Blockchain TransferredFunds (BTFs):
The New Frontier for
Investment Funds
The Evolution of Investment Vehicles

ar.ca/btf

February 2022

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

1

Table of Contents
1. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. A Century of Investment Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Regulatory Oversight of Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. ETF Dominance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
6. The Blockchain Transferred Fund (BTF): A New Model Emerges . . . . . . . 10
7. What Are Digital Asset Securities? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8. Comparing Pooled Investment Structures . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9. The BTF Is Revolutionary – Future Use Cases . . . . . . . . . . . . . . . . . . . . . . . 18
9.1 Collateral Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10. Look Back To Steer Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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1

Executive Summary
Innovative technologies have impacted and advanced many industries, yet their integration into
financial services products, processes, and infrastructure has been less frequent. Blockchain
technology is initiating a “changing of the guard,” presenting a breakthrough mechanism for thefinancial industry to modernize. This new technology’s promise of greater accessibility, increased
liquidity, elimination of intermediaries, real-time settlement, and fractional ownership are significant
improvements in and of themselves. Additionally, experience shows that applying new technology toan industry also leads to unforeseen innovations and the development of new utility opportunities.
As such, we believe the next iteration of our financial system should combine the best of traditional
finance and the transformative power of blockchain to achieve optimal performance, issuance, andinvestment processes.
The evolution of pooled investment vehicles from mutual funds to exchange traded funds (ETFs)
demonstrates how advancements in technology enabled the development of more efficientinvestment products. However, while ETFs have become a leading financial product, combining theircore features with blockchain technology creates a new framework to solve some of the industry’s
most salient challenges: transferability and time. Arca has developed a solution to incorporate
blockchain technology into the traditional pooled investment fund structure, regulated under The
Investment Company Act of 1940 (‘40 Act), with the goal of driving a paradigm shift in financial
services. Developed over 2 years, Arca Labs—Arca’s innovation division—created the blockchaintransferred fund (BTF)—the first registered ‘40 Act fund to issue shares as digital asset securities.
This paper explores the historical, present, and future state of investment vehicles as a means ofcontextualizing how blockchain-powered products and services can free the financial system fromlimiting constructs to promote a more powerful, efficient, and democratized framework. We believe
the creation of the novel BTF structure blazes a trail for other registered investment vehicles to belaunched and tokenized on-chain and positions BTFs as the next generation of investment funds.
The finance industry is at a critical inflection point: traditional finance and investment products havenot kept pace with technological developments and consumer behavior, but for the first time, a
blockchain-based solution presents an opportunity for the industry to shepherd in a revolutionary
new era.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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2

Introduction
Securities markets are vast and complex ecosystems of interconnected participants, regulators, andservice providers. Because the parties depend on each other to maintain a harmonious balance,
the evolution of investment structures and funds is often sluggish, and it is challenging to effectsubstantive change. The global institutional asset management industry is a $100 trillion behemoththat has traditionally been impervious to new technology adoption mainly due to the significant
advantage of legacy technology and strict regulation.1
But embedded in those challenges lies tremendous
opportunity for those who seize it. Early adoptershave reaped the rewards on the occasions that
innovation has emerged, and notable paradigm shifts
have propelled the industry forward and shaped theinvestment landscape for decades to come.

The global institutional asset
management industry is a$100 trillion behemoth.

One such shift was the early 20th-century idea of pooling capital for investment, which led to theadvent of mutual funds. This relatively simple concept transformed the way the world invested. The
traditional mutual fund reigned supreme until the late 1980s when the need for greater liquidity andthe ability to track indexes with computer technology gave rise to exchange traded funds (ETFs),
sparking another dramatic evolution in the investment landscape. Today, innovators have introduced
the next iteration of financial vehicles by incorporating blockchain technology into the traditional
regulated pooled fund structure: the blockchain transferred fund (BTF). ETFs and BTFs are links of thesame evolutionary chain, building on the structures that preceded them.
The combination of public blockchains, permissioned blockchains, and distributed ledger technology(DLT) creates a new technological framework that we believe will revolutionize the global financial
system and underpin all industries in the future. Blockchain technology will enable advancements
in industries like finance, insurance, and entertainment, addressing shortcomings from archaicarchitecture and antiquated processes. In addition, the decentralized nature of blockchain and its
ability to offer greater transparency, traceability, and speed without friction from intermediaries
enables more agile innovation.

