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What Is a ‘Stablecoin on Steroids’ in Digital Assets?

Jerald David
Nov 24, 2019
My last post about the ArCoin US Treasury Token generated a lot of feedback around the idea that our token will be a “stablecoin on steroids” in digital assets. Combined with constant headlines surrounding Libra, the attention Tether continues to receive, and the proposed legislation for regulating stablecoins in Congress dominating the headlines, it helped me realize the need to elaborate more on the differences between current stablecoin offerings in the market and our ArCoin.
 
As I’ve previously indicated, Arca has been working on our Securities and Exchange Commission (SEC) application for over a year. Please keep in mind that our offering is currently pending regulatory approval but the underlying concepts remain true regardless of the filing’s status.
 
A stablecoin is a digital asset that aims to "offer price stability based on the low volatility of an underlying reserve asset". Originally designed for crypto investors and traders as a safe haven from the volatility that other cryptocurrencies experience, recently the use cases for a stable digital currency have expanded as the ecosystem matures. Having increased in popularity over the past few years, stable digital currencies can solve current issues in payments, lending, treasury management, and remittances amongst other use cases. 
 
Without going too far down this rabbit hole, stablecoins generally are backed by one of the following; fiat, crypto, or algorithmically.  No matter what the underlying asset is, stablecoins have several common attributes: 
 
  • Backed 1:1
  • Pegged to a stable instrument
  • Auditable
  • Redeemable
  • Regulated  

ArCoin Benefits

Generally speaking, most of the stablecoins minted and utilized today fulfill some, but not all of these characteristics - which is problematic as it creates risk. Introducing additional risk into a highly volatile market such as crypto is exactly the opposite of why stablecoins were introduced in the first place. This is why we’ve spent so much time working on our SEC application and setting up our Trust. Our ArCoin is designed for an institutional audience which needs to adhere to the highest standards, but also will benefit the retail audience.  
 

ArCoin verses Stablecoins

CHARACTERISTIC STABLECOINS ARCOIN
Backed 1:1
For a stablecoin to remain stable, there must be a requisite amount of the underlying assets held in a segregated account; but this is not always the case
We are bound by SEC rules that require us to have a custodian bank, an auditor and a transfer agent – all to ensure that the value of tokens in the market equal the balance in our custodial bank account
Auditable
Industry convention has been for stablecoin issuers to attest through a third party once a month that they have adequate reserves. Even then, there are no guarantees
We will be posting our Net Asset Value (NAV) that is independently calculated by our auditor for all to see once a day. We will also be reporting audited financials, semi-annual reports, SEC filings and more
Redeemable
Different stablecoins have varying rules around lockup periods and redemption windows
Our create-redeem portal will be an electronic interface that will allow not only the creation of tokens, but the ability for a token holder to redeem their token for US Dollars on a periodic basis
Pegged to a Stable Instrument
All stablecoins need to ensure that price volatility is low and that moves in correlated markets don’t have an impact on the value of the token
We chose to tokenize US Treasuries as they are a familiar structure to most, and are the most liquid, & stable financial instrument in the world
Regulated
Most stablecoins are overseen by up to 50 different state regulators with different rules, application processes and enforcement
We opted for the gold standard, an SEC federally regulated security
 
Now back to that key phrase — stablecoin on steroids. This is the closest term I’ve heard by anyone describing ArCoin. You see, our token satisfies all of the requirements to be called a stablecoin and a whole lot more.  When I speak to corporate treasurers, risk managers and credit officers at firms doing due diligence to trade crypto, they scratch their head at some of the things they have to get comfortable with in order to enter the crypto market.  To them, it’s almost inconceivable that the market has pumped over 5 billion dollars into stablecoins given the ‘warts’ that the existing tokens have.  
 
Just look at Tether, the stablecoin with the most adoption (approximately 80% of the stablecoin market), which has long faced accusations of being undercapitalized.  In April 2019, New York Attorney General Letitia James filed a suit accusing Bitfinex of using Tether's reserves to cover up a loss of $850 million.   In May, the company’s lawyer disclosed in an affidavit that USDT is actually only 74% backed by fiat equivalents.  This means that in owning Tether, you have to get comfortable that the value of what you own today may not have the same value tomorrow - by as much as 26% or more.  Not only is that scary, but that is the exact opposite of what stablecoins were created for. How are professional risk managers supposed to ask their Boards to approve owning a token that has so much inherent risk?  They can’t. 
 
The market has embraced the current stablecoin offerings because they provide a utility function. But like most developing industries, the first solution is often not the best solution.  Think AltaVista, Netscape and Firefox. Our industry is maturing in front of our eyes. At Arca, we are trying to embrace regulation to provide an institutional grade solution and provides true protections for the token holder that would be prevalent and acceptable to those in traditional finance.  The protections we hope to offer under the 1940’s act prohibit the kind of practices that have been thus been tolerated.     
 
So, why did we go to such lengths and spend so much money to create our first ArCoin?  We did so because we are veterans of the financial services and we understand the importance of creating products that can withstand turbulent markets and volatile events.  The management team at Arca has seen and learned from 1987 and 2008 and understand the importance of these protections. We also created our ArCoin because the current offerings on the market are not scalable.   As the crypto ecosystem continues to grow, it is highly questionable if the stablecoins in circulation can withstand a major disruption. This is the foundation for the New York Attorney General’s case.
 
By spending over a year working with the regulator and proposing this structure we are working to create a new standard for the industry.  Pending regulatory approval, our US Treasury ArCoin will help to redefine what a stablecoin is, and perhaps steroids is what crypto needs.
 
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068
 

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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.