Grayscale files to convert AAVE trust into US ETF

Grayscale has filed with the US Securities and Exchange Commission to convert its AAVE trust into a spot exchange-traded fund, marking another strategic move by the digital asset manager to expand its product lineup in an increasingly competitive institutional crypto market. The filing, submitted in mid-February 2026, comes months after rival Bitwise advanced its own AAVE ETF application, prompting Grayscale to pursue conversion of its existing trust structure into a more accessible trading vehicle.

The Strategic Pivot

The conversion effort reflects the broader consolidation happening among major crypto asset managers seeking regulatory approval for single-asset ETF products. Grayscale’s decision follows a pattern: the firm successfully challenged the SEC over bitcoin ETF conversion in 2023, a legal victory that opened the door for multiple spot bitcoin ETFs to launch in the United States.

This latest filing demonstrates how market competition is reshaping product strategies. When Bitwise filed paperwork for multiple crypto funds late last year, including an AAVE offering, it signaled rising institutional demand for DeFi-focused investment vehicles. Grayscale responded accordingly by moving forward with its own alternative.

The conversion path offers investors greater liquidity and accessibility compared to traditional closed-end trusts, which trade at variable premiums or discounts to underlying asset value.

— Industry Analysis

The institutional asset management industry has undergone significant transformation since the first spot bitcoin ETF approval in January 2024. That watershed moment validated crypto as a legitimate institutional asset class, spurring traditional financial firms and crypto-native providers alike to develop comprehensive digital asset product suites. Assets under management in crypto ETFs have grown from negligible levels to tens of billions of dollars in just two years, demonstrating sustained institutional demand beyond initial enthusiasm.

Understanding AAVE and Market Context

AAVE functions as the native governance token for the Aave protocol, one of decentralized finance’s largest lending and borrowing platforms. The token enables holders to participate in protocol governance while accruing value from platform activity and fee structures. Launched in 2020, Aave has established itself as a foundational DeFi infrastructure protocol, with sophisticated risk management frameworks and institutional-grade operational standards that distinguish it from earlier-generation DeFi projects.

Market data shows AAVE trading around $119 per token with recent upward momentum. However, the token remains significantly below its April 2021 all-time high of $661, reflecting the broader crypto market cycles that have characterized the sector over the past five years. Current market capitalization stands near $1.8 billion, positioning AAVE among the larger DeFi assets by value.

The DeFi sector itself has matured substantially since 2020, when total value locked exceeded $1 billion for the first time. Today, DeFi protocols manage over $50 billion in user deposits across lending, trading, derivatives, and other financial services. This growth reflects genuine utility adoption rather than speculative interest, with lending protocols like Aave generating tens of millions in monthly protocol revenue. These fundamentals support institutional interest in regulated DeFi token exposure.

Competition for DeFi-focused ETF products already exists in international markets. The 21Shares AAVE ETP and Global X AAVE ETP trade on European exchanges, demonstrating institutional appetite for regulated AAVE exposure outside the United States. These products have achieved meaningful trading volumes and assets under management, validating demand for professional-grade AAVE investment vehicles. Their success internationally strengthens Grayscale’s application by demonstrating precedent for institutional DeFi token ETF adoption.

Within the United States specifically, the absence of spot DeFi token ETFs represents a significant gap in institutional product offerings. American asset managers and family offices increasingly allocate to crypto as part of diversified portfolios, yet lack direct SEC-regulated exposure to DeFi governance tokens. This regulatory arbitrage—where sophisticated investors must access international exchanges or self-custody to gain DeFi exposure—creates powerful incentives for SEC approval of qualified DeFi ETF products.

Grayscale’s Product Terms and Infrastructure

The proposed Grayscale AAVE ETF would charge a 2.5% annual sponsor fee on net asset value, payable in AAVE tokens. This fee structure differs from typical equity ETFs but aligns with emerging standards for single-asset crypto products, where fees compensate for custody, compliance, and operational complexity.

Grayscale has selected Coinbase to serve as both prime broker and custodian for the fund. This arrangement leverages Coinbase’s established institutional infrastructure and regulatory standing. The firm also plans to seek listing on NYSE Arca, the exchange platform where most US spot crypto ETFs currently trade.

The custodian selection matters significantly for institutional adoption. Coinbase’s role provides regulatory transparency and reduces counterparty risk—key factors that determine institutional investor participation in crypto ETF products. Coinbase’s status as a publicly traded company subject to quarterly SEC reporting adds additional governance oversight compared to private crypto custody providers, addressing regulatory concerns about asset safety and operational controls.

Grayscale itself operates approximately $30 billion in assets across its digital asset investment products, making it one of the world’s largest crypto asset managers by assets under management. The firm’s track record managing institutional crypto holdings, demonstrated compliance with regulatory requirements, and established relationships with custodians and exchanges provide significant infrastructure advantages over emerging competitors.

Broader Strategic Context and Market Implications

This filing represents Grayscale’s broader expansion beyond bitcoin and ethereum into more specialized crypto assets. The firm announced plans last month to convert its NEAR Protocol trust into an ETF as well, indicating a systematic approach to converting closed-end trusts into more liquid exchange-traded structures. This strategy capitalizes on existing trust assets while meeting demonstrated institutional demand for ETF-based vehicles.

Grayscale’s history with the SEC shapes current expectations. After winning its bitcoin ETF legal battle, the company demonstrated that precedent and regulatory clarity could follow successful litigation. However, subsequent SEC positions suggest the agency may apply stricter scrutiny to non-bitcoin, non-ethereum crypto asset ETF applications. The SEC has emphasized concerns about market manipulation, custody standards, and operational safeguards specific to individual crypto assets beyond the two largest by market capitalization.

The competitive landscape includes traditional asset managers entering crypto ETF markets alongside specialized crypto firms. This convergence creates pressure on providers to offer comprehensive product suites, driving Grayscale’s expansion into alternative assets like AAVE and NEAR. BlackRock, Fidelity, and other major institutional asset managers have already launched crypto ETF offerings, compelling established crypto firms to differentiate through specialized product breadth.

Market analysts project that approved DeFi token ETFs could capture $5-10 billion in assets within five years, assuming regulatory approval and mainstream institutional adoption. This addressable market size attracts significant competitive focus from asset managers seeking exposure to the fastest-growing crypto sector. Early approval of AAVE ETFs could establish market leadership for first-movers while generating substantial fee revenue.

Investors should monitor SEC comment periods and formal responses to gauge regulatory positioning on DeFi token ETFs. The agency has not yet approved spot ETFs for assets outside bitcoin and ethereum, making Grayscale’s AAVE proposal a significant test case for institutional DeFi exposure. SEC Commissioner positions on DeFi governance risks and protocol-specific considerations will likely shape approval criteria.

Approval timelines remain uncertain. While bitcoin ETF approval took years of litigation before resolution, subsequent ethereum ETF approvals moved faster once regulatory frameworks clarified. DeFi-focused products present novel questions around governance structures, protocol risk, and asset custody that may require extended review. However, the precedent of two approved crypto ETFs and growing institutional demand suggest regulatory openness to qualified applications meeting appropriate safeguards.

The AAVE ETF approval decision will have implications extending well beyond Grayscale and a single asset. A favorable SEC ruling would likely accelerate approval timelines for other DeFi token ETF applications currently pending, potentially enabling rapid expansion of regulated DeFi exposure. Conversely, SEC rejection would likely discourage similar applications and reinforce regulatory skepticism about non-major crypto assets, potentially limiting institutional DeFi adoption for years.