The Asset Management Industry
41%$61
trillion$42
trillion

59%
Institutional Investments

North America was seenas the main driver of asset
management growth and held
the lion’s share of assets at$49 trillion.1

Retail Portfolios

Note. The data are from “The Asset Management Industry Has Surpassed $100 Trillion — And There’s Still Room to Grow” by G. Chung,2021, Institutional Investor.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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3

A Century of Investment Vehicles
The odyssey of the investment fund started in 1924 with the birth of mutual funds and the arrival ofprofessional asset management. After the societal and economic trauma of World War I (1914-1917),
the global economy contracted, and confidence in financial markets shrank. The introduction of thefirst open-end mutual fund, Massachusetts Investors Trust, allowed investors to create and redeem
shares regularly, buying and selling at net asset value (NAV)–a novel concept at the time. Presently,
the fund is still widely recognized as one of the world’s most successful and longest-running mutual
funds. As prosperity fueled economic growth, the Roaring Twenties were characterized by excess
and speculation in the unregulated securities market. The stock market crash of 1929 and the onsetof The Great Depression highlighted the dangers of unregulated markets and the attractive featuresof an open-end pooled investment vehicle—a low-cost method of investing in a balanced financial
product that provided liquidity at NAV rather than at a discount.

Investment Fund Milestones
1917

The first mutualfund was launched

1929

The creation of
the U.S. Securities
and Exchange
Commission

The end ofWorld War I

1924

The Wall Street
Crash and onsetof the Great
Depression

1934

1940

Mutual funds
proliferated andgrew in assets

1975

The “Black Monday”
stock market
crash of ‘87

The creation of
the Investment
Company Act
of 1940

1950s

Vanguard 500
Index Fund grew to$267 billion

1987

2020

ETFs doubled 2020
inflows, hitting$900 billion

Mutual funds lostroughly $469 billion
in assets

2021

1993
The first ETF waslaunched by iSharesBlackRock acquired
iShares

2009

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4

Regulatory Oversight of Investment Funds
The Securities and Exchange Act of 1934 created the Securities and Exchange
Commission (SEC) and gave the agency broad authority to register, regulate,and oversee all aspects of the securities industry. Investment funds are
regulated under the Investment Company Act of 1940 (referred to hereafter
as “the ’40 Act”), which regulates the investing and trading activities ofpooled investment vehicles—mutual funds, closed-end funds, and ETFs.

Mutual funds gained momentum after the creation of the SEC and the ‘40 Act—they were a new
regulatory body and set of rules that offered investors clarity and protection around securities
offerings. When the American economy recovered and started thriving in the 1950s, capital flooded
into the financial markets; mutual funds proliferated and grew in assets. In addition to their dailyliquidity, mutual funds enabled individual investors to realize better returns generated throughdiversification, operational efficiency, and professional management.
The next major innovation in pooled investment vehicles was the exchange traded fund. Interestingly,
as the creation of the mutual fund was informed by a financial crisis, the ETF structure was bornout of the 1987 stock market crash. Once again, investors suffered significant losses; this time, it
was not due to global conflict or misguided business practices, but an unfortunate repercussion of
the equity markets’ response to computer program-driven trading and the massive, simultaneous
request for liquidity. Referred to as “Black Monday,” the SEC identified the cause and called for thecreation of a security that represented the broad market—similar to futures contracts on the S&P
500 Index, but a real-time version for the equities market.
The ETF—an open-end, exchange traded investment vehicle—evolved from the mutual fund’scommingled investment framework as a new security that birthed an entire industry. ETFs offera professionally managed pooled investment product with lower fees, accessibility, transparency,
intraday liquidity, tax advantages, and better-targeted securities baskets that can represent thebroad market. It took nearly 2 decades for ETFs to achieve widespread adoption because skeptics
challenged their development, regulatory approval took 5 years, and market adoption took another10 years. Ultimately, the ETF enhanced the pooled investment structure and resolved many constraintsof the original investment funds. Today, it is a $9 trillion industry.2

Global ETF Growth
Global ETF assets as of the end of October 20213
Key:
ETF
Asset
# ETFsAsset (US$ BN)
12
10
8
6
4
2

