Grayscale Pushes for Spot ETF Conversion of $520M Crypto Fund

Two prominent asset managers, Grayscale and Canary Capital, are making significant strides in the crypto investment space by seeking regulatory approval for new cryptocurrency exchange-traded funds (ETFs). Grayscale recently filed to convert its $520 million Digital Large Cap Fund into a spot ETF, following the successful conversions of its Bitcoin and Ethereum trusts earlier this year. Meanwhile, Canary Capital has submitted registration documents for a spot Litecoin ETF, further expanding its range of proposed crypto ETFs, including a recent filing for a spot XRP ETF. 

Grayscale Seeks SEC Approval to Convert $520 Million Digital Large Cap Fund into ETF

Grayscale, one of the largest crypto asset managers in the world, has filed a request with the United States Securities and Exchange Commission (SEC) to convert its Digital Large Cap Fund, valued at over $520 million, into an exchange-traded fund (ETF). This move continues Grayscale’s aggressive expansion into the ETF space, building upon its previous success in converting two of its flagship crypto trusts into ETFs earlier this year.

On behalf of Grayscale, the New York Stock Exchange (NYSE) submitted a 19b-4 form to the SEC on Oct. 14. This form requests that the SEC modify existing rules to permit the listing of the new ETF. The Digital Large Cap Fund, which currently manages just over $524 million in assets, allocates its holdings heavily towards Bitcoin (76%) and Ethereum (18%), with the remaining portion invested in Solana, XRP, and Avalanche.

Grayscale’s attempt to convert its Digital Large Cap Fund into an ETF marks a continued push towards simplifying access to digital assets for institutional and retail investors alike. ETFs offer a more liquid and regulated investment vehicle compared to traditional crypto trusts. Unlike trusts, spot ETFs hold the actual underlying assets (such as Bitcoin or Ethereum) directly on their books, providing a more transparent and secure structure for investors.

The conversion of the Digital Large Cap Fund into a spot ETF would allow investors to more easily buy and sell shares, simplifying their exposure to multiple cryptocurrencies. Additionally, this ETF would help track the price of digital assets more closely than non-spot funds, which rely on futures contracts that can introduce volatility and tracking inefficiencies.

Grayscale’s latest filing follows two successful conversions of its major crypto trusts earlier this year. In January, the SEC approved the conversion of the Grayscale Bitcoin Trust (GBTC) into a Bitcoin ETF, and later in July, it approved the conversion of the Grayscale Ethereum Trust (ETHE) into an Ethereum ETF. These approvals marked a major shift in the SEC's stance on crypto ETFs, as the regulator had previously rejected all applications for spot crypto ETFs. However, a favorable court ruling for Grayscale in August paved the way for these conversions, signaling a potential shift in the SEC’s approach to regulating crypto investment products.

This shift has made ETFs a more attractive investment vehicle for those seeking exposure to cryptocurrencies. Before the GBTC fund was converted to an ETF, for instance, it traded at a significant discount to the value of its underlying Bitcoin holdings. According to YCharts data, investors could purchase GBTC shares at a 44% discount compared to buying spot Bitcoin six months before the conversion. After the fund became an ETF, this discrepancy disappeared, making it more profitable for investors to sell their shares.

While the conversion of Grayscale’s Bitcoin and Ethereum trusts into ETFs provided more accessible investment opportunities, it also led to significant outflows from both funds. Since its conversion in January, the Grayscale Bitcoin ETF has seen over $21 billion in outflows, while the Ethereum ETF has experienced $3 billion in outflows since July. Much of this movement stems from investors taking advantage of the closing discount to net asset value (NAV) in the days following the conversion. 

Despite these outflows, Grayscale remains committed to expanding its lineup of crypto investment products. In recent months, the firm has launched a series of new funds, targeting a wide range of digital assets. In October alone, Grayscale launched a new investment fund focused on the decentralized finance platform Aave, following the creation of an XRP Trust in September and an Avalanche fund in August.

New Horizons for Grayscale’s Product Line

In addition to its ETF ambitions, Grayscale has broadened the scope of its crypto offerings. On Oct. 10, the firm added 35 altcoins to its list of assets under consideration for future investment products. This includes notable cryptocurrencies such as Dogecoin (DOGE), Worldcoin (WLD), and Jupiter (JUP). The continuous expansion of its asset pool indicates that Grayscale is keen on diversifying its investment products to appeal to a broader range of investors, beyond just Bitcoin and Ethereum.

The firm’s strategy of regularly launching new crypto funds aligns with the evolving preferences of institutional and retail investors who seek exposure to a wider variety of digital assets. As the demand for altcoins and decentralized finance solutions grows, Grayscale appears well-positioned to capitalize on this trend by offering products that cater to different risk appetites and investment goals.

While Grayscale’s request to convert its Digital Large Cap Fund into an ETF reflects growing optimism in the crypto market, the SEC’s approval is by no means guaranteed. The regulator has been cautious in its handling of crypto products, particularly when it comes to spot ETFs. The risk of market manipulation, liquidity concerns, and the lack of a clear regulatory framework for crypto assets are among the issues that the SEC has cited in previous rejections of spot crypto ETF applications.

However, Grayscale’s recent court victory and the growing pressure from institutional investors for more regulated investment products could sway the SEC to continue approving such conversions. If the Digital Large Cap Fund is successfully converted into an ETF, it would represent a significant milestone for the cryptocurrency industry, as it would be one of the first multi-asset crypto ETFs to be listed on a major US exchange.

