MSCI's Digital Asset Index Proposal and Its Implications for Institutional Capital Allocation

The recent proposal by MSCI to exclude companies with digital asset holdings exceeding 50% of total assets from its global equity indexes has ignited a contentious debate about index neutrality, market classification standards, and the future of institutional capital allocation in the digital asset space. At the heart of the controversy lies a fundamental question: Should digital asset treasuries (DATs)-companies that hold significant amounts of Bitcoin or other cryptocurrencies as strategic capital-be classified as passive investment vehicles or treated as operating businesses? This distinction carries profound implications for market stability, regulatory alignment, and the broader adoption of digital assets by institutional investors.

MSCI's Rationale and the Case for Exclusion

According to MSCI, companies with digital assets constituting 50% or more of their total assets operate more like investment funds than traditional corporations, thereby distorting index composition and performance metrics. The firm's preliminary proposal, which extends the consultation period until December 31, 2025, seeks to align index methodology with its existing criteria for excluding passive investment vehicles, such as real estate investment trusts (REITs) or oil and gas pipelines. MSCI contends that such exclusions ensure indexes remain representative of "operating businesses" and avoid overexposure to volatile asset classes.

However, critics argue that this approach introduces an arbitrary and inconsistent threshold. For instance, companies holding substantial real estate, oil reserves, or other non-operational assets are not subject to similar exclusion rules. Strategy, a major Bitcoin treasury company, has directly challenged MSCI's proposal, asserting that DATs are operating entities that use digital assets as productive capital to generate revenue through staking, lending, or other income-generating activities. The company warns that the 50% threshold could arbitrarily exclude firms that are integral to the U.S. digital asset ecosystem, undermining the country's leadership in financial innovation.

The Risk of Misclassification and Market Neutrality

The misclassification of DATs as passive funds risks creating structural instability in global indexes. Digital assets are inherently volatile, and applying a rigid asset-specific threshold could lead to frequent reclassifications as market conditions fluctuate. For example, a company holding 49% in digital assets might be reclassified if prices surge, pushing the percentage above the threshold. Such volatility could distort index neutrality, a core principle of MSCI's methodology.

This concern is amplified by the growing institutional demand for Bitcoin. According to a report by SSGA, 68% of institutional investors have already invested or plan to invest in Bitcoin exchange-traded products (ETPs), while 86% have exposure to digital assets or intend to allocate capital in 2025. The approval of spot Bitcoin ETFs in early 2024, for instance, triggered a 400% acceleration in institutional investment flows, rising from $15 billion pre-approval to $75 billion post-launch within Q1 2024. These developments underscore the importance of maintaining index neutrality to avoid artificially constraining access to a rapidly growing asset class.

Precedents and the Role of Regulatory Clarity

Historical precedents highlight the critical role of index classifications in shaping institutional capital allocation. The approval of Bitcoin ETFs in 2024 not only legitimized digital assets as institutional-grade investments but also demonstrated how regulatory clarity can catalyze market growth. BlackRock's IBIT ETF, for example, captured 48.5% of the Bitcoin ETF market, amassing nearly $100 billion in assets under management. This surge in institutional participation was driven by the availability of registered vehicles that provided transparency, liquidity, and compliance with existing frameworks-a stark contrast to the opaque and speculative nature of direct crypto holdings.

The contrast between the treatment of Bitcoin ETFs and DATs raises questions about MSCI's proposal. If institutional investors are increasingly allocating capital to Bitcoin through ETFs, why should companies that hold and manage Bitcoin as a strategic asset be excluded from indexes? Strategy argues that DATs are not passive funds but operating entities that contribute to the infrastructure and innovation of the digital asset ecosystem. Excluding them risks sending a conflicting signal to investors, particularly as the U.S. government has signaled support for digital asset innovation through initiatives like the GENIUS Act.

Conclusion: Balancing Neutrality and Innovation

MSCI's proposal to exclude DATs from global indexes hinges on a narrow definition of "operating businesses" that may not account for the unique characteristics of digital assets. While the firm's intent to preserve index neutrality is understandable, its approach risks stifling innovation and misallocating capital by applying inconsistent criteria to different asset classes. The growing institutional demand for Bitcoin, coupled with the precedent set by ETF approvals, suggests that digital assets are here to stay-and that index providers must adapt their methodologies to reflect this reality.

As the consultation period concludes in December 2025, the outcome of this debate will have far-reaching implications for market stability, regulatory alignment, and the future of institutional capital allocation. If MSCI proceeds with its proposal, it may inadvertently create a fragmented market where DATs are excluded from indexes while similar asset classes are not, undermining the very neutrality it seeks to uphold. Conversely, a more inclusive approach that recognizes DATs as operating businesses could foster a more resilient and innovative financial ecosystem.