10-Q: Grayscale Stellar Lumens Trust (XLM) Reports Increase in Net Assets for Q1 2024

Grayscale Stellar Lumens Trust (XLM) saw an increase in net assets during the first quarter of fiscal year 2024, driven by XLM price appreciation and share creations.

Summary

• Grayscale Stellar Lumens Trust (XLM) is a Delaware Statutory Trust that holds Lumens (XLM) and issues shares in exchange for XLM.
• The Trust's investment objective is to reflect the value of XLM held by the Trust, less expenses and liabilities.
• The Trust does not currently operate a redemption program.
• For the three months ended December 31, 2023, the Trust's net assets increased by $1.212 million.
• This increase was primarily due to a $1.192 million net realized and unrealized gain on investment in XLM and $75,000 from capital share transactions.
• The Trust's net assets were $9.448 million as of December 31, 2023, compared to $8.236 million as of September 30, 2023.
• The principal market net asset value per share increased from $9.99 to $11.37 during the quarter.
• The Trust's expenses consist primarily of the Sponsor's Fee, which is calculated as 2.5% of the aggregate value of the Trust's assets.
• The Trust held 73,213,502.7416845 XLM as of December 31, 2023.
• The fair value per XLM was $0.13 on December 31, 2023, compared to $0.11 on September 30, 2023.
• The Trust is subject to various risks, including market risk and liquidity risk related to its concentration in XLM.
• The Sponsor takes the position that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes.

Sentiment

Score: 7

Explanation: The report shows positive growth in net assets and NAV per share, driven by XLM price appreciation. However, the lack of a redemption program and the inherent risks of cryptocurrency investments temper the overall sentiment.

Positives

• The Trust experienced an increase in net assets and NAV per share.
• The Trust had a net realized and unrealized gain on investment in XLM.
• The Trust saw an increase in Shares outstanding due to creations.
• The fair value of XLM held by the Trust increased during the quarter.

Negatives

• The Trust does not currently operate a redemption program, limiting investor liquidity.
• The Trust's performance is highly dependent on the price of XLM, which is volatile and subject to various risks.
• The Trust incurs a Sponsor's Fee of 2.5% of the aggregate value of the Trust's assets, which reduces returns.

Risks

• The Trust is subject to market risk, liquidity risk, and risks related to its concentration in a single asset, XLM.
• The price of XLM is volatile and subject to influence by many factors.
• There is a risk that some or all of the Trust's XLM could be lost or stolen.
• The SEC could determine that XLM is a security, which could have material adverse consequences.
• The Trust relies on third-party service providers, and disruptions to their business operations could have an adverse impact.
• The Sponsor and the Trust may be subject to various litigation, regulatory investigations, and other legal proceedings.

Future Outlook

Subject to receipt of regulatory approval and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program; however, the Trust currently has no intention of seeking regulatory approval to operate an ongoing redemption program.

Industry Context

This report provides insight into the performance of a single-asset cryptocurrency trust, reflecting the broader trends and volatility within the digital asset market. The approval of a Bitcoin ETF for Grayscale may influence future decisions regarding similar products for other cryptocurrencies, including Stellar Lumens.

Comparison to Industry Standards

• It's difficult to directly compare Grayscale Stellar Lumens Trust to other investment products due to the unique nature of single-asset cryptocurrency trusts.
• However, the Sponsor also manages Grayscale Bitcoin Trust (BTC), Grayscale Ethereum Trust (ETH), and other similar trusts, which can be used as benchmarks for operational efficiency and expense ratios.
• The 2.5% Sponsor's Fee is relatively high compared to traditional ETFs but is common among cryptocurrency investment products due to the complexities of custody and management.
• The Trust's performance is directly tied to the price of XLM, making it more volatile than diversified cryptocurrency funds or traditional asset classes.