Canary Capital Files for Spot Litecoin ETF, Expanding Cryptocurrency ETF Landscape Ahead of US Presidential Election

Meanwhile, Canary Capital, a notable player in the asset management space, has filed registration documents for a spot Litecoin (LTC) ETF with US regulators. The filing, submitted on Oct. 15, is part of a growing trend of proposed ETFs holding alternative cryptocurrencies as the cryptocurrency sector anticipates shifts in regulatory attitudes ahead of the US presidential election in November.

This move by Canary Capital comes as the market for cryptocurrency ETFs continues to heat up, with increasing interest from both investors and fund managers looking to offer regulated products for crypto enthusiasts. According to the documents filed with the SEC, the proposed ETF aims to hold spot Litecoin and will closely track the performance of the CoinDesk Litecoin Price Index (LTX).

Litecoin, often referred to as the "silver to Bitcoin's gold," is a decentralized, peer-to-peer digital currency designed for quicker, lower-cost transactions. Created in 2011 by Charlie Lee, a former Google engineer, Litecoin operates similarly to Bitcoin but with a faster block generation time of 2.5 minutes compared to Bitcoin's 10 minutes. This feature makes it ideal for smaller payments and day-to-day transactions, positioning Litecoin as a more efficient alternative for everyday use cases. 

The digital currency has long been favored by those who seek Bitcoin's benefits but want lower transaction fees and faster processing times. As of Oct. 16, Litecoin was trading at approximately $71.84 per coin, and its inclusion in an ETF could offer investors exposure to this well-established cryptocurrency through traditional financial markets.

Canary Capital’s filing for a Litecoin ETF follows its earlier attempt to launch a spot XRP ETF. On Oct. 9, the firm submitted an S-1 registration form for the proposed XRP ETF, shortly after Bitwise, another major crypto fund issuer, filed a similar registration for a spot XRP ETF with the SEC. XRP, the native token of Ripple’s payment protocol, has been at the center of regulatory scrutiny since 2020, when the SEC filed a lawsuit against Ripple Labs, alleging that the token’s launch was an unregistered securities offering. Despite this legal cloud, interest in XRP-based financial products remains high.

The surge of ETF filings for alternative cryptocurrencies like XRP and Litecoin reflects a growing demand for regulated investment vehicles that provide exposure to digital assets beyond Bitcoin and Ethereum. Nate Geraci, president of financial advisory firm The ETF Store, recently commented on the trend, stating that the flurry of filings could be a "short-term call option" on the outcome of the US presidential election. Geraci believes that while politics may have a short-term impact, the introduction of more cryptocurrency ETFs is "inevitable" over time.

The regulatory landscape for cryptocurrency in the US has been turbulent under President Joe Biden’s administration, with the SEC taking an aggressive stance against the industry. Under the leadership of SEC Chair Gary Gensler, the regulator has pursued over 100 regulatory actions against crypto companies, leading to uncertainty among investors and industry players. However, with the US presidential election looming, market participants are closely watching the candidates' stances on cryptocurrency regulation.

Vice President Kamala Harris, who is also a presidential candidate, has been viewed as somewhat friendlier to the crypto industry than President Biden. However, she is seen as less pro-industry compared to her main rival, former President Donald Trump. Harris has recently emphasized the importance of blockchain technology in keeping the US dominant in emerging tech sectors, a stance that has signaled a more constructive approach to crypto than that of the current administration. Behind-the-scenes discussions suggest that Harris could potentially offer a more favorable regulatory environment for digital assets if elected.

Former President Trump, on the other hand, has taken a stronger pro-crypto position. In a July campaign promise, Trump vowed to "fire" Gary Gensler if re-elected, signaling his desire to take a more laissez-faire approach to regulating the industry. Under Trump’s previous administration, the SEC took a more hands-off approach to cryptocurrency, allowing for the industry to grow with less regulatory interference.

The Road to ETF Approval: A Lengthy Process

While Canary Capital’s filing is a step in the right direction, the journey to launching a spot Litecoin ETF will still require SEC approval. The filing of the S-1 registration form marks the initial step, but Canary will have to wait for the SEC to review the documents and determine whether to authorize the fund. Approval also depends on the SEC allowing at least one national securities exchange, such as the New York Stock Exchange (NYSE) or NASDAQ, to list the proposed ETF.

The approval of a spot Litecoin ETF would represent a significant milestone for the cryptocurrency industry, as it would allow investors to gain exposure to Litecoin through a traditional and regulated investment vehicle. Unlike futures-based ETFs, which track the price of assets through derivatives contracts, spot ETFs hold the actual underlying assets on their books, providing a more accurate and transparent investment option for market participants.

Canary Capital’s interest in a Litecoin ETF follows a broader industry push to introduce ETFs that hold alternative cryptocurrencies. This diversification of investment products is particularly significant as investors look for options beyond Bitcoin and Ethereum. Should the SEC approve the proposed ETFs for Litecoin and XRP, it could pave the way for even more crypto assets to be included in regulated financial products in the future.

As the US presidential election approaches, cryptocurrency policies are expected to play an increasingly important role in voter decision-making. A recent survey conducted by Gemini, a cryptocurrency exchange, found that three in four crypto owners said a candidate’s stance on digital assets would impact how they vote in the upcoming election. The rapid growth of the crypto industry, combined with the rising number of people investing in digital assets, means that the regulatory environment will likely be a major factor in the election’s outcome.

Candidates like Kamala Harris and Donald Trump have already started to position themselves on the issue, each offering a distinct approach to crypto regulation. Harris has expressed an interest in supporting blockchain technology and fostering innovation in the sector, while Trump has signaled his intention to roll back many of the regulatory efforts initiated by the Biden administration.