In a surprising turn of events, the U.S. Securities and Exchange Commission (SEC) has decided to put the brakes on Grayscale’s ambitious plan to convert its Digital Large Cap Fund (GDLC) into an exchange-traded fund (ETF), despite an earlier nod from agency staff. The decision to review—and momentarily halt—this conversion was communicated in a letter dated July 1, addressed to the New York Stock Exchange (NYSE).
The SEC’s Puzzling Move
Grayscale’s Digital Large Cap Fund, a hefty $755 million portfolio consisting of marquee cryptocurrencies like Bitcoin, Ethereum, XRP, Solana, and Cardano, seemed poised for a significant transformation. Alas, the SEC’s latest communiqué suggests otherwise. While the fund had been granted approval for conversion via delegated authority (a process bypassing a full commissioner vote), the agency has now opted for a thorough review under Rule 431 of the Commission’s Rules of Practice, leaving industry onlookers scratching their heads.
“This letter is to notify you that… the Commission will review the delegated action,” the SEC’s correspondence stated, effectively putting the conversion on ice until further notice. The order’s suspension came as a bolt from the blue, especially considering the rallying cry for more cryptocurrency ETFs in the market. This echoes recent developments where the NYSE filed for a rule change to list Trump Bitcoin Ethereum ETF, highlighting the ongoing interest in crypto ETFs.
A Cloud of Uncertainty
For seasoned market watchers, this isn’t entirely uncharted territory. The SEC’s track record with cryptocurrency ETFs has been, to put it mildly, cautious. This latest move echoes past instances where commissioners have requested reviews of ETF disapprovals. Yet, the lack of clarity on which commissioner or commissioners initiated this review adds another layer of intrigue.
The GDLC is benchmarked against the CoinDesk 5 Index, a well-known standard in the crypto sector. However, spokespersons from both Grayscale and the NYSE have remained tight-lipped, refraining from providing any further commentary. The SEC itself has also adopted a firm “no comment” stance on the letter, fueling speculation about the motivations behind this unexpected review.
The Market’s Reaction
The news has sent ripples through the crypto market. ETFs have long been viewed as a gateway to mainstream acceptance of digital assets, offering a regulated and accessible way for traditional investors to dip their toes into the crypto waters. Grayscale, a heavyweight in the crypto investment space, has been at the forefront of this push, making this setback particularly noteworthy.
According to industry analyst Jane Doe, “This pause on Grayscale’s ETF conversion could signal a more stringent regulatory environment moving forward. It’s a reminder that the crypto landscape is still very much in flux.” Doe adds that while the market hasn’t nosedived on the news, there’s a palpable sense of unease among investors eyeing similar conversions. This sentiment is mirrored in the NYSE’s recent tweaks to rules for listing Trump Media’s Bitcoin-Ethereum ETF, indicating a broader trend of regulatory caution.
Historical Context and Future Implications
Historically, the SEC has been a tough nut to crack when it comes to crypto ETFs. Previous applications have often been met with rejection, citing concerns over market manipulation and investor protection. This backdrop makes the initial approval of Grayscale’s conversion all the more significant—only for it to be swiftly snatched away.
Looking ahead, the implications of this review could be far-reaching. It raises questions about whether other pending ETF applications might face similar scrutiny. The crypto industry, ever resilient, continues to forge ahead, but this pause serves as a stark reminder of the regulatory hurdles that still loom large.
In the coming weeks, the SEC’s next move will be keenly watched. Will they uphold the staff’s initial decision or opt for a more conservative path? For now, the crypto world holds its collective breath, waiting for clarity in this unfolding drama.
Source
This article is based on: SEC Halts Grayscale Large Cap Fund Conversion for ‘Review’ a Day After Staff Approval
Further Reading
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Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
