Even though the concept of economic freedom is old, our experience with it is new, as though it has been rediscovered—wild and unfamiliar like an uncharted land. While the age of discovery will undoubtedly continue, key milestones in 2021 signaled growth beyond this age and movement toward the next phases—exploration and application. For instance, the SEC approved the first Bitcoin Futures ETF; the NFT market exceeded $23 billion in trading volume; and the digital asset universe, outside of Bitcoin, is receiving recognition. Institutional interest in digital assets exploded over the past year. It led to a record amount of capital deployed into the ecosystem, an influx of talent from other industries, and validation of proofs of concept like the Bahamian Sand Dollar.
2021 was also foundational for Arca’s growth. Since our company’s founding in 2018, Arca has been methodically building institutional-inspired processes in anticipation of financial incumbents flocking toward the digital revolution. As Wall Street’s interest in digital assets swelled, our innovative products were available, with additional products to meet investor demand in the wings. In one year, we increased AUM significantly, launched new funds, and quadrupled our team.
● Record growth, exceeds $600M AUM
● Oversubscription of both new funds: Arca Endeavor Fund I and Arca NFT Fund I
● 700% growth in our operations team
Arca Funds—Arca’s asset management division—is our most mature business line. It best reflects the full realization of Arca’s long-term vision: to create what we consider to be the best products that meet the needs of our sophisticated investor client base as they engage with digital assets. Our flagship fund, the Arca Digital Assets Fund (DAF), exemplifies our broad growth strategy. The fund has grown in size and sophistication and has been the breeding ground for Arca’s future strategies.
Building on the success of DAF, we are developing products and services that align with the evolving landscape while adhering to our strict due diligence, compliance, and risk mitigation standards. 2021 saw the beginning of this plan take shape with the launch of three additional Arca Funds products that leverage our experience in research, capital markets, portfolio management, and operations. Our portfolio team continues to identify the potential to create targeted investment strategies intended to take advantage of opportunities present in the digital asset ecosystem. As we apply the insights gleaned from the discovery phase, we believe we can provide the right product for the right investor at the right time.
We built our three new funds on the foundation of the Arca Digital Assets Fund, and they bring the same experience to Arca clients. Existing clients have validated our patient approach to product creation, as they make up the majority of subscriptions in our new products. The new funds have been well-received, providing diverse investment exposure to the digital asset space.
Arca Digital Yield Fund
An actively managed, opportunistic fund seeking double-digit annualized returns through a low-beta, market-neutral strategy. We believe we can take advantage of fundamental and structural inefficiencies across the digital assets landscape to generate this low volatility return profile. The fund has gathered significant assets each month with a robust and growing institutional pipeline.
Arca Endeavor Fund I
Our early-stage venture capital fund represents a symbiotic investment strategy with the Arca Digital Assets Fund focusing on beta and pre-launch projects. The fund is based on our extensive experience in digital assets and the "first-look" opportunities that consistently presented themselves in our flagship Digital Assets Fund.
Arca NFT Fund I
An actively managed fund offering unique and deeply researched opportunities within the diverse and growing NFT ecosystem. The fund invests in non-fungible tokens (NFTs), including underlying ecosystem tokens, index tokens that carry NFT exposure, and equity and equity-related securities of companies in the NFT ecosystem, focusing on underlying tokens that drive value to the NFT ecosystem.
In 2021, Arca Funds’ AUM grew 14-fold, and new capital contributions increased by $360M. The excellence of our investor relations (IR) team is undeniable—their minimal redemption record and the oversubscription and upsize of both of our newly launched and closed funds are testaments to their efforts. The IR team grew from 1 to 7 in a year to reflect and support our growing and maturing investor base and their significant allocations to the digital asset marketplace.
Rising inflation and degradation of trust in traditional institutions are causing a growing number of institutional investors to seek alternatives to conventional solutions and trusted investment partners to get them there. Arca will continue to innovate and implement investment strategies—including several new funds on the launchpad—and we pledge to continue challenging ourselves and expanding our capabilities as institutional adoption progresses.
