SecProbe.io

CORRESP
1
filename1.htm

          Stradley Ronon Stevens & Young, LLP

          2000 K Street, N.W.

          Suite 700

          Washington, DC  20006-1871

          Telephone  202.822.9611

          Fax  202.822.0140

          www.stradley.com

  Michael W. Mundt

  Admitted only in Virginia

  Practice Limited to Federal Securities Law Matters

  (202) 419-8403

  mmundt@stradley.com

  February 20, 2024

  Filed via EDGAR

  Mr. Asen Parachkevov

  U.S. Securities and Exchange Commission

  100 F Street, NE

  Washington, DC  20549

          Subject:

          Grayscale Funds Trust (the “Registrant” or “Trust”)

          (File Nos.  333-271770; 811-23876)

  Dear Mr. Parachkevov:

  On behalf of the Registrant, below are the Registrant’s responses to the comments you provided on September 29, 2023 to Michael W. Mundt, J.
    Stephen Feinour, Jr. and Shawn A. Hendricks of Stradley Ronon Stevens & Young, LLP, with regard to Pre-Effective Amendment Nos. 2/2 (“PEA 2”) to the Registrant’s initial registration statement on Form N-1A (the “Registration Statement”) relating to
    the registration of the Registrant’s new series the Grayscale Privacy ETF (the “Fund”). Responses to the comments you provided with respect to the Grayscale Global Bitcoin Composite ETF will be furnished supplementally under separate cover. The
    Registration Statement was filed with the U.S. Securities and Exchange Commission (“SEC”) on May 9, 2023, under Section 8 of the Investment Company Act of 1940, as amended (the “1940 Act”), and Section 6 of the Securities Act of 1933, as amended (the
    “Securities Act”), and subsequently amended on May 17, 2023 with a Pre-Effective Amendment (“PEA 1”) and again on August 1, 2023 with PEA 2.

  On June 16, 2023, you provided initial comments to PEA 1. On August 1, 2023, we filed correspondence responding to those comments (the “Initial
    Response Letter”). On September 29, 2023, you provided additional comments in response to the Initial Response Letter and, therefore, we are writing to respond to those additional comments with respect to the Fund. Below we have provided your comments
    (in bold) and the Registrant’s response to each comment. These responses will be incorporated into a Pre-Effective Amendment to the Registrant’s Registration Statement filed pursuant to Rule 472 under the Securities Act.  Capitalized terms not
    otherwise defined in this letter have the meanings assigned to the terms in the Registration Statement.

  Mr. Asen Parachkevov

  U.S. Securities and Exchange Commission

  February 20, 2024

  Page 2

          Initial Response Letter

          Comment 2 of the Initial Response Letter

          1.

          Comment:  In connection with Comment 2 of the Initial Response Letter, the staff would like to learn whether any potential APs
            have been engaged or expressed legitimate interest and/or intent to act as AP for each Fund because there are statements in response to Comment 2 and throughout the letter that speak to what APs could do in terms of accessing the respective
            markets and arbitraging the ETPs. It would be valuable to understand the state of those conversations.

          Response:  The Adviser has engaged several APs and market makers for feedback and interest in the Grayscale Privacy ETF. Most of the engagement has
            been focused on pricing, ability to make two-sided markets, and engagement in primary market transactions. While the Registrant has not yet entered into any AP agreements, the feedback has been that the inclusion of ZCSH presents little to no
            operational or mechanical concerns (from a market making perspective). Conversations with APs and market makers remain ongoing, and the Adviser expects such arrangements to progress and be finalized in the lead up to launch, as is typical for
            all new ETF registrants.

          2.

          Comment:  Please discuss the anticipated impact on the Fund stemming from crypto asset platforms that are or may be subject to
            litigation, investigations or enforcement actions by regulatory authorities. Please consider adding appropriate risk disclosure about this issue.

          Response:  The Registrant has revised the Registration Statement in response to the Staff’s comment to address such risks in the “Digital Asset
            Market Risk.”

          3.

          Comment:  With respect to the allocation to Zcash, please explain whether the Grayscale Zcash Trust (“ZCSH”) would be considered
            an affiliate of the Fund as such term is defined in Section 2(a)(3) of the 1940 Act.  How would the inclusion of ZCSH in the proposed index and the resulting investments and transactions by the Fund be structured to comply with Section 17 of
            the 1940 Act in light of the apparent affiliation between the Fund and ZCSH.

