Digital Assets To Transform Financial Markets
Rayne Steinberg was previously co-founder of exchange-traded fund provider WisdomTree but believes that digital assets will be even for transformative for financial markets than ETFs from his seat at asset manager Arca, which raised new funding this month.
Arca was founded in 2018 as an asset management firm for digital assets. Last year Arca launched the first fund offering digital shares that is registered with the US Securities and Exchange Commission. The Arca US Treasury Fund is regulated under the Investment Company Act of 1940 as a closed-end fund investing in US Treasuries. The fund uses blockchain technology to create a digital security.
Steinberg told Market Media: “It is good to have first mover advantage but the structure has been publicly filed. There was a landgrab at the start of the ETF market which scaled quickly but there will need to be more patience with digital assets.”
He explained that ETFs could fit within the existing financial market infrastructure but digital assets need a new ecosystem and new firms to develop.
Regulated exchanges and custodians for digital assets and cryptocurrencies will continue to launch this year according to GMEX Group, a set of companies that provide technology for new digital markets.
GMEX said in a report that traditional exchanges will seek to digitally transform and form partnerships due to growing interest in digital asset trading from both retail and institutional investors. In addition, traditional custodians will look to develop digital custody service offerings.
At the start of January 2020 GMEX Group made its top 5 predictions in this space and evaluated how these had played out at the start of January 2020. We try to repeat that feat with our key predictions for 2021.https://t.co/BzhCfEM64B#cryptocurrency #digitalassets #trading
— GMEX (@GMEX_Group) January 11, 2021
“The key will be how they avoid replicating old, silo-based models to truly embrace the digital revolution, “ added GMEX. “Expect regulation to be front of mind to enable all of this, in both key individual jurisdictions as well as standards development across jurisdictions.
Before founding Arca, Steinberg founded WisdomTree and oversaw the sales team responsible for raising $50bn in ETF assets under management.
Last year US ETFs had record inflows of $502bn according to Morningstar, the independent investment research provider. In contrast mutual funds had a record $289bn of outflows in 2020, although their $18.2 trillion of total assets at year’s end was more than three times the total assets of ETFs.
U.S. ETFs took in $493.6 billion in 2020, breaking the previous record of $465.2 billion set in 2017. Inflows for 2020 were nearly 5 times the level seen a decade earlier. pic.twitter.com/6ZTZqbJKfN
— Morningstar Research (@MstarResearch) January 14, 2021
Steinberg said that he is benefitting from his experience at WisdomTree in launching innovative products in a heavily regulated environment.
“There are high hurdles to overcome so it was instructive,” he added. “The transformation from digital assets will be orders of magnitude greater than from ETFs which provided intraday liquidity and some tax advantages.”
He has described the introduction of digital assets as the greatest innovation in financial services since the Dutch East India company issued the first shares to the public in the seventeenth century.
This month Arca said it had closed a $10m (€8.2m) Series A funding round led by RRE Ventures with additional participation from Alex Tisch, President of Loews Hotels and a coalition of senior financiers led by Littlebanc Advisors.
James Robinson, founder and chief executive of RRE Ventures, said in a statement: “We have worked with members of the Arca senior team for the past two decades as they revolutionized asset management, giving us high confidence they can do it again with future evolutionary products.”
The money raised will be used to fund a broad expansion and product development, including a suite of Blockchain Transferred Funds (BTFs) through Arca Labs, Arca’s innovation division.
“This is a capital constrained space,” added Steinberg. “The funding round means we can pulled forward product launched on the active management side and recruit talent, including senior executives from financial institutions.”
He expects more institutions to participate in the digital asset space.
“Institutions have crossed the rubicon with regards to the narrative,” said Steinberg. “This was not the case at the start of last year and is very important.”
For example, CME Group is slated to launch Ether futures next month, after launching Bitcoin futures in 2017. This week BlackRock filed with the SEC to allow the fund manager to make allocations to Bitcoin futures it two of its funds.
Steinberg said the funds will also be used to launch more innovative products, to attract more retail investors and to encourage wider adoption of Arcoin.
We’re taking it back to the basics in our most recent blog by breaking down why Arca selected U.S. Treasuries as collateral for our digitized ‘40 Act Fund product, ArCoin.https://t.co/iW4iaWLAMg
— Arca Labs (@arcalabs) November 19, 2020
Each ArCoin is one share in the Arca U.S. Treasury Fund and accrued interest is paid directly to ArCoin holders each quarter. ArCoin was created by Arca Labs, the firm’s digital product development division. Steinberg expects to see more use cases for Arcoin and more proofs of concept over the next year.
“We will also launch products with some very substantial financial institutions as partners,” Steinberg added.
He highlighted that the digital asset market is in its infancy and is very fast moving.
Steinberg said: “A year ago no-one could see where the puck was going as things change so fast.”
The US SEC has not approved spot bitcoin ETFs.
SEC has approved bitcoin futures ETFs but not bitcoin spot funds.
The SEC rejected VanEck's application for a spot bitcoin ETF.
Non-deliverable forwards are seen as a gateway to crypto for traditional financial institutions
The bitcoin ETP from the provider of institutional-grade, digital asset-backed securities has gathered $1.6bn.