S-1: Grayscale Stellar Lumens Trust Files S-1 for ETF Listing

Grayscale Stellar Lumens Trust (XLM) files S-1 to list as an ETF on NYSE Arca, detailing financial performance and market risks.

Summary

• Grayscale Stellar Lumens Trust (XLM) is converting to an ETF and plans to list its shares on NYSE Arca under the symbol GXLM.
• The Trust's investment objective is to reflect the value of XLM held, less expenses and liabilities, without using leverage or derivatives.
• As of June 30, 2025, the Trust's net assets were $28,536,000, a 170% increase for the nine-month period from September 30, 2024.
• XLM's circulating supply was approximately 31.2 billion as of June 30, 2025, with an aggregate market value of $7.4 billion, making it the seventeenth largest digital asset by market capitalization.
• The Trust currently only supports 'Cash Orders' for share creation and redemption, meaning Authorized Participants deposit/receive cash, and a Liquidity Provider handles XLM transactions.
• In-kind creation and redemption of shares are not currently available, pending 'In-Kind Regulatory Approval' from the SEC and NYSE Arca.
• The Sponsor, Grayscale Investments Sponsors, LLC, is an indirect wholly-owned subsidiary of Digital Currency Group, Inc. (DCG).
• The Trust's primary expense is the Sponsors Fee, which accrues daily at an annual rate of % of the NAV Fee Basis Amount and is paid in XLM.
• The Index Price for XLM is calculated using the CoinDesk XLM CCIXber Reference Rate, a volume-weighted composite rate from multiple Digital Asset Trading Platforms.
• The Trust is an 'emerging growth company' and will benefit from reduced reporting requirements under the JOBS Act.

Sentiment

Score: 7

Explanation: The filing indicates strong growth in net assets over the nine-month period and a significant step towards broader market access through the NYSE Arca listing. However, substantial risks remain, including high XLM price volatility, regulatory uncertainty, and the current inability to facilitate in-kind creations/redemptions, which could impact efficiency and liquidity.

Positives

• The Trust is moving to list its shares on NYSE Arca, which could enhance liquidity and accessibility for investors.
• Net assets increased significantly by 170% to $28,536,000 for the nine months ended June 30, 2025, driven by XLM price appreciation.
• The SEC approved generic listing standards for commodity-based trust shares, potentially streamlining future digital asset ETP listings.
• The Trust uses a robust safekeeping system with Coinbase Custody Trust Company, LLC, including cold storage and geographically distributed private key shards to enhance security.
• The Sponsor has committed to irrevocably abandoning any Incidental Rights and IR Virtual Currency, simplifying the Trust's structure and tax treatment.

Negatives

• Shares have historically traded at substantial premiums and discounts to NAV per Share, with a maximum premium of 461% and a maximum discount of 35% between October 19, 2021, and June 30, 2025.
• The Trust is currently unable to facilitate in-kind creations and redemptions of shares, relying solely on cash orders, which may lead to operational inefficiencies and impact the arbitrage mechanism.
• The value of XLM and, consequently, the Shares, is subject to extreme volatility, with the Index Price ranging from $0.07 to $0.72 between July 1, 2020, and June 30, 2025.
• The digital asset markets are largely unregulated and lack transparency, increasing risks of fraud, market manipulation, and business failures.
• The amount of XLM represented by each Share will gradually decrease over time due to the payment of the Sponsors Fee and any Additional Trust Expenses in XLM.
• Shareholders do not have the protections associated with ownership in a registered investment company under the Investment Company Act or protections afforded by the CEA.
• The Custodian's maximum liability for losses is limited, and the Trust's insurance coverage may not be adequate to cover all potential losses.