          Response:  It is possible that ZCSH could be considered an affiliated person of the Fund due to the fact that Grayscale Investments LLC is the
            sponsor of ZCSH and a controlling person of Grayscale Advisors, LLC, the investment adviser to the Fund, although the Registrant does not concede that an affiliation would exist.  In this regard, the Registrant notes that the SEC has indicated
            that the determination of whether a fund is under control of its adviser, officers, or directors depends on all the relevant facts and circumstances.  See, e.g., Investment Company Mergers, Investment
            Company Act Release No. 25259 (Nov. 8, 2001) at n. 11.  Regardless of any determination regarding the possible affiliation of ZCSH and the Fund, the Registrant notes that the Fund does not intend to engage in principal transactions with ZCSH.
            Rather, the Fund expects to receive shares of ZCSH primarily through in-kind deposits by Authorized Participants that wish to purchase Creation Units from the Fund.  If it was necessary for the Fund to acquire shares of ZCSH outside of the
            creation process, the Fund would expect to purchase shares of ZCSH in the secondary market through over-the-counter transactions that do not involve ZCSH.  In this manner, the Registrant would comply with Section 17(a) of the 1940 Act.

          4.

          Comment:  The response states that ZCSH “shares are offered through daily subscriptions when there is an open, periodic private
            placement.” Please explain whether the Fund anticipates investing in such private placements (i.e., if the Fund grows in size and shares in the secondary

  Mr. Asen Parachkevov

  U.S. Securities and Exchange Commission

  February 20, 2024

  Page 3

          market are not available). How does the Fund anticipate classifying ZCSH for liquidity purposes and the rationale for such classification
            pursuant Rule 22e-4 under the 1940 Act.

          Response:  The Fund does not anticipate investing directly into ZCSH through such private placements. Regarding the classification of ZCSH for
            liquidity purposes, the Registrant confirms that it will monitor, classify and report on this position in accordance with the requirements of Rule 22e-4.  At present, it is possible that the ZCSH holding could be deemed to be illiquid under
            Rule 22e-4 based on applicable factors.  The Registrant confirms that the Fund will comply with the requirements of Rule 22e-4 including any required corrective actions, including to the extent that the Fund ends up in a situation where it
            holds more than 15% of its net assets in illiquid investments. In addition, the Index Provider has a 13% weight cap on ZCSH and will initiate a special rebalance between regular quarterly rebalances to reduce the weight to 10% and redistribute
            the excess 3% proportionately to the remaining Index constituents and maintaining the overall market capitalization of the Index.

          Comment 18 of the Initial Response Letter

          5.

          Comment:  Consistent with comment 18 above, the staff would like to re-issue Comment 29 of the Initial Response Letter to apply
            more specifically to the types of derivatives that could be held by the Funds.  Comment 29 of the Initial Response Letter states:

          Please tailor the Derivative Risk subsection to the investment strategy of the Fund to the type of derivatives in which the Fund intends
            to invest. Disclosures regarding any principal investment related to derivatives should be tailored specifically to how a fund expects to be managed and should address those strategies that the fund expects to be the most important means of
            achieving its objectives and that it anticipates will have a significant effect on its performance. Disclosure should not be generic risks associated with each derivative type. See Barry Miller letter to ICI, (Jul. 30, 2010).

          Response:  The Registrant intends to invest all the Fund’s assets in equity securities that are components of the Index and no longer intends to
            preserve the flexibility to invest in other instruments that provide investment exposure to the constituents of the Index, such as derivatives. As a result, all references to the Fund investing in derivatives have been removed from the
            Registration Statement.

          Comment 37 of the Initial Response Letter

          6.

          Comment: Please address the risks and challenges for privacy-oriented crypto assets, such as ZCSH, arising from regulatory
            concerns that such crypto assets and their blockchain may be used for illicit purposes, including money laundering, financing terrorism and sanctions evasion. Please note that the latest ZCSH Form 10-k filing includes risk disclosure about
            these issues.

          Response:  The Registrant has revised the Registration Statement in response to the Staff’s comment to add a “Privacy Network Risk” as a principal
            investment risk of the Fund.

          7.

