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"Reading the Merkle Leaves" - Abra & Quandriga CX

Phil Liu, Esq
Feb 12, 2019

Abra — Fractionalized trading of stocks

Abra and Celsius Network (decentralized finance) are two players that are moving traditional finance onto the blockchain. There are others, including Arca, that are bringing institutional knowledge into this space and that’s a good thing. Practical blockchain applications of existing needs will ultimately bring new users into this space.

Last week Abra, the crypto wallet/exchange came out with the news that it will allow fractional trading of traditional stocks via its wallet app. However, unlike traditional investing, the company intends to give investors synthetic access to public stocks via a process it calls “crypto-collateralized contracts”. In other words, the users aren’t actually going to be stockholders in a company but will be exposed to the performance — upside and downside — of the stock.

From what I can gather from publicly-available sources, rather than requiring an investor to purchase a minimum of one stock, an investor can purchase a fraction of a stock. This would be especially useful in the case of high-priced stocks such as Google ($1,102 a share), Amazon ($1,588 a share) or Berkshire Hathaway Class A ($300,771 a share). Instead, investors decide the amount of exposure they want to a particular stock, say, $5, and Abra goes ahead and gives an equivalent exposure to the actual stock. It isn’t clear whether an investor would actually be able to receive any dividends should they be declared on the stock and it also isn’t clear if the investor has any voting or other rights a normal shareholder would have.

0__RrneF7olUHjz74MThere’s no mention of when this service is going to launch and there are a lack of details on how the company intends to operationally accomplish this new service. However, the company has stated that investors will need to deposit crypto to gain exposure. This would appear that in addition to being exposed to the performance of a particular stock, the investor is also exposed to the crypto/fiat floating exchange rate. Also, it isn’t clear what the margin requirements would be but it appears to be at least 100% collateralized, with margin calls for both the crypto/fiat exchange rate as well as the stock’s performance.

It remains to be seen what the regulatory framework will be for Abra’s new stock investing business. The company has at least taken the position that it isn’t subject to KYC/AML review for crypto deposits. From my perspective though, I’m thinking that Abra will need to address whether it is a broker/dealer and/or alternative trading system, and whether it needs to comply with FinCen KYC/AML (federal) rules.

QuadrigaCX — Investor gets screwed

More news continues to come out of QuadrigaCX. Consider the software engineer who lost his life savings (7 years’ worth). In order to save on some exchange fees, he transferred crypto to QuadrigaCX then attempted to withdraw it later (after he moved to Canada). The exchange, however, held onto the deposits since October, a couple of months before the apparent death of the founder, Gerald Cotten. Some of the Twitter comments to this news were just plain mean and blame the engineer for being foolish for trusting a third-party exchange. Yet, these are exactly the type of people that regulators are out to protect — investors who don’t know better (even if they should). I can’t imagine something like this happening in the existing financial system without a series of checks and balances. That regulatory judgment day is coming to crypto- sooner rather than later.

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©2018 by Arca Funds Past performance is not indicative of future results. Investors should carefully consider the investment objectives, risks, charges and expenses of Arca "(The "Funds"). This ad other important information about the Funds are in the respective Fund's offering documents which can be obtained by entering Arca Private Investor Portal. All of the offering documents should be read carefully before investing. Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document.