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Wednesday, July 5, 2023

A Blockchain Creator Joins the Mutual Fund World

News summary by MFWire's editors

A startup RIA with a famed founder from the blockchain world is seeking to shake up the mutual fund industry. Last week Superstate, a newly formed San Francisco-based SEC registered investment advisor, filed to create a short-term government mutual fund that will be recordkept on the Ethereum blockchain. Superstate's CEO is Robert Leshner, the creator of the Compound blockchain.

Robert Leshner
Leshner plans to create mutual funds that invest in government bonds and that use Ethereum as a secondary transfer agency record. His intent is to allow crypto native investors to hold real world assets in the same technology stack they use to store their crypto assets. His seed round investors provided $4 million and include ParaFi Capital, 1kx, Cumberland Ventures, and Distributed Global.

The idea is not entirely new. Franklin Templeton manages more than $300 million in its OnChain U.S. Government Money Market fund, and WisdomTree has filed for a family of blockchain TA's mutual funds under the WisdomTree Digital brand (it just pushed the effective date for those funds to July 14).

Leshner tweeted that "Superstate's mission is to create regulated financial products that bridge traditional markets & blockchain ecosystems." He added that the SEC filing for the new fund is "... the first step on a long journey to upgrade financial markets."

"Stable coins burn a hole in the pocket of anyone holding them because the user earns zero percent, and the sponsor keeps one hundred percent of the interest underlying the product," Leshner told CoinDesk. "It is not a healthy product. What we're creating is an incredibly healthy product for the shareholders. The shareholders are keeping all of the return potential of the assets in the fund, and it is being done in a way that should be technology neutral. We are using a new platform to power pieces of the technology but not innovating on the fund itself, what it holds, the returns or risks for shareholders."

Leshner said he expects to have discussions with the SEC staff as they become comfortable with the structure of the product. He said that he expects the fund to be live by the end of this year.

The use of blockchain as a secondary transfer agent record mimics funds created by Arca, and WisdomTree. Both of these fund families uses the two-step dance of pairing a traditional transfer agent with a secondary blockchain share ownership record.

Franklin Templeton runs the largest blockchain-recordkept fund and uses the Stellar and Polyglon blockchains as its primary record.

Last month, Abrdn tokenized a U.K. form money market fund in partnership with Archax. AB has been working on tokenized UCITs with AllFunds, and Deutsche Bank's DWS has announced plans to tokenize its funds.

Industry sources have told MFWire that one of the SEC's concerns with using a public blockchain to recordkeep securities ownership is the protection of personal shareholder information. In all of these cases, the primary transfer agent record is kept by a primary transfer agent that maintains the personal identifying information necessary to associate a given share with the record owner of that share in a separate database that is not available to the public. MFWire has also learned that fund firms are creating new offerings rather than adding tokenized "T" shares to existing funds because of feedback from the SEC staff that they will not approve "T" shares.

Denver-based ALPS Fund Services will be the primary transfer agent for the Superstate trust, and Proskauer Rose provides legal services. Covington, Kentucky-based Key Bridge Compliance provides the chief compliance officer duties to the trust. The other custodian and other service providers to the trust have not been identified. The trust board members were also not named in the filing.

Superstate's initial fund will be the Superstate Short-Term Government Bond Fund. Superstate will maintain a "white list" of investors allowed to purchase shares in the fund. At launch, shareholders selling their fund shares will initiate their redemption request through the Superstate portal. That request will "burn" their shares and the sale will be completed in one to three days. One feature of the Superstate fund is that shareholders must request to mint secondary blockchain shares to represent their holding on chain.

In the future, the filing adds that shareholders may be able to transfer shares in peer-to-peer transactions with other whitelisted investors.

The fund's preliminary prospectus identifies that it may use a sub-advisor to manage the underlying portfolio of ultra short-term government securities. Currently there is no sub-advisor named in the prospectus.

Correction: An earlier version of this story mischaracterized how the Franklin Templeton fund is recordkept. The fund's primary transfer agent record is kept on blockchain.

Editor's Note: A version of this story first appeared on MFWire's sister publication CeFiWire. 

Edited by: Sean Hanna, Editor in Chief

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