          Comment:  The response states that ZCSH “is the only publicly traded security in the U.S. that provides exposure to the
            privacy-preserving sub-theme and which otherwise satisfies the Indxx Privacy Index’s inclusion criteria.” The corresponding disclosure indicates that a privacy-oriented crypto asset is designed to ensure more private and secure transactions by
            obfuscating user identities and transaction details. Please confirm that this is accurate, given it is the staff’s understanding that the Grayscale Litecoin Trust invests in Litecoin whose blockchain (i.e., the Litecoin blockchain) underwent an
            upgrade that, similar to the ZCSH blockchain, enables the

  Mr. Asen Parachkevov

  U.S. Securities and Exchange Commission

  February 20, 2024

  Page 4

          concealment of the amount of a transaction and the wallet address of the sender and recipient of the transaction. Please clarify how
            “privacy-oriented crypto asset” is defined and described in the index methodology’s inclusion criteria with sufficient specificity.

          Response:  The goal of the privacy-preserving sub-theme is to provide exposure to protocols in which the primary use case and core protocol offering is to provide privacy-preserving benefits to users while prioritizing anonymity or confidentiality in transactions.
            Emphasis is added to the “primary” and “core” aspects of the use and protocol, because they are key distinctions relative to more “general purpose” protocols in which value transfer happens with less priority or significance on those aspects.
            In the case of Litecoin, the Registrant and the Index Provider are aware of the MimbleWimble upgrade that went into effect in May 2022. The Index Provider has been reviewing Litecoin and the MimbleWimble upgrade as it pertains to the potential
            eligibility of investment vehicles providing exposure to Litecoin (such as the Grayscale Litecoin Trust) in the Privacy-Preserving Protocol sub-theme. The Index Provider has been assessing the potential inclusion of investment vehicles
            providing exposure to other crypto assets, such as Litecoin, that have blockchains whose prospective protocols will have significant or material privacy-preserving characteristics or usage and have been introduced as part of the design (even if
            such characteristics or usage are not currently the primary use case or core protocol offering). As a result, the Index Provider is currently in review of Litecoin and the sub-theme criteria and may update the Index methodology and Registration
            Statement accordingly and communicate such to the Staff.

          8.

          Comment:  The prospectus disclosure does not specify that the investment vehicles must issue securities that are publicly traded
            in the U.S.; however, this is noted in the response and appears to be inconsistent with the prospectus disclosure. Please revise the prospectus disclosure accordingly to include such specification.

          Response:  The Registrant has revised the Registration Statement in response to the Staff’s comment to make clear that publicly trading in the U.S.
            is a requirement for an investment vehicle’s eligibility for inclusion in the Index as part of the Privacy-Preserving Protocol sub-theme. This requirement has also been clarified in the Index’s methodology.

          Comment 39 of the Initial Response Letter

          9.

          Comment:  The summary prospectus describes the “core sub-themes” without mentioning any of the factors and directs the reader to
            the “Additional Information About the Index” section of the statutory prospectus for such factors and rules. Please review the disclosure and ensure that is consistent with the index methodology.

          Response:  The Registrant has revised the Registration Statement to provide a more detailed summary of the tiered scoring system for security
            selection from the updated Index methodology in the summary prospectus.

          Comment 40 of the Initial Response Letter

          10.

          Comment:  The staff asked to clarify what is meant by “provide solutions” and the response added the parenthetical “(i.e.,
            products and services). Please further explain and clarify what kind of products and services are being referred to.

  Mr. Asen Parachkevov

  U.S. Securities and Exchange Commission

  February 20, 2024

  Page 5

          Response:  The Registrant has revised the Registration Statement in response to the Staff’s comment by further clarifying that the products and
            services are those that assist with the processing, storage, transfer and access of data.

          Comment 51 of the Initial Response Letter

          11.

          Comment:  The staff would like to re-issue Comment 51.c. of the Initial Response Letter with respect to the statutory prospectus
            disclosure that states, “[t]he business exposure of the company: Whether all or some of the business operations of the company are related to the Cyber Service Providers, Data Privacy Solution Providers and Blockchain-based Privacy Solutions
            sub-themes. Companies with ‘all’ business operations related to the Cyber Service Providers, Data Privacy Solution Providers and Blockchain-based Privacy Solutions sub-themes will receive a score of 4 and those with only ‘some’ (but not all)
            business operations related to those sub-themes receiving a score of 2.”  Comment 51.c. of the Initial Response Letter is as follows:

          Please explain what the Index provider considers to be “business operations,” and how it makes such determinations.

          Response:  The use of the term “business operations” refers to revenue generating activities of a company which are related