Grayscale's Strategic Shift to Cash-Only ETF Transactions

Grayscale Adapts to Regulatory Shifts

In a significant regulatory compliance move, Grayscale, a renowned crypto asset manager, has recently updated its S-3 filing with the United States Securities and Exchange Commission (SEC). The revised filing, submitted on December 26, aligns with the SEC's new guidelines, necessitating cash-only transactions for fund redemptions. This change marks a departure from the traditional "in-kind" method used in the exchange-traded fund (ETF) market.

Traditionally, ETFs operate on an "in-kind" basis, allowing direct asset-for-share exchanges. Contrarily, the "cash create" system, now adopted by Grayscale, requires cash exchanges for each ETF share transaction. This move mirrors actions by other entities, including financial giant BlackRock, in their applications for spot Bitcoin ETFs.

Eric Balchunas, a senior ETF analyst at Bloomberg, views Grayscale's adjustment as a pivotal step towards transitioning its Bitcoin Trust into a fully-fledged ETF. This development comes as the SEC has been pushing ETF applicants towards a specific operational format, favoring cash transactions over the traditional in-kind approach. The SEC's stance, largely seen as a measure against market manipulation and illicit activities, involves barring broker-dealers from direct Bitcoin engagement.

Scott Johnsson, a general partner at VB Capital, however, raises concerns about this shift. He argues that the SEC's insistence on a cash-centric model could heighten risks for investors looking to gain Bitcoin exposure through a spot ETF.

Additionally, Grayscale's filing reveals another significant change. The firm's spot Bitcoin ETF shareholders will not benefit from blockchain airdrops or forks. The document states that any incidental rights or virtual currency resulting from such events will be irrevocably abandoned. In case of a policy change, NYSE Arca would have to seek SEC approval for amending its listing rules. Johnsson criticizes this decision, questioning its rationale, especially when other applicants have tactically avoided this issue. He suggests that the SEC's influence might be behind Grayscale's choice.

While Grayscale's compliance demonstrates adaptability, it also raises questions about the potential impact on investor risks and market dynamics.