# ETFs
9,000
7,000
5,000
3,000
1,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Oct
2021

Source: ETFGIBlockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

6

Mutual Fund and ETF Comparison

Source: Ally4

5

ETF Dominance
The first ETF was launched in 1993 and is recognized today as one of the most significant financial
disruptions in the last half-century. ETFs have spread virally across investment portfolios in the past
decade, with massive inflows into ETFs weekly. In March of 2021, $71 billion flowed into U.S.-listed
ETFs in a single week.5 Today, ETF inflows nearly doubled those of 2020 ($507.4 billion), hitting
an annual inflow of over $900 billion.6.7 These gains stand in stark contrast to mutual funds, whichlost roughly -$469 billion in assets in 2020.8 ETFs continue to assert their dominance in pooled
fund strategies.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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Despite their current prevalence, ETFs initially failed to gain immediate traction. Inertia and theembedded distribution fees of mutual funds initially hindered growth, as advisors did not readily
recognize the potential of ETFs. Even Vanguard’s Jack Bogle initially resisted adopting the ETF
opportunity, criticizing the new product for being rooted in self-serving objectives for the exchange
business and pegging it as detrimental to investors.9 Vanguard, then the leader of the investment
fund sector, championed index mutual fund products with their core Vanguard 500 Index Fundthat grew from an initial $11 million in 1975 to $267 billion, becoming the largest fund in theworld by 2013.10,11 Even so, Vanguard has since been surpassed by BlackRock—who acquired ETF
pioneer iShares from Barclays in 2009 and is now the largest issuer of ETFs, with $2.2 trillion in
AUM.12 The delay in Vanguard’s adoption of ETFs enabled first-movers like iShares to become one oftoday’s market leaders. The structural advantages of the ETF—low fees and intraday liquidity—havecontinued to attract investors and their capital, becoming especially apparent over the last decade.
The growth rate of ETFs has held firm above 10% while mutual funds’ growth fell consistently below
5%—even dipping into negative growth for multiple years.

A Decade of Dominance
Investors pour money into ETFs while mutual funds stagnate13

15%

Key:
10%

ETF Organic
Growth Rate

5%

Mutual Fund
Organic
Growth Rate

0%

-5%
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Bloomberg Quint

ETFs provide simplified access to a balanced exposure of various asset classes, specialized sectors,
and investment strategies in a ‘supermarket’ approach. Over the past 2 decades, ETFs have expanded
to offer hundreds of variations, most originating and gaining popularity only in the last few years, likethematic and ESG incorporated funds.14 The versatility of exchange traded funds includes index ETFs,
commodity ETFs, inverse ETFs, industry ETFs, actively managed ETFs, foreign market ETFs, bond ETFs,
investment style ETFs, and debt ETFs, suitable for almost all investment profiles. Presently, exchange
traded funds continue to grow in product variation, size, and functionality, demonstrating the untold
opportunities.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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ETF Types
Index

Commodity
Designed to track aparticular index like the
S&P 500 or NASDAQ

Industry

InverseDesigned to track theprice of a commodity,
such as gold, oil, or corn

Actively Managed
Designed to provide
exposure to a particularindustry, such as oil,pharmaceuticals, or high
tech

Bond

Designed to profit from adecline in the underlying
market or index

Foreign Market

Designed to outperform
an index unlike most ETFs,
which are designed to
track an index

Style
Designed to provide
bond exposure, including
U.S. treasury, corporate,municipal, international, andmore

Designed to track non-U.S.
markets such as Japan’s
Nikkei index or Hong
Kong’s Hang Seng index

Exchange-Traded Notes
Designed to track an
investment style or market
capitalization focus, suchas large-cap value or
small-cap growth

Senior, unsecured debt
security issued by abank—designed toprovide access to illiquidmarkets and tax benefits

Note. Adapted from “Exchange TRADE Funds (ETF): The definitive guide” by S. Rana, 2018, Medium.15

The flexible structure of ETFs broadens investor choice, which allows issuers to create diverse
products. As such, financial institutions have begun to consider the application of ETFs as a toolfor internal management, expanding their utility for scalability and collateral management. However,ETFs still have certain restraints, such as third-party intermediary fees and marketplace limitations.
Enhancing the pooled investment vehicle with new technologies promotes further expansion, utility,and elimination of current deficiencies.

