In the US, the Blockchain Association reports that Securities and Exchange Commission (SEC) actions have cost crypto companies over $425 million in legal defenses since 2021, calling for regulatory clarity and a shift in leadership. Simultaneously, Coinbase claims that the Federal Deposit Insurance Corporation (FDIC) has urged banks to limit crypto-related services, raising further concerns about access to financial resources for law-abiding firms. Meanwhile, regulatory actions extend internationally, as Australian authorities recently seized crypto assets under new laws aimed at tackling digital crime.
Grayscale Leads Charge with First Multi-Crypto ETF Proposal, SEC Review Underway
In a landmark move, US regulators are reviewing a proposal from asset management giant Grayscale to list an exchange-traded fund (ETF) featuring a diversified basket of cryptocurrencies, including several prominent altcoins. The proposal, aimed at launching Grayscale Digital Large Cap Fund (GDLC) on the New York Stock Exchange’s Arca platform, could mark the first multi-asset crypto ETF approved for trading on a national securities exchange.
Grayscale’s proposal was submitted by NYSE Arca on Oct. 29, with a request to the Securities and Exchange Commission (SEC) to allow the listing of GDLC. If approved, the rule change would create a pathway for trading multi-crypto ETFs, a first for a US national securities exchange. Grayscale stated that “[the] proposed rule change, if adopted, would represent the first national securities exchange ruleset permitting the listing and trading of shares of multi-crypto asset [ETFs].”
The GDLC Fund currently manages a crypto portfolio that includes Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Avalanche (AVAX), and XRP. This ETF, unlike many other proposed products, offers exposure to a diverse array of digital assets beyond BTC and ETH, positioning itself as a unique alternative for investors looking to diversify their cryptocurrency holdings through a regulated fund structure.
Originally launched in 2018, the GDLC Fund has yet to be accessible on public exchanges, despite managing significant assets. As of Nov. 4, the fund holds approximately $534 million in assets under management (AUM).
The fund’s holdings showcase some of the top-performing cryptocurrencies, with Bitcoin trading at around $67,869, Ethereum at $2,403.98, Solana at $158.18, Avalanche at $22.74, and XRP at $0.5046. By including SOL, AVAX, and XRP, Grayscale is positioning GDLC as a unique ETF that provides investors with exposure to high-potential altcoins.
The SEC officially published NYSE Arca’s requested rule change in the federal register on Nov. 4, setting a 240-day period for the regulatory body to determine whether the ETF will be approved for trading. If granted, the approval would be a landmark decision, potentially paving the way for a wave of diversified crypto ETFs to enter the US market.
Grayscale faces competition from other asset managers, such as Hashdex and Franklin Templeton, which have also submitted proposals for crypto ETFs. However, these funds primarily focus on Bitcoin and Ethereum, lacking the altcoin diversity that sets GDLC apart.
The interest in multi-asset crypto ETFs suggests an evolution in investor preferences as cryptocurrency assets mature and diversify. With single-asset BTC and ETH ETFs already available since January and July, respectively, the shift toward index-based crypto ETFs is seen as a natural progression in the industry. These indices mirror the efficiency and risk diversification offered by traditional equity indices like the S&P 500, providing a simpler route for investors to gain exposure to multiple cryptocurrencies within a single investment vehicle.
Katalin Tischhauser, head of investment research at Sygnum, a crypto-focused bank, highlighted the importance of this trend in an interview in August, noting that “the next logical step is index ETFs because indices are efficient for investors — just like how people buy the S&P 500 in an ETF. This will be the same in crypto.”
The recent flurry of multi-crypto ETF proposals is not only a response to investor demand but also a strategic move with potential political ramifications. Many industry analysts see the timing as significant, with some dubbing these filings a “call option” on the upcoming US presidential election in 2024. Should the election yield a more crypto-friendly administration, regulatory approvals for these funds could become more favorable.
The political angle is particularly evident in the inclusion of altcoins such as Solana, XRP, and Litecoin (LTC) in the proposed funds. According to Bloomberg analysts, the presence of these assets within ETFs could signal a proactive strategy by fund managers who are betting on a regulatory shift toward a more inclusive approach to crypto assets under potential new leadership.
Grayscale’s Commitment to Regulatory Compliance
In a statement accompanying the proposal, David LaValle, Grayscale’s global head of ETFs, emphasized the careful and compliant approach taken by Grayscale and NYSE Arca in crafting the proposed rules for the GDLC ETF. “Grayscale and NYSE Arca have taken a thoughtful approach toward developing a proposed ruleset to permit the listing and trading of shares of multi-crypto asset ETPs within the SEC’s existing standard,” LaValle stated.
