Digital assets, also known as crypto assets or tokens, refer to any asset—digital or physical—that is stored, accessed, and traded via the blockchain. The digital asset ecosystem includes thousands of different tokens that can be categorized into 3 types:
Stablecoins are intended to be digital cash equivalents, often pegged to an external reference such as the U.S. Dollar, treasuries, or commercial paper. Stablecoins can be fiat-backed, commodity-backed, algorithmic-based, or cryptocurrency-backed. In volatile markets like crypto, investors look for digital means of “fixed” assets as on-ramps or off-ramps for token positions that allow them to remain in the digital asset ecosystem. For more information, read What Is a Stablecoin?
Methods for analyzing securities and fixed income products in traditional markets, such as Graham and Dodd’s Security Analysis and The Handbook of Fixed Income Securities by Frank Fabozzi, offer useful frameworks for valuing some digital assets. Similar to other asset classes, digital assets vary in function, type, and issuance; therefore, they should be treated separately using a blend of conventional and nuanced guidelines. To learn more about valuation methods, watch Digital Asset Types and Valuations.
Institutions have identified digital assets for investment diversification, liquidity, and efficiencies in adopting emerging technologies. However, many institutions face adoption challenges due to outdated operational procedures, a lack of regulatory guidance, and tax and compliance discrepancies. For more information, watch our panels from The Digital Age For Institutional Investors.
Several traditional banks or financial service companies, such as Goldman Sachs, offer limited access to select crypto assets through third-party partnerships. Conversely, fund managers like Arca or MultiCoin Capital focus on digital asset investing with versatile fee structures, comprehensive risk management, and broad product exposure. For more information, read Crypto Digital Asset Funds - An Easy Way Into Crypto Investing For Family Offices?
The digital assets market is nascent and rapidly evolving, resulting in significant information asymmetry and price inefficiency. However, experienced investment managers are well-equipped to capitalize on the associated volatility and opportunities due to their strong information network, scalable infrastructure, risk management, and other advanced technologies. For more information, read Why Digital Assets Require Active Management.
ESG encompasses any business or investment’s environmental, social, and governance aspects. With respect to digital assets, Bitcoin—one of the thousands of crypto assets that make up this ecosystem—has been criticized for its environmental impact. More pertinent to the ESG conversation concerning digital assets is the governance impact, which reflects collaborative decision-making and organizational structures. For more information, read Digital Assets: ESG – Why Not GSE?
Institutions and other market participants must implement new operational procedures to accommodate the perpetually changing conditions and corresponding price actions characteristic of a 24/7/365 global market. A market without opening and closing hours creates a need for institutions to analyze larger sets of data, constantly monitor global news, and consider price changes through a different lens. For more information, read Here’s How Crypto-Market’s 24/7 Trading is Setting an Example.
Digital assets offer a different means for investors to diversify portfolio exposure and risk. Further, tokens allow investors to contribute and participate in blockchain projects with varying use cases, including DeFi, NFTs, and Web3. The digital asset ecosystem has many sectors and enables investors to get involved in projects they foresee future adoption and growth. For more information, read The Case for Crypto in an Institutional Portfolio.
Governance encompasses the processes and interactions of administering control of a system. This includes the careful balancing of leadership, diversity, and democratization. The digital asset ecosystem’s primary intention is to provide alternative governance solutions that enable greater autonomy over monetary transactions and decision-making. To learn more, read our white paper, ESG – Why Not GSE?
The Bitcoin blockchain was created as an alternative to centralized authorities within the financial system. Blockchain technology has the potential to challenge corruption, distribution of power, and centuries-old governance methods, enhancing them with transformative and collaborative frameworks. For more information, read DeFi Governance in Action.
The central purpose of decentralized governance is to provide users with greater financial freedom and impact. Decentralized governance facilitates a communal organizational framework rather than a top-down hierarchical structure, enabling equitable stakeholder inclusion and democratized decision-making. To learn more, read Decentralized Governance of Digital Platforms.
Good governance refers to the accessibility, management, and economics of a digital asset—fair token distribution, stable voting structures, transparency, and voter efficacy. These token elements help ensure stakeholder roles are appropriately balanced, protocol and constituent objectives are aligned, and decisions are executed objectively. Find out more about good governance in the article, How to Think About Good Governance.
At the beginning of 2022, Anchor stakeholders Arca and Polychain proposed token yield cuts to improve the protocol’s sustainability. Although Anchor ultimately declined the proposal, it showcased the power of collaborative ownership with a record-breaking voter turnout of more than 70%. This community engagement helped increase price performance and later inspired Anchor’s implementation of a similar proposal.