Risks

• Extreme volatility of XLM trading prices could cause the value of Shares to decline significantly.
• The medium-to-long term value of Shares is uncertain due to the nascent stage of blockchain technologies and digital assets.
• Concentrated ownership of XLM (top 100 wallets hold approximately 60% of circulating supply, 73% including SDF holdings) could lead to adverse price effects from large sales.
• The largely unregulated nature and lack of transparency of Digital Asset Trading Platforms may lead to fraud, market manipulation, and operational problems.
• Temporary or permanent forks or clones of the Stellar Network could adversely affect XLM's value and the Trust's operations.
• Smart contract vulnerabilities, as seen in past exploits on other networks, could negatively impact XLM's value.
• Scaling challenges and network congestion on the Stellar Network could increase transaction fees and reduce demand for XLM.
• Malicious actors or botnets gaining control over a significant portion of Stellar Network validators could manipulate the ledger.
• Competition from other digital assets, central bank digital currencies (CBDCs), and private blockchain platforms could negatively impact XLM's price.
• The Stellar Development Foundation's control over XLM distribution and potential changes to its plans could cause price declines.
• Reliance on third-party service providers (Custodian, Prime Broker, Authorized Participants) introduces risks of business disruptions, insolvency, or security failures.
• Security threats to the Trust's XLM holdings, including hacking and malware, could result in loss of assets.
• XLM transactions are irrevocable, meaning stolen or incorrectly transferred XLM may be irretrievable.
• The lack of full insurance coverage and limited legal recourse against service providers expose the Trust and shareholders to loss.
• The Trust may be forced to terminate and liquidate at a disadvantageous time for shareholders.
• Shareholders have limited voting rights and restricted ability to bring derivative actions.
• Errors in NAV calculation by the Sponsor could adversely affect Share value.
• Extraordinary, non-recurring expenses could be borne by the Trust, requiring XLM sales and reducing NAV.
• Tax uncertainty regarding XLM's classification and the Trust's grantor trust status could lead to adverse tax consequences for shareholders.
• Potential conflicts of interest between the Sponsor/affiliates and the Trust, as the Sponsor may favor its own interests.

Future Outlook

The Trust intends to issue Shares on an ongoing basis and list them on NYSE Arca, relying on an SEC exemption under Regulation M to operate a redemption program. The Sponsor expects the arbitrage mechanism to effectively link the value of Shares to the Index Price. The SEC has launched a Crypto Task Force and 'Project Crypto' to develop a comprehensive regulatory framework for digital assets, which could impact the Trust and the broader industry. The Trust intends to take advantage of reporting exemptions as an emerging growth company.

Management Comments

• The Sponsor believes that shares of the Trust would qualify for listing and trading on NYSE Arca under the Generic Listing Standards.
• The Sponsor believes that the Trust is not a commodity pool for purposes of the Commodity Exchange Act of 1936, as amended (the CEA), as administered by the Commodity Futures Trading Commission (the CFTC) and that neither the Sponsor nor the Trustee is subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor.
• The Sponsor believes that it is applying the proper legal standards in determining that XLM is not a security in light of the uncertainties inherent in the Howey and Reves tests.
• The Sponsor has committed to causing the Trust to irrevocably abandon all Incidental Rights and IR Virtual Currency to which the Trust may become entitled in the future.

Industry Context

The digital asset industry is characterized by extreme volatility and ongoing regulatory uncertainty, with recent market disruptions and increased scrutiny from U.S. and foreign regulators. Competition is intensifying from other digital assets, central bank digital currencies (CBDCs), and private blockchain initiatives. The SEC and CFTC are actively working on developing clearer regulatory frameworks, with recent initiatives like the SEC's 'Project Crypto' and the CFTC's 'crypto sprint' aiming to modernize rules and enable trading of digital assets at the federal level. The Stellar Network, designed for transactional utility, faces competition from other smart contract platforms like Ethereum, Solana, Polkadot, Avalanche, and Cardano.

Comparison to Industry Standards

• The Trust's reliance on cash-only creation and redemption contrasts with other spot digital asset ETPs (e.g., Bitcoin and Ether ETPs) that have received SEC approval for in-kind creations and redemptions, which are generally considered more efficient and less costly.
• XLM's market capitalization of $7.4 billion as of June 30, 2025, makes it the seventeenth largest digital asset, significantly smaller than Bitcoin and Ether, which are more established.
• The Stellar Network's consensus protocol (SCP) is a federated Byzantine agreement mechanism, differentiating it from fully permissionless blockchains like Bitcoin, which may offer different security and efficiency tradeoffs.
• The Trust's Sponsors Fee rate is a competitive factor compared to other digital asset financial vehicles, some of which may offer lower fees or more liquid secondary markets.

