SEC Begins Review of Proposal to Convert Grayscale Digital Fund to Multi-Crypto ETF

The U.S. Securities and Exchange Commission (SEC) has started reviewing a proposal to convert Grayscale’s Digital Large Cap Fund (GDLC) into an exchange-traded fund (ETF), marking a pivotal moment for multi-crypto asset funds in the U.S. If approved, this conversion would enable Grayscale’s fund, which currently offers exposure to a diversified portfolio of digital assets, to trade on a national securities exchange. The SEC’s review process, set to last up to 240 days, could pave the way for a broader class of regulated crypto ETFs, potentially expanding beyond Bitcoin and Ether.

Grayscale and NYSE Arca Lead the Push for Multi-Crypto ETP Approval

Grayscale’s proposal, submitted on October 16 in collaboration with NYSE Arca, seeks to convert GDLC from an over-the-counter (OTC) traded product to a regulated exchange-traded product (ETP). NYSE Arca’s application includes a proposed rule change under NYSE Arca Rule 8.800-E, which, if approved, would be the first to permit a diversified multi-crypto asset ETF on a U.S. exchange. This framework mandates that at least 90% of the fund’s assets be allocated to established digital currencies, such as Bitcoin and Ether, with up to 10% allowed for other cryptocurrencies.

As of November 1, 2024, GDLC holds over $530 million in assets, with significant allocations to Bitcoin (76.53%) and Ether (16.92%), as well as smaller portions in Solana, XRP, and Avalanche. David LaValle, Grayscale’s Global Head of ETFs, expressed that this proposal aligns with the company’s goal of delivering “client-focused, future-forward solutions” within the U.S. regulatory structure.

The Growth and Unique Structure of Grayscale’s Crypto Index Fund

Grayscale launched GDLC as a private placement in 2018, and it began trading publicly on OTC Markets in 2019. By 2022, the fund achieved SEC reporting entity status, positioning itself as a pioneer in regulated crypto investments. Unlike single-asset crypto funds, GDLC provides diversified exposure by holding a basket of five digital assets, selected based on the CoinDesk Large Cap Select Index (DLCS). This index fund model appeals to investors seeking exposure to the broader crypto market rather than focusing on individual assets.

Grayscale’s diversified approach contrasts with other funds, such as those by Hashdex and Franklin Templeton, which are currently limited to Bitcoin and Ether. This multi-crypto structure allows GDLC to reflect the broader crypto market while reducing reliance on any single asset.

A New Wave of Crypto ETFs: Competing Filings and Market Demand

The review of Grayscale’s proposal comes amid a surge in filings for crypto-based ETFs, indicating growing investor interest in diversified digital asset funds. Canary Capital and Bitwise recently filed for XRP ETFs, while Canary also submitted a proposal for a spot Litecoin ETF. Analysts view multi-crypto ETFs as the next big evolution in digital asset investment, akin to the role of the S&P 500 in traditional finance, providing diversified exposure in a single product.

Eric Balchunas, a Bloomberg ETF analyst, remarked that multi-crypto ETFs could be a significant development for both retail and institutional investors seeking streamlined access to digital assets. He also noted that the outcome of the U.S. presidential election could shape the regulatory landscape for crypto ETFs. A Trump administration may favor a more crypto-friendly SEC, potentially accelerating crypto ETF approvals, while a Harris administration might adopt a cautious approach, slowing down the approval process.

What’s Next for Grayscale’s ETF Journey?

With the SEC’s formal review underway, industry insiders will closely watch the regulatory agency’s decision on Grayscale’s multi-crypto ETF. If successful, this move could set a precedent for other crypto index funds and drive competition among asset managers, who are now seeking to broaden crypto accessibility. Grayscale’s push reflects a larger industry demand for regulated crypto investment vehicles that offer diversified exposure to digital assets.

As the U.S. regulatory environment continues to evolve, Grayscale’s ETF application represents an important step toward integrating cryptocurrency into the mainstream financial system, potentially opening the door to more innovative crypto investment products in the future.