The collapse of Terra source: CoinMarketCap

Whether the spectacular collapse last month of the Terra blockchain and its assets UST and Luna, with losses estimated between $40 billion and $60 billion, will increase the already active regulatory scrutiny on crypto is still anyone’s guess. A clearer picture might be emerging where firms that have gone to the trouble of passing regulatory muster are set to benefit.

Rayne Steinberg happens to own one such firm, Arca, and isn’t shy about saying now is the time for clarity from regulators, seeing as there are “hundreds of trillions of dollars in securities on exchanges overseen by various regulatory bodies” that are ripe for a new way of trading and ownership.

“The greatest benefit of blockchain is to crush down fees and error rates and frictions around those things,” Steinberg told me recently. “But you can’t have it in an environment where there’s also an outcome where everything might be liquidated and not there. There’s still a very important investor protection function of regulators right now to oversee those efforts.”

The death spiral for UST and Terra started in early May and soon helped spark one of the more brutal crypto sell offs in recent years, where about $700 billion in value vanished. It followed the March hack on the Ronin bridge to Ethereum, where over $600 million in crypto was stolen. It’s not crypto if there isn’t conference in a few days or a devastating breach fresh in the rearview.

With all that in mind, Arca could gain some traction for its ArCoin, according to Steinberg. The stablecoin is registered as a 40 Act security with the Securities and Exchange Commission, and is actually a digital share of Arca’s U.S. Treasury Fund. Collateralized with U.S. Treasuries and investment-grade bonds, ArCoin pays holders the yield on that debt. He compared it to the structure of an exchange-traded fund, or ETF, but a big difference is how you can trade Arca Coin.

Unlike an ETF that trades on centralized exchanges such as Nasdaq or the NYSE, ArCoin is done peer-to-peer. Arca refers to this as a blockchain transferred fund, or BTF.

Rayne Steinberg

“That’s basically the 40 Act structure but instead of having to transact on the New York Stock Exchange or the Nasdaq it can trade peer-to-peer and is an Ethereum token, so the way the customer interacts with it is native to the blockchain,” he said. “We think that that has great utility going forward.”  

Arca’s institutional investor clients see the lack of regulation as a stumbling block to becoming more involved in crypto. Many of those investors are still learning how to use wallets and adapting to how to transact in a peer-to-peer web3 environment.

“But at least there isn’t the idea that it’s illegal,” Steinberg said. “We’re overseen by the SEC, they understand the 40 Act.”

There is a risk of over regulation after the Terra disaster, Steinberg said.

“It’s such a big event it presents the danger of over-correcting,” he said. “I hate that it happened and it’s a black eye for our space, but it actually energizes efforts around regulated products and regulated spaces.”

Read more: Arca’s Rayne Steinberg on His Father’s Influence and Building Investor Services for Crypto

Arca filed its ArCoin application with the SEC in November of 2018 and was accepted in July of 2020. Steinberg, who helped popularize the ETF market while at Wisdom Tree in the 2000s, said his old ETF applications with the SEC took longer to process than ArCoin.

With the general sell off in crypto underway and signs that inflation in the broader economy will be with us for a while, it’s hard to say what the decentralized worlds of finance and culture will look like on the other side of this bear market. Yet in one sense, the innovation has already occurred, the fact that BTFs can trade at any time from anywhere in the world between individuals.

“You can’t have it in an environment where there’s also an outcome where everything might be liquidated and not there. There’s still a very important investor protection function of regulators right now to oversee those efforts”

— Rayne Steinberg

“Where we had a very mechanical use for money as an intermediary of exchange, it’s not like anybody desired to be in it, you want to have a utility around it,” Steinberg said. As in, money that pays you as you use it. “We see something like this as collapsing the space between investment vehicles and payment vehicles.”

Steinberg does have sympathy for regulators, noting that crypto is quite difficult to police due to its tremendous volatility, still weak regulation and the geographic spread of the market.

The Luna disaster won’t be ignored by regulators, Steinberg said.

“It pulls forward regulations,” he said. “These markets are getting big enough where regulators are saying ‘we have to pay attention.’”