The Implications of MSCI's Proposed DAT Exclusion for U.S. Innovation and Passive Capital Flows

The recent proposal by MSCI to exclude companies with substantial digital asset treasury (DAT) holdings from its flagship equity indices has ignited a critical debate about the intersection of index provider policies, market structure, and innovation in the digital asset sector. This move, which targets firms where digital assets constitute 50% or more of total assets, could reshape capital flows and innovation trajectories in the U.S. market. By analyzing the rationale, potential impacts, and historical precedents, this article assesses how such policy shifts may stifle innovation while altering the dynamics of passive investing.

The Rationale Behind MSCI's DAT Exclusion Proposal

MSCI's consultation, initiated in October 2025, seeks to exclude DAT companies deemed to operate similarly to investment funds, which are currently ineligible for index inclusion according to MSCI's consultation. The firm argues that these entities exhibit characteristics such as high volatility and performance tied to digital asset price swings, which could distort index representation as research shows. For instance, companies like Strategy, Riot Platforms, and Marathon Digital-whose balance sheets are heavily weighted toward Bitcoin-would face exclusion if the proposal is finalized according to Bloomberg. The consultation remains open until December 31, 2025, with implementation slated for February 2026 as per MSCI's announcement.

Impact on Passive Capital Flows and Market Liquidity

The exclusion of DAT companies from major indices could trigger massive passive outflows. JPMorgan estimates that Strategy alone could face up to $2.8 billion in selling pressure if removed from the MSCI USA and Nasdaq 100 indices. Passive funds, which account for nearly $9 billion of Strategy's market exposure, are particularly vulnerable to such adjustments, as their redemption rules mandate large-scale sell-offs following index changes.

This could exacerbate liquidity challenges and amplify short-term volatility in the digital asset sector.

Historical precedents underscore the power of index providers to shape market dynamics. For example, MSCI's ESG index reviews have historically triggered abnormal returns and trading volumes, demonstrating how index composition changes can influence investor behavior and liquidity. In the case of DATs, the exclusion could further erode institutional credibility for these firms, according to market analysis, deterring new capital inflows and compounding existing market fragility.

Stifling Innovation in the Digital Asset Sector

Critics argue that MSCI's proposal risks stifling innovation by conflating investment vehicles with operating businesses. Strategy, a vocal opponent, emphasizes its role as an active entity engaged in Bitcoin-backed credit instruments, corporate treasury management, and enterprise software development according to its response. By excluding such firms, index providers may inadvertently discourage innovation in traditional operational models, as research suggests pushing companies toward asset accumulation strategies instead.

This tension reflects broader debates about the role of digital financial inclusion in fostering innovation. Studies show that access to digital financial tools enhances innovation in SMEs and high-tech enterprises by reducing transaction costs and expanding capital access. However, if DATs are excluded from major indices, their ability to attract capital-and by extension, to fund innovation-could be severely curtailed.

Broader Implications for Market Structure and Policy

The proposed exclusion also highlights a shift in how index providers define "traditional operating businesses." While MSCI's criteria aim to align with existing fund eligibility rules, critics argue the policy is discriminatory, as similar asset concentrations in industries like oil or gold are permitted. This inconsistency raises questions about the fairness of index provider gatekeeping and its long-term impact on market structure.

Moreover, the rise of retail investing in the tech sector-where flows increased by 50% from 2023 to 2025-suggests that index provider decisions could amplify retail investor behavior. If DATs are excluded, retail investors may follow suit, further reducing liquidity and deepening market volatility.

Conclusion

MSCI's proposed DAT exclusion underscores the dual-edged nature of index provider policies. While the firm aims to preserve index integrity and mitigate volatility, the move risks undermining innovation in the digital asset sector and disrupting passive capital flows. As the consultation concludes in December 2025, stakeholders must weigh the short-term stability of indices against the long-term health of a sector poised to redefine financial markets. The outcome will not only shape the fortunes of DAT companies but also set a precedent for how index providers balance innovation, market structure, and investor expectations in the digital age.