Governance tokens are typically granted to users upon joining a blockchain project, such as a decentralized autonomous organization (DAO). These tokens provide voting rights, which users may implement to present or influence proposals for product roadmap, hiring, and business decisions. To learn more about governance as it pertains to DAOs, read Decentralized Autonomous Organizations (DAOs) Explained.
Arca has identified three main digital asset types: cryptocurrency, pass-through, and asset-backed tokens. Governance tokens are a kind of pass-through token, whereby governance rights are granted to the token holders in addition to other benefits such as cash flow/dividends and reduced trading fees. To learn more about the broader digital asset landscape, view our Digital Asset Classification.
A decentralized autonomous organization, or DAO, is a blockchain-based, self-governing organization that enables participants to work toward a common goal on a trustless network. DAOs start with an idea, assemble participants based on a defined goal, and stimulate action by granting access, voting rights, and ownership to contributors in exchange for tokens of the underlying project. To learn more, read DAOs: An Institutional Guide to Decentralized Governance.
DAO members can pursue their goals of pooling capital, recruiting contributors, and compensating users/contributors with remarkable swiftness. Because blockchain technology is rooted in the internet, it eliminates accessibility restraints and geographic barriers, and encourages freely flowing ideas. To learn more about the potential advantages of DAOs, read Re-Envisioning Corporations: How DAOs and Blockchain Can Improve the Way We Organize.
Certain voting structures within DAOs, such as token-weighted or quadratic voting, may favor the inputs of initial and large token holders, making it difficult for new and small token holders to implement their ideas. Additionally, decentralization is challenging in its application; successful coordination and efficient governance depend on considered, methodical implementation. For more information, read The Merits and Pitfalls of Decentralized Autonomous Organizations.
Currently, there is little legal framework regarding DAOs and their classification. As DAOs gain prominence, regulators are likely to consider factors such as legal and financial compliance. Although DAOs represent groups working toward common goals, this does not relieve members of individual responsibilities. For more information, read Legal Issues Confronting Formation and Operation of a Decentralized Autonomous Organization (DAO).
Constructivist investing allows investors to directly influence a company by collaborating with management to offer improvement suggestions for greater profit generation. Within the digital asset ecosystem, structures such as DAOs provide a channel for opinion to all project stakeholders—founders, developers, token holders, and institutions. These members can directly influence a DAO’s trajectory. For more information, read Five Things: Constructivist Funds.
The concept of DeFi originated in 2018 in a Telegram group chat of entrepreneurs and Ethereum developers. Three years earlier, Vitalik Buterin launched Ethereum to accommodate more complicated financial transactions, like borrowing and lending, that Bitcoin’s simple code could not process. Amidst a deliberation about Ethereum-based decentralized innovations, the developers coined the term DeFi. Read more about DeFi’s origin in “What Is Decentralized Finance?”
DeFi aims to remedy structural problems in centralized institutions by introducing a decentralized network on which individuals can freely develop, collaborate, and transact. DeFi users control their funds with individual crypto wallets without relying on banks or brokers and can access financial services with increased efficiency and transparency. Read “My Bank Forced Me to Use DeFi” for more information.
Individuals become liquidity providers by depositing funds into a DeFi lending or borrowing platform. Users can then borrow funds and pay interest to these liquidity providers. Compared to traditional markets, DeFi optimizes borrowing and lending by removing intermediaries (typically a bank or business) with requirements—like proof of income, bank statements, and credit history—that create high barriers to entry. Read Wharton’s “DeFi Beyond the Hype” to learn more.
Digital yield describes DeFi strategies where periodic cash flows and price convergence are the primary drivers of return, similar to fixed income. Common digital yield strategies include yield farming and stablecoin lending. For more information, watch the “Introduction to Digital Yield” webinar.
Fixed income investments are known for their regular and non-varying returns that typically maintain a conservative risk approach. DeFi aims to improve traditional fixed income strategies by offering lending and borrowing opportunities that allow individuals, rather than brokers, banks, or market makers, to provide liquidity and generate yield. To learn more, read “New Kid on the Block: DeFi Asset Classes.”
Yield farming is a digital yield investment strategy that involves depositing funds into a liquidity pool in exchange for tokens and other rewards, such as governance (influence), pass-through benefits (airdrops and access), and interest. Individuals can sell these tokens for yield and retrieve their capital at any time. In return, the protocol benefits from token circulation. For more information about yield farming, see “Yield Farming: An Investing Strategy Involving Staking or Lending Crypto Assets to Generate Returns.”
