SEC Halts Grayscale ETF Conversion Pending Full Review

The U.S. Securities and Exchange Commission (SEC) has halted the conversion of Grayscale’s Digital Large Cap Fund (GDLC) into an exchange-traded fund (ETF). The SEC issued a letter to the New York Stock Exchange (NYSE) notifying that the approval, previously granted through delegated authority, is now under review by the full Commission. This decision effectively places the ETF conversion on hold until further notice.

The SEC staff initially approved the ETF conversion without a commissioner vote using delegated authority. However, a July 1 letter confirms that the full Commission will now review the decision under Rule 431 of the SEC’s Rules of Practice. The order has been stayed immediately, pending further instructions. The letter to the NYSE reads: “This letter is to notify you that, pursuant to Rule 431 of the Commission’s Rules of Practice, the Commission will review the delegated action.” It continues: “In accordance with Rule 431(e), the July 1, 2025 order is stayed until the Commission orders otherwise.” The SEC will inform the exchange of any new actions taken.

The letter did not disclose which commissioner initiated the review. Under SEC rules, any commissioner may request a review of staff-level decisions. This process has previously been used in cases involving ETF disapprovals. The SEC's decision to halt the conversion process underscores the need for thorough review and compliance with regulatory standards before such products can be listed on major exchanges. The SEC's actions reflect a cautious approach to the approval of crypto-related ETFs, ensuring that all necessary regulatory requirements are met before allowing such products to be traded publicly.

Grayscale’s Digital Large Cap Fund (GDLC) holds approximately $755 million in assets across major cryptocurrencies. The fund includes Bitcoin, Ethereum, XRP, Solana, and Cardano, and it tracks the CoinDesk 5 Index. Bitcoin makes up the largest share of the fund, accounting for over 80% of its weight. Grayscale has worked to convert several of its crypto trusts into ETFs to close pricing inefficiencies. Investors often exploit price gaps between the fund’s trading price and its net asset value. By transitioning to ETFs, Grayscale aims to reduce arbitrage and align market value more closely with underlying assets.

This decision by the SEC highlights the regulatory scrutiny that crypto-related financial products continue to face. The SEC's decision to halt the conversion process underscores the need for thorough review and compliance with regulatory standards before such products can be listed on major exchanges. The SEC's actions reflect a cautious approach to the approval of crypto-related ETFs, ensuring that all necessary regulatory requirements are met before allowing such products to be traded publicly. The hold could be due to various reasons, including the need for a full commission-level review under Rule 431. The decision transitions the fund from a traditional crypto investment vehicle to a fully regulated spot ETF under NYSE Arca's amended Rule 8.500-E. This move by the SEC highlights the regulatory scrutiny that crypto-related financial products continue to face.