The U.S. Securities and Exchange Commission has recently approved Grayscale’s request to convert its Digital Large Cap Fund into a spot exchange-traded fund (ETF). This development marks a significant milestone for the cryptocurrency world and for institutional investors looking for regulated options to invest in digital assets.
The approval, communicated through a filing by the SEC on July 1, allows Grayscale’s fund to list and trade on NYSE Arca. This transition from a private trust to a fully regulated ETF signifies a major shift in how digital assets can be publicly accessed by investors, enhancing the legitimacy and transparency of the investment vehicle.
Grayscale’s Digital Large Cap Fund primarily tracks the CoinDesk 5 Index. This index includes prominent cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), XRP (XRP), Solana (SOL), and Cardano (ADA). As of the SEC’s approval, the composition of the fund was approximately 80.2% Bitcoin, 11.4% Ethereum, 4.8% XRP, 2.8% Solana, and 0.8% Cardano, reflecting a strategic allocation towards established digital assets.
The Daily valuation of the assets is based on CoinDesk reference rates, and the portfolio is rebalanced quarterly to align with market changes. This systematic approach helps maintain the fund’s investment strategy and ensures that it accurately reflects the underlying index it seeks to replicate.
Originally launched in 2018, Grayscale’s Digital Large Cap Fund has been trading over the counter since 2019 under the ticker GDLC. The newly approved ETF structure enables a more dynamic investment process, allowing for the daily creation and redemption of shares, in baskets of 10,000, settled in cash through authorized participants. This structure offers liquidity and ease of access for investors, with the fund calculating its net asset value at 4:00 p.m. ET each business day, akin to traditional ETFs.
The SEC’s accelerated rulemaking process played a crucial role in facilitating this transition. During this process, amendments to NYSE Arca’s rules were also established, allowing ETFs to be structured as limited liability companies and to be based on index-tracked portfolios. This regulatory evolution could simplify future innovations in the ETF space, aligning well with the growing interest in cryptocurrency investments.
To adhere to regulatory guidelines, Grayscale’s fund must ensure that at least 85% of its assets comprise digital assets already backed by SEC-approved exchange-traded products. If this threshold is breached, the fund manager is obligated to rebalance or pause trading to comply with the stipulated limits, thereby protecting investors and maintaining regulatory integrity.
Grayscale has actively pursued the conversion of several of its crypto trusts into ETFs. In a pivotal 2023 legal victory, a federal judge ruled in favor of Grayscale, asserting that the SEC’s prior rejection of its Bitcoin ETF application was “arbitrary and capricious.” As a result, its Bitcoin trust is now operating as an ETF with a competitive expense ratio of 1.5%, although this rate is currently the highest among its peers.
The approval for Grayscale’s Digital Large Cap Fund is particularly significant, especially as other firms like Bitwise, Hashdex, and Franklin Templeton await similar ETF proposals. Grayscale’s success could pave the way for the establishment of a framework within which future multi-asset crypto ETFs can flourish under existing exchange rules, potentially expanding the investment landscape for cryptocurrencies.