Total value locked (TVL) refers to the number of digital assets stored in a DeFi protocol, akin to a financial institution’s assets under management (AUM). Due to the layers of development within DeFi, subsequent applications rely on the underlying infrastructure to operate. This reliance reinforces and grows the TVL, inspiring the development of varied and complementary protocols with different advantages. To learn more about TVL, read “What Is Total Value Locked?”
First and foremost, DeFi is not a regulated sector. Therefore, the protections to which investors are accustomed in traditional markets do not yet exist. Further, blockchain’s unique features present added exposure to counterparty, protocol, and governance risks. Read “The 5 Risk Vectors of DeFi” to learn more.
Non-fungible tokens, or NFTs, are unique digital assets on the blockchain that enable the creation, monetization, and trading of traditionally illiquid valuables such as artwork, real estate, and music. NFTs can be considered virtual certificates of authenticity. For more information, read What Is a Non-Fungible Token (NFT)?
Digital assets, such as cryptocurrencies and asset-backed tokens, are interchangeable because their financial worth is the same for all holders. For example, like the U.S. Dollar, one Bitcoin equals another Bitcoin. NFTs are singular and unique, which means that each NFT is valued independently of other NFTs. For more information, view our Digital Asset Taxonomy.
A JPEG is a format for virtual image files that can be infinitely copied and shared on the internet. Blockchain enables content authentication using smart contracts and tracks its circulation for continuous remittance to the original creator. For more information, read What Are NFTs?
NFTs are minted on a blockchain; thus, they are transparent and immutable. Using smart contracts, NFTs can be programmed to provide payment back to the creator when they are traded or consumed. For more information, read Next-Generation Securitization: NFTs, Tokenization, and the Monetization of “Things.”
The Bored Ape Yacht Club (BAYC), a collection of NFTs that sits on the Ethereum blockchain, was one of the most well-known NFT projects of 2021, experiencing more than $1 billion of trading volume since its inception. Similarly, CryptoPunks are popular NFT collectibles of pixelated avatars. For more information, read Nonfungible Tokens: A New Frontier.
An NFT can be likened to a wrapper or a vessel. The wrapper represents the investment structure, but the value of an NFT is defined by the asset contained within the wrapper. Given that NFTs are unique items, their financial worth is determined by perceived, intrinsic, and functional valuation. For more information, view our webinar, NFTs for Professional Investors.
The gaming industry has integrated competition and consumable goods to attract and retain players. One example is Fortnite, where players can gain a competitive advantage by using microtransactions or digital purchases that unlock specific gaming features. Blockchain-based gaming has enabled the creation of digital, non-fungible, in-game assets that can be collected or traded. Players will therefore have opportunities to own unique assets versus items that are the same for all participants. For more information, read In-Game NFTs You Should Know About.
Music NFTs have been rising in popularity, enabling artists to monetize their work and receive direct support from fans without interference from music labels. For example, Grimes released a 2021 NFT collection of original art paired with her songs, one of which sold for almost $400,000. NFTs have also been used in the sports industry, providing digital sports trading cards, expanding brand partnerships, and deepening connections between famous players and their fans. For more information, read Top 7 NFT Use Cases.
NFTs may be used for events and ticketing, which could merge concert admissions with artwork, memorabilia, and other VIP privileges, even allowing audience members to become concert shareholders. Another potential use case lies in the Metaverse, where participants could use NFTs to purchase sections of virtual land, stimulate a virtual economy, enter private parties, and upgrade their avatars. Further, NFTs provide opportunities to digitize certificates and other forms of identification, such as college diplomas, social security numbers, and account logins. For other future use cases, see 15 NFT Use Cases That Could Go Mainstream.
Tokenization is the process of converting something of value into digital tokens that can be transferred on the blockchain while retaining the asset’s original characteristics. For example, real estate tokenization allows investors to directly own fractional units of a property and transfer their property rights via the blockchain. To learn more, read Tokenization of Assets.
Initially known as a security token, digital asset security is a digital representation of fractional ownership interests in an underlying asset or company that can be transferred among KYC/AML-approved investors. Digital asset securities must follow prescribed purchase and transfer guidelines and are subject to jurisdictional securities laws and applicable regulations. Find out more about digital asset securities here.
The digital asset ecosystem has expanded to include various types of assets—cryptocurrencies, asset-backed and pass-through tokens—with varying functionalities—store of value, medium of exchange, or pass-through value. Digital asset securities must pass the U.S. Supreme Court’s Howey test to be deemed a security. Watch the Regulation and the Howey Test conference video to learn more about the differences between tokenized securities and tokenized assets.
