Grayscale Litecoin Trust Steps Closer to an ETF
Grayscale Investments, the world’s largest digital asset manager with nearly $50 billion in AUM revealed exclusively to Forbes that the Grayscale Litecoin Trust (LTCN) has become SEC reporting company along side the companies Bitcoin (GBTC), Ethereum (ETHE), Digital Large Cap Fund (GDLC), Ethereum Classic (ETCG) and Bitcoin Cash (BCHG) trusts.
The new designation means regular financial statements and disclosures regarding the trust are to now be provided to the US Securities and Exchange Commission (SEC). The trust is additionally expected to comply with all the other requirements laid out in the Securities Exchange Act of 1934. As such Grayscale’s 6 trusts will now be regulated more akin to publicly traded companies as they look to upgrade their status from ETP to ETF.
“This is something that investors not only have expressed wanting, but something that we feel they deserve,” said Grayscale CEO Michael Sonnenshein in advance of the announcement. He also said that creating SEC reporting companies “has opened Grayscale to a wider audience of investors who are typically used to seeing that [type of reporting] when they think about making investments.”
ETF status would open up the trust to the wider retail market greatly increasing the accessibility to investors looking to purchase shares in the trust. For existing and accredited investors ho directly result in more of the underlying asset entering the trust, they would see a reduction of the lockup period from 12 to 6 months.
To date the SEC has not approved any Bitcoin ETF put before it notably Gemini’s Winklevoss twins attempt in 2018. However sentiment does appear to be changing, as former SEC chairman Jay Clayton who was had rejected multiple bitcoin ETF proposals is now fighting for their approval. Current SEC Chairman Gary Gensler has also made his support for an ETF clear but has expressed a preference for a futures ETF as opposed to one based on the spot market. Stating In a speech:
“I anticipate that there will be filings with regard to exchange-traded funds (ETFs) under the Investment Company Act (’40 Act). When combined with the other federal securities laws, the ’40 Act provides significant investor protections…I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded Bitcoin futures (emphasis added).”
“We would like to see the SEC create a level playing field where they allow both futures based and spot based products in market at the same time so that investors can choose the best product for them…it would be short sighted or myopic of the SEC to be favoring products registering under one set of legislation over the other.”
There are underlying differences between spot and futures based ETFs which will impact investors differently depending on preference and asset type, as noted by Neena Mishra, Director of ETF Research at Zachs Investment Research:
“The problem with futures-based products is that futures have to be rolled over. Usually the futures market is in contango, which means the futures which are expiring later are more expensive. So, the ETF sponsors would be selling cheaper products to buy more expensive products, and all of these costs would roll up to investors. There are some estimates that these could be around 10% in additional costs.”
“We can compare custody of bitcoin with the custody of gold, which are similar. That is why it makes more sense for the SEC to approve a physically-backed product.
The ideal outcome for investors would likely be a spot based ETF, something noted by Mishra on her observation of past investor preferences, although there are arguments to be made for both sides.