Grayscale’s proposal comes at a time when the SEC has shown signs of increased openness to the concept of regulated crypto ETFs, particularly following its recent approvals for BTC and ETH ETFs. However, the SEC remains cautious, with Chair Gary Gensler consistently emphasizing the need for comprehensive investor protections within the crypto space.
If approved, Grayscale’s GDLC ETF could set a precedent for future multi-crypto ETFs, potentially driving further innovation and adoption within the cryptocurrency market. The approval of a multi-asset crypto ETF would likely bolster institutional confidence in cryptocurrency as a legitimate asset class, helping to bridge the gap between traditional finance and digital assets.
The Blockchain Association Criticizes SEC’s Costly Enforcement Actions Against Crypto Industry Amid Calls for Change
In other regulatory news, the Blockchain Association (BA) has highlighted the significant financial toll the United States Securities and Exchange Commission (SEC) has placed on the cryptocurrency industry through extensive litigation. The BA, a prominent advocacy group for the blockchain and crypto sectors, reports that companies have collectively spent over $425 million on legal defenses in cases brought by the SEC from 2021 to 2023.
According to an Oct. 31 update on the BA’s “regulation by enforcement” page, the SEC has initiated 104 legal cases against various entities within the crypto space over the past two years. These cases, which encompass a broad range of regulatory challenges, have compelled companies to expend substantial resources on “defensive litigation.” The BA estimates that its member companies, which represent only a portion of the industry, have already spent around $426 million in legal fees and associated costs.
The Blockchain Association has condemned this heavy-handed regulatory approach, calling it a form of “law-fare” against the industry. It argues that these actions are part of a concerted effort by the SEC to stymie innovation and growth within the cryptocurrency sector, a stance that has sparked debate among policymakers, industry leaders, and investors alike.
In its statement, the BA expressed that both the cryptocurrency industry and the American public are “ready for change,” emphasizing the need for new leadership at the SEC to curb what it perceives as excessive regulatory enforcement. The association’s call for a shift in leadership comes at a time when the agency, under SEC Chair Gary Gensler, has escalated its scrutiny of crypto companies. Critics argue that the current SEC administration’s regulatory stance has created a climate of uncertainty, with enforcement actions often targeting companies that lack clear guidelines on compliance.
The BA’s criticism of the SEC is rooted in its assertion that regulation through enforcement, rather than through clear and accessible guidelines, has placed unnecessary burdens on companies. Without a clear regulatory framework, crypto firms are forced to defend themselves in court, leading to costly litigation that diverts resources from innovation and growth.
The SEC isn’t the only agency under scrutiny for its stance on cryptocurrency. On Nov. 1, Paul Grewal, Chief Legal Officer at Coinbase, revealed that the Federal Deposit Insurance Corporation (FDIC) has actively discouraged banks from engaging with crypto-related businesses. Coinbase, one of the largest crypto exchanges in the United States, claims it discovered over 20 instances of the FDIC instructing banks to “pause” or “refrain from providing” crypto-banking services.
The FDIC’s discouragement of crypto-banking services adds another layer to the regulatory challenges faced by the crypto sector. The BA and Coinbase argue that regulatory bodies are adopting exclusionary tactics that contradict broader calls for financial innovation and inclusion.
Legal Battles Ripple Across the Crypto Industry: FTX and KuCoin
The SEC and FDIC are not the only entities grappling with crypto companies in court. The complex legal web extends to private entities and the fallout of failed crypto ventures, such as FTX. Alameda Research, the trading arm of the now-defunct FTX, has filed a lawsuit against KuCoin, a prominent cryptocurrency exchange, to reclaim assets valued at over $50 million. These assets were frozen on KuCoin’s platform following FTX’s bankruptcy declaration in November 2022.
Filed in the US Bankruptcy Court for the District of Delaware, Alameda’s lawsuit alleges that KuCoin’s refusal to release the funds, initially valued at $28 million but now worth over $50 million, constitutes a violation of the Bankruptcy Code. The lawsuit demands that KuCoin return the assets and seeks potential damages for the prolonged delay.
In a separate but related development, the Victoria Police in Australia reported its first successful seizure of cryptocurrency assets under recently expanded legal powers. On Oct. 31, the Victoria Police announced it had seized $142,679 in crypto assets following updates to the Confiscation Act 1997. These changes allow officers to seize digital assets from individuals involved in criminal activities, marking a significant step in how law enforcement agencies handle digital assets in criminal cases.