Management Changes

Corporate Governance

Legal Proceedings

• Osprey Funds, LLC filed a lawsuit against the Sponsor in Connecticut Superior Court on January 30, 2023, alleging violations of the Connecticut Unfair Trade Practices Act (CUTPA) related to advertising of Grayscale Bitcoin Trust ETF. The court initially denied the Sponsor's motion to dismiss, but later granted the Sponsor's motion for summary judgment on February 7, 2025. Osprey's subsequent motion for reargument was denied on March 19, 2025, and the action and appeal were withdrawn on May 12, 2025.
• Genesis Global Capital, LLC and Genesis Asia Pacific Pte. Ltd. filed a complaint in the United States Bankruptcy Court for the Southern District of New York on May 19, 2025, against Digital Currency Group, Inc. (DCG) and certain affiliates, including GSO, alleging preferential transfers made to GSI (predecessor to GSO) during the preference period. GSO believes this lawsuit is without merit and intends to vigorously defend against it.

Related Party Transactions

• Digital Currency Group, Inc. (DCG) is the sole equity holder and indirect parent company of the Sponsor, and also holds a minority interest (less than 1.0%) in Kraken, one of the Digital Asset Trading Platforms included in the Index.
• The Sponsor and its professional staff also service other affiliated digital asset investment vehicles, potentially leading to conflicts of interest in resource allocation.
• Grayscale Securities, LLC, an affiliate of the Sponsor, is an Authorized Participant for the Trust.
• Officers of the Sponsor may trade XLM for their personal accounts, subject to internal policies, potentially creating conflicts of interest with the Trust's positions.
• The Index Provider, CoinDesk Indices, Inc., was an affiliate of the Sponsor until its sale to an unaffiliated third party on November 20, 2023.

Stakeholder Impact

• Shareholders: Potential for increased liquidity and market access with NYSE Arca listing, but also exposure to high XLM price volatility and risks associated with cash-only creation/redemption. Limited voting rights and legal recourse.
• Employees: No direct employees of the Trust; Sponsor's employees manage the Trust's affairs.
• Customers (investors in Shares): Provided a cost-effective and convenient way to gain investment exposure to XLM, but face risks of premiums/discounts to NAV and potential losses.
• Suppliers (service providers): The Trust relies on third-party service providers (Custodian, Transfer Agent, etc.), whose operational disruptions could impact the Trust.
• Creditors: The Trust's assets are primarily XLM, subject to market value fluctuations, which could impact the ability to satisfy claims in case of insolvency.

Next Steps

• The Trust intends to list its Shares on NYSE Arca under the symbol GXLM.
• NYSE Arca may seek In-Kind Regulatory Approval to permit the Trust to create and redeem Shares via in-kind transactions.
• The SEC's Crypto Task Force and 'Project Crypto' will continue efforts to develop a comprehensive regulatory framework for digital assets.
• The Sponsor will continue to monitor for material hard forks or airdrops and notify investors of any policy changes regarding Incidental Rights and IR Virtual Currency.

Key Dates

Recommendation

The Grayscale Stellar Lumens Trust (XLM) is undergoing a significant transition to an ETF structure and NYSE Arca listing, which could improve market access and liquidity. The recent 170% increase in net assets over nine months is a positive indicator of XLM's price appreciation. However, the digital asset market remains highly volatile and subject to substantial regulatory uncertainty, including the ongoing debate about XLM's security status and the lack of in-kind creation/redemption for the Trust. These factors introduce considerable risk. A 'hold' recommendation is appropriate, suggesting investors maintain existing positions to benefit from potential upside while acknowledging the significant inherent risks and waiting for further clarity on regulatory developments and the full operational efficiency of the ETF structure.

Keywords

Stellar Lumens, XLM, Grayscale, ETF, Digital Asset, Cryptocurrency, SEC Filing, S-1, NYSE Arca, Investment Trust, Blockchain, CoinDesk Index