ETF Application
How institutions use ETFs16
72%

Tactical Adjustments

68%Core Allocation
Rebalancing

60%

54%

Liquidity Management
44%

Transition Management
Risk/Overlay Management

42%

Portfolio Completion

57%

Interim Beta

37%

International Diversification

56%

Cash Equitization

37%

Source: Visual Capitalist

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

96

The Blockchain Transferred Fund (BTF):
A New Model Emerges
While ETFs have become the financial product of choice, integrating blockchain technology into apooled investment structure offers the potential to create a financial product that combines thebenefits of an ETF with the advantages of blockchain technology. Technology has reshaped muchof our world into an interconnected, accessible, digital universe, but the financial industry and its
investment products have often lagged. Regulatory moats, entrenched and co-dependent systems,
and the high stakes involved with enormous sums of money hinder agile innovation. Blockchain
technology introduces a compelling and disruptive value proposition that gives the industry thetools and the impetus to improve upon traditional, antiquated methods.
As ETFs improved on the daily 4 pm market close and liquidity limitations of mutual funds, similarly,
new technology has introduced a means to improve the structural constraints of ETFs.

Enter: the blockchain transferred fund (BTF) — a pooled investment fundregistered under the ‘40 Act that issues its shares on the blockchain. Theseshares represent ownership in the fund’s portfolio and are digital asset securities
that can be issued, transferred, and redeemed entirely via a blockchain.
Blockchain’s decentralized and distributed technology offers peer-to-peer transferability, traceability,
immutability, and enhanced security features that transform the investment experience with greater
accessibility, increased liquidity, near real-time settlement, and fractional ownership.

Blockchain’s Decentralized and Distributed Technology
FeaturesPeer-to-Peer
Transferability

Immutability

Traceability

Enhanced Security
Features

Near Real-time
Settlement

Fractional
Ownership

Benefits

Greater
Accessibility

Increased
Liquidity

Source: Arca Labs17

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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The BTF integrates blockchain technology into the structure that underpins ETFs; it enhances thepreceding framework and offers a more operationally efficient product with increased time andcost savings. Additionally, BTFs can offer more than just a new investment opportunity; the digitalasset security shares present the ability to reimagine existing processes and improve outdated
operational methods. Blockchain’s peer-to-peer functionality enables the BTF’s digital asset security
to be held by the investor rather than a third-party intermediary. This unique quality radically shifts
industry perspectives on asset ownership and has the potential to change investment behavior andmarket strategies.

Blockchain Transferred Fund Advantages
Utilizes Existing
Regulatory Structure

Reduces Intermediaries,
Mitigating Costs

Allows for 24/7/365
Transferability

Shortened
Settlement Timelines

Asset Management
and Possession
Provides Strict
Investor Protection

Source: Arca Labs17

Following the trajectory of how ETFs built upon the mutual fund structure, we believe the next
iteration of ‘40 Act products will similarly transform the investment landscape. Akin to the evolutionof phones (telephones granted instant communication, cell phones provided remote accessibility,
and smartphones enabled productivity and further innovation), blockchain and distributed ledgers
can build on previous financial instruments to offer new efficiencies and unique functionalities.
Beyond the primary objective of creating financial products to maximize investor returns, countlessundiscovered opportunities exist for additional utility and use cases. Just as the smartphonetranscended the telephone’s original intended uses and transformed photography, navigation, andsoftware creation and distribution, financial institutions look for additional applications for theircurrent financial products.18 One such example is that financial institutions are investigating how
they can utilize ETFs for other workflows in collateral and treasury management applications. The
unanticipated outcomes of technology can far outweigh the anticipated ones.
Truly innovative technologies profoundly challenge our concept of utility and stimulate previously
unimagined possibilities. The idea of decentralizing our centralized world is a fundamental shift thathas the potential to revolutionize how we use financial products.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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7

What Are Digital Asset Securities?
One of the primary structural innovations of the BTF is that shares of the fund are issued as digitalasset securities.

Digital asset securities represent an ownership stake in real-world assets that already havevalue, where ownership is recorded on a blockchain, such as:Real Estate

A Car

Corporate Stock

Initially known as security tokens, they are digital representations of fractional ownership interests
in an underlying asset or company that can move freely among KYC/AML-approved investors at
the asset owner’s discretion. Digital asset securities must follow prescribed purchase and transfer
guidelines and are subject to jurisdictional securities law and applicable regulation.
According to The Future of Securities: A Digital Asset Securities Study conducted by Coalition
Greenwich on behalf of Arca Labs in 2021, 77% of respondents across all global regions agreed thatmost securities would be digitized and settled on a blockchain in 5-10 years. The belief was mostpronounced in Europe, where 89% agreed.19

Will Most Securities Be Digitized and Settled on a Blockchainin 5-10 years?
North America
23%

