Blockchain

Blockchain moved funds to challenge ETFs

Blockchain moved funds to challenge ETFs

Rayne Steinberg, chief executive and co-founder of Arca, expects the institutional digital asset manager’s blockchain-transferred-funds (BTF) structure to be used by other buyout firms this year.

Steinberg told Markets Media, “This year is going to be a transformative year as we do some exciting things with the BTF structure.”

Arca launched the first BTF registered with the United States Securities and Exchange Commission in 2020. Arca United States Treasury Fund is regulated under the Investment Company Act of 1940 as a closed-end fund investing in US Treasury bonds.

Blockchain technology was used to create ArCoin, a digital security that represents a share of the US Treasury fund Arca and accrued interest is paid directly to ArCoin holders quarterly. Arccoins can be transferred peer-to-peer or wallet-to-wallet and Ethereum blockchain technology offers greater transparency, traceability, speed and lower costs as it requires fewer financial intermediaries.

Source: Arca.

Steinberg said Arca designed the BTFs in May 2018, filed a draft prospectus in November of that year, and received SEC approval in 2020. He said, “We really see this as a continuation of the ‘evolution of regulated mixed funds.’

Prior to launching Arca Steinberg co-founded ETF issuer WisdomTree where he was responsible for raising capital, creating intellectual property and building and overseeing the sales team responsible for raising $50 billion. dollars of assets under management.

Rayne Steinberg, Arca.

He argued that BTFs could potentially have a faster growth trajectory than ETFs which improved at the 4 p.m. daily market close and mutual fund liquidity limitations. BTFs provide more benefits including peer-to-peer transferability, 24/7 trading and immutable record keeping.

“When I co-founded WisdomTree, the entire ETF industry had $40 billion in assets and fund managers weren’t sure that would be the killer structure,” Steinberg added. “That’s what they have become 29 years after their invention.”

Global ETF assets reached a record $10.3 trillion at the end of 2021 according to ETFGI, an independent research and advisory firm.

Source: Arca.

Steinberg continued that the ability of the BTF structure to increase capital efficiency through real-time settlement and the use of smart contracts to integrate with settlement workflows also has great potential.

“I think there will definitely be use cases coming out this year,” he said. “We are also in talks to partner with some large asset managers.”

Barriers

Steinberg said a market ecosystem needs to develop to enable large traditional asset managers to use BTFs. For example, in addition to transmitters, the ecosystem requires authorized participants.

Another obstacle is the lack of regulatory clarity regarding digital assets and issues such as custody.

“Regulators are trying to fix that and it’s not an easy project,” Steinberg added. “We’re moving from a very centralized world with walled gardens and jurisdictions to a world where you can buy any security in the world, so there are a lot of difficult issues.”

David Easthope, head of fintech, market structure and technology at consultancy Coalition Greenwich, said in a blog post that greater regulatory certainty is needed before traditional investors can further embrace the digital asset ecosystem.

Commitment

However, Steinberg also said that 2021 was a pivotal year for institutional engagement in digital assets and that hasn’t changed despite falling prices.

The Arca Labs white paper, Blockchain Transferred Funds (BTFs) To transform the financial system, found that three quarters, 77%, of respondents believe that all securities will be settled on the blockchain in five to 10 years.

Source: Arca.

“A year ago, 77% of respondents would not have believed this,” Steinberg added. “There is institutional recognition that this is a very important and transformative activity.”

The Arca Labs report said that just as the smartphone transcended the original uses of the phone and transformed photography, browsing, and software creation and distribution, financial institutions are looking for additional applications for their current financial products.

For example, financial institutions are exploring how they can use ETFs for other workflows in collateral and cash management applications.

David Easthope, Greenwich Coalition

Easthope wrote that as an ecosystem around BTF participants emerges, other second-order networking benefits are also present in areas such as collateral management, compliance, and stablecoin alternatives.

“ETFs were originally designed to address some of the shortcomings of mutual funds and provide low-cost investment opportunities for retail and institutional investors,” Easthope added. “But the rise of blockchain, 24/7/365 marketplaces, and broader digitization efforts offer a new approach.”