Arca Labs, Arca's innovation arm, follows a guiding principle of responsible innovation, which we define as a balance between deploying new technologies that optimize financial structures while understanding the value and necessity of what came before. Responsible innovation requires collaboration across the industry and a patient, inclusive, iterative approach to blockchain technology. We believe that digital assets are not a separate asset class, and blockchain technology will underpin all assets in the future—it is an innovation that has the power to transcend, rather than disrupt, current frameworks.
To help usher in this digital future, Arca Labs has been diligently developing the blueprint for bringing tokenized funds to the market. We believe the complex process of integrating blockchain into existing financial product structures positions us to apply our experience to other industries—like insurance and real estate—to create transformative products and processes. In addition, our tokenization of the investment fund has revealed utility beyond its immediate investment use case for workflow improvements in areas such as treasury and collateral management. We predict that these changes will initially impact areas in financial services and will ultimately radiate to all functions of our society—similar to how the internet influenced broader and broader swaths of human endeavor than initially anticipated.
We found evidence that this is a broadly-held view. The Future of Securities: A Digital Asset Securities Survey, conducted in partnership with Coalition Greenwich, details the views of a wide range of financial services participants on tokenized funds. Results indicated that 77% of participants surveyed believe all securities will be digitized and settled on the blockchain. Further, the respondents cited real estate and equities as the asset classes most likely to be tokenized first for the advantages of transparency and real-time settlement. The survey precedes the release of our whitepaper debuting the blockchain transferred fund (BTF) and the evolution of investment vehicle liquidity.
Our commitment to advancing the digital asset ecosystem prompted Arca Labs to develop “Finance on the Blockchain”—a virtual conference for financial professionals seeking to integrate blockchain and digital asset securities into their business practices. The educational event brought together digital asset securities professionals with incumbent financial firms to showcase the transformative capabilities of blockchain-powered financial products.
These long-tail, fundamental efforts have the potential to generate incredible value for Arca specifically and the digital asset ecosystem more generally. Even though the digital asset market has seen tremendous growth, its $2-3 trillion size is dwarfed by the hundreds of trillions of dollars in assets in the traditional financial system. Our pioneering work on the world’s first ‘40 Act Fund that transfers shares on the blockchain—the blockchain transferred fund (BTF)—will potentially enable us to commercialize products across many sectors, creating expansive opportunities. Stay tuned for exciting forthcoming announcements in these areas.
2021 was a momentous year for Arca as we continued to build on the solid foundation we began laying when we founded Arca in 2018. In a balanced and deliberate manner, we grew, strengthening our capabilities, offerings, and brand. This growth has involved welcoming talent with a varied skill set to match the diversity of the digital asset landscape. Our team of finance industry veterans has a deep and ever-expanding knowledge of digital asset innovation. They approach the ecosystem with foresight about industry transformation, institutional adoption, regulation, and market opportunities. As evidenced in our 2022 Digital Asset Industry Outlook, the team’s broad areas of experience help enable us to bridge the gaps between traditional and decentralized finance effectively. We are guiding companies to this next financial paradigm and its continual evolution with careful consideration and measured insight
But as we direct our gaze from the past to the future, it is appropriate that we think of the two-faced Roman god Janus, after whom January is named. He is the god of beginnings, endings, and change. Though we often use this time of the year to take stock of the past and look forward, it feels more important this year. Incredible gains in digital assets defined 2021, but the end of last year and the beginning of 2022 have been marked by immense volatility, mainly driven by instability in our financial system and the response of our centralized institutions. It has instigated a realization that old tools and methods for establishing stability are less effective and has catalyzed an impetus to explore alternatives. A monumental time is upon us. As such, we vow to shepherd our clients, partners, and the industry into the digital future and through the possibilities that lie ahead
Onward and upward,
Rayne Steinberg, CEO
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Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, legal advice, tax advice, a research report, or a recommendation. Any decision to invest or take any other action with respect to any investments discussed in this commentary may involve risks not discussed, and therefore, such decisions should not be based solely on the information contained in this document. Please consult your own financial/legal/tax professional.
Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.