Key:
Yes
No

24%

Europe11%

Other Regions
44%

Total
77%

76%

89%

56%

Source: Arca Labs19
Other regions = Mostly Asia Pacific

Blockchain technology can revolutionize the securities industry. Like traditional securities, tokenized
securities abide by the conventional regulatory oversight, reporting requirements, and strong
compliance mandates prescribed by the ‘40 Act that investors are accustomed to, encouraging
further investment confidence in the BTF structure. Additionally, the BTF delivers the enhanced
benefits that blockchain enables.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

12‘40 Act Traditional
Regulatory Requirements

BTF Added Benefits

Assets held in a regulated trust

Immutable record-keeping

An independent auditor,
administrator, and board oftrustees

Automated execution

Mandatory reporting of annual
audited financials, semi-annual
reports, trade confirmations,monthly account statements,
daily NAV, and SEC filings onmaterial events

Faster settlement

Asset ownership andhistory transparency

FractionalizationPeer-to-peer transference

Programmable security/
fund registration
requirements

Ability to freeze, cancel,
or replace lost or
compromised tokens
Lower fees due to theelimination of unnecessaryintermediaries

Source: Arca Labs17

There are countless securities and investment products in the traditional financial world, providing
an expansive landscape for blockchain enablement. One of the most highly anticipated use cases forthe convergence of blockchain and financial products is the investment fund. In the survey mentioned
above, 61% of participants wanted to see investment funds transferred on the blockchain.

Other Tokenized Assets Represented as Digital Asset Securities
Real estate and equities are survey respondents’ top 2 choices to be represented as digital asset
securities and transferred on the blockchain.19

Real Estate71%

Fixed Income

58%

Equities

70%

Art/Collectibles

55%

VC/PE

63%

Commodities

Investment Funds

61%

Other

47%
4%

Source: Arca Labs

ETFs depend on intermediaries like issuers, broker dealers, and exchanges for product issuance,
investor verification, and investment purchase and sale. Investors are obligated to disclose KYC/
AML financial data for background verification; the exchange and its team of service providers
then return an electronic representation of the purchased asset. The investor has given up controlof their data and transferred capital without gaining possession of an asset—instead, they have alegal representation of ownership. This solution was satisfactory in the early ‘90s when an electronic
representation of an asset was advanced compared to previous snail-mail certificates.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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In comparison, a registered fund that issues its shares as digital asset securities via a blockchain
gives investors newfound freedoms: ownership of the underlying fund through a tokenized shareand the ability to transfer the asset to any KYC/AML-approved investor at any time, outside of thesurveillance of an exchange or trading platform.

Security Issuance and Transaction Process
Digital Asset Security

Traditional Security

Underwriter

Underwriter

IssuerIssuerBroker Dealer/Bank
The issuance and transaction activities
of digital asset securities eliminate theneed for excess intermediaries, offering
simplified workflows.

Central Securities Depository

Investor One

Investor One

Custodian/Digital Asset Wallet

Custodian

Exchange

Investor Two

Investor Two

Custodian/Digital Asset Wallet

Custodian

Source: Arca Labs20

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

14According to the Arca Labs digital asset securities study, real-time settlement and transparency
are the most commonly cited benefits of blockchain-based settlement globally, as stated byknowledgeable professionals, investors, and technology builders.

Key Benefits of Blockchain-Based Settlement for
Digital Asset Securities
North American and European respondents agree that real-time settlement and transparency are
top benefits19

North America
81%

Real-Time Settlement

100%

73%

Transparency
Fractional Ownership

60%

Liquidity

57%

Elimination of Intermediaries

52%

Peer-to-Peer Transfer
Other

Europe
67%
67%
52%
67%

40%
4%

33%
4%

Source: Arca Labs

The potential benefits of tokenizing real-world assets are becoming more widely understood. A widearray of financial assets, such as venture capital, commercial real estate, precious metals, collectibles,and even equities and bonds can be tokenized into digital asset securities. We share the sentimentsof the survey participants—that the tokenization of securities is inevitable and will happen within theforeseeable future. This monumental shift toward harnessing the potential power of blockchain can
reshape the trajectory of investment funds and financial services.

