Grayscale Argues SEC Overstepped Authority in ETF Delay: Impact on Bitcoin and Crypto ETFs in 2025
Introduction: Tensions Rise Between Grayscale and SEC Over ETF Approval Delay
In a significant development for the cryptocurrency market, asset manager Grayscale has officially challenged a stay order issued by the U.S. Securities and Exchange Commission (SEC) related to its proposal to convert its Digital Large Cap Fund (GDLC) into a publicly traded crypto ETF. This clash brings into focus an ongoing debate over regulatory authority and procedural deadlines—and its resolution could reshape the future of crypto-based financial products in the U.S.
With the SEC previously approving the proposal but placing a hold on that approval, Grayscale’s legal team is now pushing back, arguing the stay order violates provisions under the Exchange Act. As the legal battle unfolds, the implications stretch beyond one company—touching on market readiness, institutional interest, and the growing competition in the digital asset ETF space.
Grayscale vs. SEC: The Core of the Dispute
At the heart of the dispute is Grayscale's assertion that the SEC lacks the legal authority to pause or delay the final approval of its ETF conversion under Section 19(b) of the Exchange Act. According to Grayscale's attorneys, this section only allows the Commission to either approve or disapprove a proposed rule change within a 240-day window.
Grayscale's ETF proposal had already received approval, but the SEC subsequently issued a stay order, effectively halting the process until further notice. The asset manager claims this is outside the SEC's jurisdiction under Section 19b and argues that the stay is legally invalid.
The legal team, represented by Davis Polk, has emphasized that while Rule 431(e) of the SEC's own Rules of Practice does allow for stay orders in certain delegated decisions, it cannot override the strict 240-day timeline set by federal securities law.
What Is the Grayscale Digital Large Cap (GDLC) Fund?
Grayscale's Digital Large Cap Fund is an index-based crypto ETF designed to offer diversified exposure to top digital assets, including Bitcoin, Ethereum, Solana, XRP, and Cardano. The aim is to provide institutional and retail investors with a regulated way to gain access to the broader cryptocurrency market without directly managing crypto wallets or trading on exchanges.
The fund is intended to be listed on NYSE Arca, but due to the SEC’s stay order, its launch is currently stalled—causing frustration among Grayscale, the exchange, and investors.
Legal Grounds: Section 19(b)(2)(D) vs. Rule 431(e)
Grayscale’s lawyers argue that since the SEC failed to take definitive action—either approval or disapproval—within 240 days, the GDLC ETF proposal should be considered automatically approved under Section 19(b)(2)(D). This section explicitly states that a rule change is deemed approved if the SEC fails to act within the legally mandated timeframe.
While the Commission has argued it can use Rule 431(e) to pause approval decisions made by delegated authorities, Grayscale insists this internal rule cannot override federal law. In other words, Grayscale is saying: “The clock ran out, and the law is on our side.”
Damage Done: Delays Impact Fund, Exchange, and Investors
Grayscale and NYSE Arca have expressed concerns about the financial and strategic harm caused by the delay. The ETF’s launch was expected to give a major boost to the U.S. crypto investment market by providing exposure to top digital assets in a regulated format.
According to legal representatives, the delay not only affects Grayscale’s ability to operate competitively but also harms investors who were counting on the fund as a gateway to diversified crypto exposure.
Additionally, NYSE Arca, which was set to list the ETF, is facing business setbacks from the stalled launch. These disruptions are now prompting Grayscale and its stakeholders to consider legal options to compel the SEC to lift the stay.
Possible Petition to Challenge SEC’s Stay
In light of the situation, Grayscale's legal team is exploring whether to file a formal petition to request that the SEC immediately lift the stay order under Rule 431(e). Such a move would allow the ETF to move forward, even as the broader review process continues.
However, Grayscale maintains that a more straightforward resolution would be for the SEC to acknowledge that its authority does not supersede the 240-day legal deadline. Doing so would resolve the conflict quickly and pave the way for the ETF’s public launch.
Competitive Pressure in the Crypto ETF Space
One of the additional frustrations for Grayscale stems from growing competition in the crypto ETF market. Other firms have already filed for index-based crypto ETFs, including products tied to platforms like Truth Social.
Industry observers like market analyst Nate Geraci have emphasized that "first to market" advantage is crucial in the ETF space. Being delayed could hurt Grayscale’s position, particularly as institutional investors and retail participants seek regulated exposure to the crypto market.
Implications for the Broader Market
This legal battle could set an important precedent in the intersection of cryptocurrency investment and U.S. regulatory policy. If Grayscale prevails, it could weaken the SEC's ability to delay or block crypto ETFs in the future—potentially leading to a wave of new crypto ETF approvals.
Moreover, it would signal to the market that companies can hold regulators accountable for exceeding their legal authority, strengthening investor confidence and speeding up the pace of innovation in digital asset financial products.
Final Thoughts: Will the SEC Back Down?
The outcome of this regulatory conflict will be closely watched by industry leaders, investors, and policymakers. Grayscale’s argument that the SEC overstepped its bounds could have ripple effects across the entire crypto investment space, especially as Bitcoin ETF demand continues to grow in 2025.
Whether the SEC lifts the stay voluntarily or is compelled to do so by legal action, the decision will either validate or constrain the Commission’s approach to digital asset oversight going forward.
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