The primary benefits of blockchain technology—such as peer-to-peer transferability, immutability, and traceability—enable digital asset securities to have near real-time settlement, transaction transparency, fractional ownership, and the potential for greater liquidity and lower counterparty risk. For more information on tokenizing securities, watch Finance on the Blockchain: Pioneering the BTF.
Due to regulatory confines, digital asset securities can trade on alternative trading systems (ATSs), but not yet on exchanges. ATSs such as Oasis Pro, tZERO, Securitize, Symbridge, and INX are pioneering the digital asset security frontier. To learn more, watch this conference panel recording: “ATS Leaders - The Future of Digital Exchange.”
The issuance process for digital asset securities removes many of the intermediaries that traditional assets require. Because of the core features of blockchain, many of the connectivity functions provided by third parties are now unnecessary or can be strengthened by utilizing the technology. Review this Security Issuance Diagram to learn more.
Public blockchains provide access to open-source technology for participants to build and collaborate with the ecosystem; Ethereum is one such blockchain. A permissioned blockchain, such as Symbiont, is a controlled environment that allows tokens to exist in a closed setting where privacy is needed to protect information. Read more about how digital asset securities can be issued using different blockchains.
Industries with pricing disparities, limited liquidity, and operational inefficiencies stand to benefit from digital asset securities. The insurance and real estate industries are among the top sectors that we believe are ripe for disruption.
Barriers to entry for traditional institutions include regulatory uncertainty, compliance/legal costs, new risk management and governance processes, and the recruitment of technical talent. Listen to financial incumbents discuss their perspectives and the challenges they face on this conference panel.
A lack of regulatory oversight can lead to suboptimal outcomes, such as fraudulent ICOs. Appropriate regulation could create clarity, instill confidence in end consumers, lead to widespread adoption among institutions, and spur innovation in the asset class. Learn more about innovation and regulation.
The Arca U.S. Treasury Fund is the first BTF that invests 80% of its assets in U.S. Treasury bills, bonds, and notes. The Fund issues its shares as digital asset securities called ArCoin, which was approved by the SEC on July 6, 2020. For more information about the Arca U.S. Treasury Fund and ArCoin, visit the Arca Labs website and ArCoin FAQs.
The BTF structure can benefit collateral management by reducing cross-collateralization costs and the time required to trade reserves using traditional trading platforms. BTFs can also make payments more efficient by enabling peer-to-peer interactions and can grant investors greater authority and earning power over their assets.
Like mutual funds and ETFs, BTFs are available for retail and institutional investors.
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This fund is an interval closed-end fund.
An investor should carefully consider the investment objectives, risks, charges, and expenses of the Arca U.S. Treasury Fund before investing. This and other information is available in the Fund’s prospectus, which should be reviewed carefully prior to investing. To obtain a prospectus, please call 1-888-526-1997.
You may not have access to the money you invest for an extended period of time. • You may not be able to sell your shares at the time or in the quantity of your choosing regardless of how the Fund performs. • Investors should understand that the Fund's shares are not currently listed on or available for trading through a national securities exchange or any other exchange, and a market for trading on an exchange may never be available to investors. Except for individually negotiated peer-to-peer transactions, there is currently no secondary market for ArCoins, and no such market is expected to develop. • Because you may not be able to sell your shares at the time or in the quantity of your choosing, you may not be able to reduce your exposure to the Fund in a market downturn. • An investment in the Fund may not be suitable for investors who may need the money they invested in a specified timeframe. • The amount of any distributions the Fund may pay is uncertain. There is no assurance that the Fund will maintain a particular level of distributions, nor is there any guarantee that the Fund will make distributions at any particular time. • Due to the emerging nature of blockchain use in securities transactions, the Fund anticipates that (other than monthly repurchase offers as described below) there will initially be limited to no liquidity in ArCoins due to low or no volume in peer-to-peer transactions. Investors should therefore initially expect greater price volatility in the secondary market than would be the case if the shares had greater liquidity. • The Fund will not invest, directly or indirectly, in digital assets, including digital securities. • Although shareholders can engage in peer-to-peer transactions using blockchain technology, the Transfer Agent will maintain the official record of the Fund's shareholders.
Arca Capital Management, LLC dba “Arca Labs” serves as adviser to the Arca U.S. Treasury Fund, distributed by UMB Distribution Services, Member FINRA/SIPC. Arca and UMB are not affiliated.