs.

SEC approval for Arca has potentially opened the door to new and innovative blockchain-based financial products. Regulator registration may be a problem for many companies, but Arca has shown how to achieve it. The project has taken an innovative and revolutionary step towards combining traditional finance with digital investment.

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