SEC Pauses Grayscale’s Altcoin ETF Conversion

The U.S. Securities and Exchange Commission (SEC) has paused Grayscale Investments’ application to convert its Digital Large Cap Fund (GDLC) into a spot exchange-traded fund (ETF), just a day after initially approving it. This abrupt halt has created uncertainty about the anticipated expansion of crypto-based exchange-traded products and disrupted immediate trading plans.

Acting under delegated authority, the SEC’s Division of Trading and Markets had granted accelerated approval on July 1 for NYSE Arca’s rule change, which was necessary to list and trade shares of the GDLC ETF. This approval was widely reported as a landmark move, converting Grayscale’s existing closed-end GDLC fund into one of the first regulated ETFs offering exposure to a diversified basket of major cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Solana (SOL), XRP, and Cardano (ADA).

Analysts had heralded the approval as a potential “test run” that could pave the way for future single-asset altcoin ETFs, with trading expected to begin imminently, pending final operational steps. However, a letter from Deputy Secretary J. Matthew DeLesDernier, also dated July 1, explicitly stated that the Commission will review the delegated action. According to the letter, the July 1, 2025 order is stayed until the Commission orders otherwise, preventing Grayscale from converting the fund “at this time,” despite the initial approval.

With the sudden delay leaving the community puzzled, analysts offered several theories to explain the decision. One theory suggests that internal coordination issues between different SEC departments may be at play. Another theory posits that the financial watchdog may be holding off on any launches under the existing rule-changing system until it puts in place a more comprehensive regulatory structure for crypto ETFs. This aligns with information shared on X by a journalist, who revealed that the agency was in the “early stages of creating a listing standard for token-based ETFs.”

While the regulator’s criteria are still unknown, it is speculated that they could include market cap, trading volume, and liquidity. Issuers will be allowed to skip the 19b-4 process if their tokens meet the soon-to-be-created threshold. Industry watchers agree that the delay is most likely temporary, with one expert writing, “It can’t convert YET, but it will.”

The SEC's decision to delay the approval of Grayscale's Altcoin ETF Basket is part of a broader regulatory landscape that has seen the commission take a cautious approach to cryptocurrency-related products. The SEC has not yet approved any spot ETFs tied to meme coins or other altcoins, citing concerns over volatility and market manipulation. This cautious stance has led to a backlog of applications from various ETF issuers, who are eager to capitalize on the growing interest in cryptocurrencies.

The delay in approving Grayscale's Altcoin ETF Basket is likely to have a ripple effect on the cryptocurrency market. Investors who were hoping to gain exposure to a basket of altcoins through an ETF may now have to explore other investment vehicles or hold the underlying assets directly. This could lead to increased volatility in the altcoin market, as investors adjust their portfolios in response to the delay.

The controversy surrounding the SEC's decision highlights the ongoing debate over the regulation of cryptocurrencies. While some argue that stricter regulations are necessary to protect investors and prevent market manipulation, others contend that excessive regulation could stifle innovation and hinder the growth of the cryptocurrency industry. The SEC's delay in approving Grayscale's Altcoin ETF Basket is a clear indication that the regulatory landscape for cryptocurrencies remains uncertain, and that investors should proceed with caution.

The delay in approving Grayscale's Altcoin ETF Basket also raises questions about the future of cryptocurrency ETFs more broadly. While the SEC has approved several Bitcoin futures ETFs, it has yet to approve a spot Bitcoin ETF, citing similar concerns over volatility and market manipulation. The delay in approving Grayscale's Altcoin ETF Basket suggests that the SEC may be taking a similarly cautious approach to other cryptocurrency-related products.