WSJ: Grayscale applies to convert the Digital Large Cap Fund into an exchange-traded fund

What’s new? Crypto investment company Grayscale intends to convert its Digital Large Cap Fund product into an exchange-traded fund (ETF). It has filed an application with the US Securities and Exchange Commission (SEC) to do so. The Digital Large Cap Fund basket includes several cryptocurrencies: bitcoin, Ethereum, Solana, XRP, and Avalanche.

Material by WSJ

What else is known? Earlier this year, Grayscale converted two of its trusts — bitcoin and Ethereum-based — into spot ETFs. The products are traded on the New York Stock Exchange (NYSE) under the tickers GBTC and ETHE, respectively.

Their conversion was also only possible after SEC approval. In the case of GBTC, Grayscale had to go to court to get it. Thus, the company applied for the conversion of the trust into an exchange-traded fund back in 2021, and after receiving the rejection, accused the regulator of violating securities laws.

In 2023, the court found that the SEC had acted inconsistently: by that time, it had already allowed futures products on the market but did not allow trading in spot fund shares, which inherently carry similar risks.

The court ruling forced the SEC to reconsider its decision, and on January 11, 2024, it not only approved the GBTC conversion but also allowed new spot BTC ETFs from a number of investment firms, including BlackRock and Fidelity.

Trading in spot Ethereum funds was authorized by the SEC on July 23. It is noteworthy that BTC and ETH do not fall under the definition of a security according to the commission’s classification, which made it possible to create commodity funds based on them.

After that, the market expected the regulator to approve ETFs based on other highly capitalized altcoins, including Solana and XRP.

However, in September, the commission rejected applications for SOL ETFs, citing that the asset could be a security. In October, investment firms Bitwise and Canary Capital filed applications to launch spot XRP funds. So far, they are still under review.

The situation with XRP is complicated by the fact that the SEC and its issuer, fintech company Ripple, have been in court since 2020 over the status of the asset. The court has determined that XRP is not a security, but the SEC is preparing to appeal the decision.

The issue became the subject of a new lawsuit this month. Bitnomial exchange claimed that the SEC is preventing it from launching an XRP futures contract by calling it a security, contradicting the ruling in the SEC’s case against Ripple.

As for Grayscale with its Digital Large Cap Fund, the product basket includes both controversial assets (SOL and XRP), which could prevent it from converting to a commodity fund.

WSJ reports that the NYSE has filed a Form 19b-4 application with the SEC on behalf of Grayscale to change its trading rules. This is one of the mandatory conversion steps.

According to a Grayscale spokesperson, the filing reflects the company’s strong commitment to making the crypto asset class more accessible to all investors. If it is registered in the federal register, there will be a clear deadline for the SEC under the law in which it must respond.

Digital Large Cap Fund with the ticker GDLC is currently traded on the over-the-counter (OTC) market and manages $524 million in assets. Bitcoin accounts for 75% of it, with Ethereum accounting for about 19%. The rest of the fund is represented by SOL, XRP, and AVAX.