Digital Asset Security Opportunity: Tokenization Benefits
Lower Costs: Elimination of additional
fee layers bestowed by intermediaries(banks, brokers, exchanges)

Faster Settlement: Dramatic increase
in clearing and settlement speed byleveraging blockchain technology

Increased Liquidity of Assets: Tokens
have the potential to unlock illiquid
assets to be traded and transferred
24/7 across the globe

Programmability: Smart contracts
enable effective enforcement of
securities contracts

Fractional Ownership: New customer
segments get access to previously
unattainable asset classes forinvestments

Immutable Proof of Ownership:
Blockchain secures traceability of everytransaction and provides a “single
source of truth”

Note. Adapted from “Wave Financial + TQ Tezos: State of Digital Securities” by Wave Financial + TQ Tezos, 2020, Slideshare.”21

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Comparing Pooled Investment Structures
Mutual funds, exchange traded funds, and blockchain transferred funds are all varying investment
structures that contain a portfolio of assets within a “wrapper.” Each structure is created differently
with distinct advantages and drawbacks, but they all benefit from adaptability. ETFs have become
the dominant pooled investment structure in today’s market due to the incredibly flexible natureof what can be put inside. A financial product that improves on these capabilities, allowing further
liquidity with 24/7/365 investor-to-investor transfer and near-instant settlement, may have theability to overtake mutual funds and ETFs in market share.
BTFs introduce expanded benefits that potentially help eliminate many unnecessary intermediaries,
which reduces counterparty risk and third-party dependencies. In doing so, many of the traditional
investment vehicle workflows need to be re-engineered to facilitate enhanced liquidity and ownershipcontrol. Displacing banks, broker-dealers, and central depositories requires introducing an issuanceplatform to fulfill the creation, issuance, and redemption of a digital asset security. Digital asset
securities provide the investor with greater choice related to custody (self or third-party), transaction(ATS or peer-to-peer), and utility (payment, investment, or medium of exchange).

Blockchain Transferred Funds
The next evolution of ‘40 Act products17

1924

1993

Mutual Funds

Exchange Traded Funds

2020
Blockchain Transferred Funds

Broad Diversification

Lower Operating Costs

Peer-to-Peer Transferability

Professional Management

Intraday Trading

Reduced Need forIntermediaries

Relative Low Cost

Greater Transparency

24/7/365 Market Access

Daily Liquidity

Better Tax Efficiency

Utility of Investment andMedium of Exchange

Source: Arca Labs

Today, large ETF brands and distributors have built robust businesses, spending significant timeand energy establishing intermediary relationships and perfecting workflow processes that makeit difficult to innovate against their existing products (giving rise to the Innovator’s Dilemma).22
However, a combination of new firms and some daring incumbents will likely be the first to adopt
blockchain and the BTF structure and incorporate it in their product and technical roadmaps.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

16

Blockchain transferred funds improve the experience for all participants. The potential benefits
conferred by BTFs in their current and future state extend past the issuer to the entire networkof investors:

Issuers

Investors

Immutable recordof ownership

Fractional
ownership

Increased liquidity
with peer-to-peertransfer

Near real-time
settlement

Limiteddependency onintermediaries,
such as exchanges
and broker-dealers

24/7/365 peer-topeer transference
Asset possession
and control

Intermediaries

Regulators

Increasedtransparency forrecord-keeping

KYC/AML validation
embedded into
financial product

Programmabletechnology that
reduces humanerror

Real-timetransparency

Increasedstakeholder
confidence withimmutable ledger

Expanded networkof potential
investors

Immutable ledger
of KYC/AMLapproved investors
Programmablesmart contracts for
future automatedcomplianceTechnology has consistently been a catalyst for the transformation and growth of financial products,
often resulting in redefining moments. Blockchain technology is the current stimulus for pooled
investment vehicles, with BTFs offering a novel perspective on their evolution. When the ETF wasconceived, no one fully understood the potential extent of its utility. Similarly, BTFs may encouragecommingled investment vehicles for myriad uses not yet considered.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

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9

The BTF Is Revolutionary – Future Use Cases
Beyond providing utility as an investment vehicle, blockchain transferred funds offer the additional
benefit of being a means of value transfer. The utility integrated into the BTF structure can impact
those financial sectors that can benefit from a reduction in settlement time, elimination of laborious
processes, and risk mitigation.

9.1 Collateral Management
Collateral management—the pledging of assets from one party to another to mitigate credit risk andpotential default—is widely used in banking and financial services. However, the current methods forcollateralizing are manual, expensive, and time-consuming, exhibiting a prime area for innovation:

Problem

Problem

Problem

4pm ET market close

Time and cost ofcollateral movement

Counterparty risk

Consequence

Consequence

Consequence

Companies become
undercollateralized
throughout the day andrun the risk of credit
default if re-collateralization
is not completed by theclose of the market.

Custodians are commonlyused to move collateralfrom one business line toanother. Each movement
requires fees and trust that
custodians will make thetrades in a timely manner.

