Grayscale Challenges SEC’s Stay Order Blocking GDLC’s ETF Conversion

Asset manager Grayscale has responded to the SEC’s stay order regarding its proposal to convert its Digital Large Cap Fund into an ETF. The asset manager argued that the Commission doesn’t have the authority to put such an order on the proposal under Section 19b of the Exchange Act.

Grayscale Argues SEC Has No Power To Stay Its Proposal

In a letter sent to the SEC, the asset manager’s lawyers, Davis Polk, argued that the SEC lacks the authority to stay a rule change proposal under Section 19b of the Exchange Act. The lawyers argued that this section only gives the Commission the right to approve or disapprove a rule change.

This move comes just a week after the SEC put a stay order on its approval order of Grayscale’s proposal to convert its Digital Large Cap Fund into an ETF. The Commission had approved the proposal, but asked that the stay order stay in effect until it orders otherwise.

The asset manager’s lawyers argue that the stay order is invalid and that the Digital Large Cap Fund conversion has received the SEC’s approval under Section 19(b)(2)(D) of the Act. The section stipulates that a proposal is deemed approved if the Commission fails to approve or disapprove within 240 days of publication.

Grayscale acknowledged that the SEC can put a stay order on a decision made by a delegated authority under Rule 431 of the Commission’s Rules of Practice. However, this provision cannot override Section 19b of the Exchange Act, which only gives the agency power to approve or disapprove a proposal.

As such,  in this case, the Commission was well within its right to stay its approval order. However, in doing so, it failed to approve or disapprove the order GDLC conversion proposal within the 240-day window, meaning that the proposal has ultimately gained approval under Section 19(b)(2)(D).

Harm Caused To The Asset Manager And Exchange

Davis Polk stated that Grayscale, NYSE Arca, which is meant to list the Fund, and the Fund’s current investors are suffering harm as a result of the delay in the public launch of the Fund. The Fund is an index-based crypto ETF that will hold Bitcoin, Ethereum, Solana, XRP, and Cardano.

The lawyers further revealed that the interested parties are considering whether to file a petition requesting that the SEC lift the stay imposed by Rule 431(e), so that the Fund may launch while the Commission’s review under the stay order proceeds.

However, Grayscale and the NYSE Arca believe that a simpler path will be for the Commission to recognize that Rule 431 (e) cannot override the deadline under Section 19(b)(2) if the Commission fails to finalize its own decision within the 240-day window.

As market expert Nate Geraci noted, the asset manager will not be happy with the stay order, especially since Truth Social has filed for its index-based crypto ETF. Geraci stated that being first to market matters, which is why Grayscale would look to launch its DLC fund as soon as possible.