Companies are reliant
on third parties to buy,
price, and sell theircollateral, which increases
the potential for humanerror, long timelines, andasset exposure.

U.S. Treasuries are among the most common assets pledged for collateral management becauseof their stability, liquidity, and high investment-grade ranking. Therefore, a BTF with a portfolio of
U.S. Treasuries that issues its shares as digital asset securities has a clear use case for institutional
collateralization. BTFs utilize the core benefit of digital asset securities—peer-to-peer transference—
to reduce costs associated with cross-collateralization, abate the time required to trade reservesusing traditional trading platforms, and decrease risk and error by eliminating intermediaries.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

189.2 Payments
Payments is a massive financial sector that represents the mechanisms allowing individuals andentities to exchange goods and services.
However, the existing structural make-up
of payment networks is encumbered by
McKinsey’s 2021 Global Payments
layers of intermediaries between assets
Report anticipates global payments
and owners, presenting an industry ripe
revenue to generate
for modernization. For example, a checking
by 202523
account is a stop for your money on its
way somewhere—not a final destination; abrokerage account allows an investor toparticipate in financial markets by investing their capital in financial products to achieve a potential
return. The purpose of investing is to grow one’s capital and then deploy it for a specific use. The
current framework requires a liquidation step before capital can be utilized. Ideally, an individual
would be able to consolidate and deploy their assets without the friction of liquidation.

$2.5 trillion

Like banks and brokerage accounts, walled gardens have been put in place to facilitate trade and are
responsible for settlement and record keeping. When the world was transitioning into the electronicage, this function was essential; individuals were willing to pay a premium and give up temporary
ownership of assets for convenience and safety. This trade-off allowed third-party intermediaries toutilize individuals’ custodied funds for the intermediary’s own earning potential. Today, blockchain
enables individuals to retain ownership of their assets and deploy their capital for their gains rather
than those of the bank.
The introduction of a more liquid, instantly settled asset, such as digital asset securities, provides
a means to carry out payment exchange without the need for intermediaries. This change could
collapse the space between payments and investments, enabling investors to access and deploy allof their capital more efficiently. In addition, the frictionless feature of digital asset securities grants
investors greater authority and earning power over their assets. BTFs add this capability to single
assets represented by digital asset securities and commingled investment vehicles.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

19

10

Look Back to Steer Ahead
Traditionally, new financial technologies faced resistance from investors and institutions. It was 40
years before mutual funds gained critical adoption; decades later, they remain an important part ofinvestment portfolios worldwide. Likewise, more than 10 years passed before ETFs picked up steam,
ultimately enjoying exponential growth after the turn of the century.
Like many innovations in financial services, dominant players rarely initiate disruption. For example,
low commission and later commission-free ETF trading did not come from the large wirehouseincumbents but rather from challengers like Charles Schwab. If the past is a guide, early adopters will
eclipse market participants who delay implementing new technology-driven applications. The early
adopters will likely capture the largest share of these new markets.

Investment Fund Timeline
MutualFunds

Exchange
TradedFunds

BTF
Market

1924

1960s

1970s

First modern
mutual fundlaunched

Mutual funds
began being
marketed toretail investors

From 1960 - 1965 andagain from 1965 - 1970,
assets of stock mutual
funds doubled

1993

2003

First ETF
launched: SPDRETF AUM hits $40B marking
the initiation of widespreadETF adoption

2017

2020

Inception ofdigital asset
securities

Arca pioneered
the BTF structure
for digital asset
securities

Digital Asset
Securities
CAGR of 22.45%

2025
Institutionalizationof the BTF*

High interest
rates parabolicallyincrease industry
growth40
years

Until criticaladoption10
years

Until criticaladoption8
years

Until criticaladoption*

Source: Arca Labs17*Research Supported by: SEC Archives, PWC, LCX, BOA, Data Bridge, Chain Partners Research, Investopedia

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

20

11

Conclusion
Historically, institutions that have been slow to adopt new technologies have scrambled—often too
late—to catch up. Mutual fund giants that failed to swiftly embrace the ETF fell behind more agile
companies. We have arrived at a similar inflection point: asset management is being disrupted by
the digital asset ecosystem and its accelerated pace of change. Institutional investors and regulatory
bodies that do not engage will run the risk of suffering the same fate.
For investment funds, the potential benefits of tokenization are profound. The BTF is the first iterationof incorporating blockchain technology into a registered fund with the potential for more significant
gains in utility than the ETF had over mutual funds. As immense as the ETF market is, we believe
the BTF opportunity is just as large (if not larger) for those intrepid organizations that choose topursue it. Innovators and investors recognize that blockchain’s attributes of decentralization, peer-topeer transferability, and immutability offer new benefits that can challenge the centralized nature ofother investment structures. Moreover, given that BTFs adhere to existing regulation and compliancemandates, the structure should inherently earn credibility and will pave the way for institutional
adoption. As regulations and compliance standards take time to adjust to new technology, financial
innovators will continue to forge ahead with solutions designed to level the financial playing field
and bridge the gap between our current and future worlds.
For more information about BTFs visit: arcoin.arcalabs.com/blog

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

21

Acknowledgements
AuthorSarah Macedonio, Vice President of Content
Sarah Macedonio is Vice President of Content at Arca. In her role, Sarah is
responsible for curating, enhancing, and amplifying digital asset information
for sophisticated investors. She has over a decade of finance and digitalasset experience focused on early-stage business strategy, communications,and growth. Prior to joining Arca, Sarah served as Head of Marketing andCommercial Operations at Lukka, and Director of Marketing and Operationsat SenaHill Partners. Sarah holds a Bachelor of Arts in Communication Studies
from Northeastern University.

Lead Editor
Jaime Randle, Senior Editor
Jaime is the Senior Editor at Arca. She is responsible for ensuring Arca’s
mission and voice are consistently upheld across all written content. Jaime
collaborates with cross-functional teams and internal subject matter experts
to develop, edit, and publish impactful communications. Jaime brings over a
decade of marketing, copywriting, and editing experience to Arca’s marketing
team. Jaime holds a Bachelor of Arts in Psychology from the University ofConnecticut.

Contributing Editor
David Easthope, CFADavid is a senior analyst at Coalition Greenwich, focused on capital markets
FinTech, including digital assets and market data & analytics. He advises on
emerging technologies such as cloud computing, AI/ML, and Blockchain/
DLT. Prior to Coalition Greenwich, he led Celent’s Capital Markets FinTech
practice. David has been widely featured in the press including Bloomberg,
CNBC, Financial Times, and Waters. He is a graduate and an active alumni of
Vanderbilt University and a Chartered Financial Analyst.

Blockchain Transferred Funds (BTFs): The New Frontier for Investment Funds

22

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Arca Disclaimer
Arca Capital Management dba “Arca Labs” is a registered investment adviser. The information contained in this publication is of ageneral nature and is intended for informational purposes only, and does not constitute financial, investment, tax or legal advice.
The information and opinions expressed within this publication are as of the date it was written and are subject to change at any
time without notice due to various factors, including, but not limited to, changing market conditions. Where data is presented
that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. Arca Labs
is separate and unaffiliated from any third parties contained within this publication and is not responsible for their products,
services, policies or the content of their respective websites or research studies. All investments are subject to risk, and there
can be no assurance that the future performance of any specific investment, strategy or product referenced directly or indirectlyin this publication will be profitable or is suitable for your portfolio.

Contact Us
Website: ar.ca
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Email: ir@ar.ca
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Arca is an asset management firm investing and innovating in digitalassets, headquartered in Los Angeles with an additional office in New
York City. Our mission is to offer asset management products that meetthe operational, compliance, legal, and regulatory standards needed for
professional investors to gain exposure to digital assets. Arca Labs is theinnovation division of Arca focused on using the transformative power ofblockchain and digital assets to create a more efficient and democratizedfinancial system. Arca Labs is leading the effort to build financial
infrastructures, networks, and products for the digital age through researchand development, partnerships, advisory, and community building. Arca
Labs pioneered the BTF structure in July 2020 with the launch of the Arca
U.S. Treasury Fund, the first registered ‘40 Act fund to issue shares as digitalasset securities. Arca’s founders and senior team members have worked in
traditional finance and FinTech across many asset classes and are working
to bring the best of traditional finance practices to digital assets to deliver
the right product to the right investor at the right time.

Coalition Greenwich, a division of CRISIL, an S&P Global Company, is aleading global provider of strategic benchmarking, analytics and insights
to the financial services industry. We specialize in providing unique,high-value and actionable information to help our clients improve theirbusiness performance. Our suite of analytics and insights encompass all
key performance metrics and drivers: market share, revenue performance,
client relationship share and quality, operational excellence, return on
equity, behavioral drivers, and industry evolution.		

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