Legal Proceedings

• The Sponsor and an affiliate of the Trust, Grayscale Bitcoin Trust (BTC), are currently parties to certain legal proceedings.
• On November 18, 2022, the Sponsor received a letter on behalf of Fir Tree Master Fund, L.P. and certain of its affiliates (together, Fir Tree) demanding access to certain of the Sponsors and the Grayscale Bitcoin Trusts books and records pursuant to Section 3819 of the Delaware Statutory Trust Act and certain provisions under the Trust Agreement.
• On December 6, 2022, Fir Tree filed a suit in Delaware Chancery Court (the Fir Tree Action) against the Sponsor and Grayscale Bitcoin Trust alleging that the Sponsor and Grayscale Bitcoin Trust violated Fir Trees information rights and seeking to compel access to the requested books and records.
• On January 13, 2023, the Sponsor received a letter on behalf of 210K Capital, LP (210K Capital) demanding access to certain of the Sponsors and Grayscale Bitcoin Trusts books and records pursuant to Section 3819 of the Delaware Statutory Trust Act and certain provisions under the Trust Agreement.
• On March 6, 2023, 210K Capital filed a suit in Delaware Chancery Court (the 210K Capital Action and, together with the Fir Tree Action, the Demands) against the Sponsor and Grayscale Bitcoin Trust alleging that the Sponsor and Grayscale Bitcoin Trust violated 210K Capitals information rights and seeking to compel access to the requested books and records.
• On July 10, 2023, the Sponsor, Fir Tree, and 210K Capital entered into a Settlement Agreement which resolved the Demands, in which the Sponsor and Grayscale Bitcoin Trust agreed to voluntarily produce certain books and records in response to the Demands without any admission of liability or fault, without conceding the shareholders entitlement to any information, and without the payment of any money.
• On September 21, 2023, Fir Tree and 210K Capital filed stipulations of dismissal for the Demands.
• On January 30, 2023, Osprey Funds, LLC (Osprey) filed a suit in Connecticut Superior Court against the Sponsor alleging that statements the Sponsor made in its advertising and promotion of Grayscale Bitcoin Trust violated the Connecticut Unfair Trade Practices Act, and seeking statutory damages and injunctive relief.
• On April 17, 2023, the Sponsor filed a motion to dismiss the complaint and, following briefing, a hearing on the motion to dismiss was held on June 26, 2023.
• On October 23, 2023, the Court denied the Sponsors motion to dismiss.
• On November 6, 2023, the Sponsor filed a motion for reargument of the Courts order denying the Sponsors motion to dismiss.
• On November 16, 2023, Osprey filed an opposition to the Sponsors motion for reargument, and on November 30, 2023, the Sponsor filed a reply in further support of its motion for reargument.
• The motion for reargument remains pending.
• In October 2021, NYSE Arca filed a proposal with the SEC pursuant to Rule 19b-4 under the Exchange Act for a rule change to list the Shares of Grayscale Bitcoin Trust on NYSE Arca as an exchange-traded product, and in June 2022, the SEC issued a final order disapproving NYSE Arcas proposed rule change.
• In June 2022, the Sponsor filed a petition for review of the SECs final order in the United States Court of Appeals for the District of Columbia Circuit.
• In August 2023, the D.C. Circuit Court of Appeals granted the Sponsors petition and vacated the SECs order as arbitrary and capricious.
• The SEC did not seek panel rehearing or rehearing en banc.
• In October 2023, the D.C. Circuit Court of Appeals remanded the matter to the SEC.
• Ultimately, on January 10, 2024, the SEC approved NYSE Arcas 19b-4 application to list the shares of the Grayscale Bitcoin Trust on NYSE Arca as an exchange-traded product.
• On March 6, 2023, Alameda Research, Ltd. (Alameda) filed a suit against the Sponsor, DCG, Michael Sonnenshein and Barry Silbert in the Court of Chancery of the State of Delaware alleging various breach of contract and fiduciary duty claims, including that the defendants had breached the terms of the trust agreements of Grayscale Bitcoin Trust and Grayscale Ethereum Trust (ETH) for failing to reduce the Sponsors fees and operate a redemption program (the Initial Complaint).
• On April 4, 2023, the Sponsor, DCG, Michael Sonnenshein and Barry Silbert moved to dismiss the Initial Complaint.
• On May 19, 2023, the Sponsor filed a brief in support of its motion to dismiss.
• On September 15, 2023, Alameda filed an amended complaint (the Amended Complaint) alleging breach of contract and fiduciary duty claims concerning the Sponsors purported failure to operate a redemption program that are substantially similar to those alleged in the Initial Complaint.
• On December 8, 2023, the Sponsor filed a motion to dismiss the Amended Complaint and its supporting brief.
• On January 19, 2024, Alameda voluntarily dismissed the action without prejudice, thereby terminating the action.

Related Party Transactions

• Grayscale Investments, LLC (Grayscale or the Sponsor) acts as the Sponsor of the Trust and is a wholly owned subsidiary of Digital Currency Group, Inc. (DCG).
• Grayscale Securities, LLC (Grayscale Securities or, in such capacity, an Authorized Participant), a registered broker-dealer and wholly owned subsidiary of the Sponsor, is the only Authorized Participant, and is party to a participant agreement with the Sponsor and the Trust.
• Genesis Global Trading, Inc. (Genesis), a wholly owned subsidiary of DCG, served as a Liquidity Provider from October 3, 2022 to September 12, 2023.
• As of December 31, 2023 and September 30, 2023, 104,901 and 110,393 Shares of the Trust were held by related parties of the Trust, respectively.
• The Sponsors parent, an affiliate of the Trust, holds a minority interest in Coinbase, Inc., the parent company of the Custodian, that represents less than 1.0 % of Coinbase, Inc.s ownership.
• The Trust pays a fee to the Sponsor, calculated as 2.5 % of the aggregate value of the Trusts assets, less its liabilities (which include any accrued but unpaid expenses up to, but excluding, the date of calculation).
• On March 2, 2022, the Board of the Sponsor approved the purchase by DCG, the parent company of the Sponsor, of up to an aggregate total of $ 200 million worth of Shares of the Trust and shares of any of the following five investment products the Sponsor also acts as the sponsor and manager of, including Grayscale Bitcoin Trust (BTC) (NYSE Arca: GBTC), Grayscale Bitcoin Cash Trust (BCH) (OTCQX: BCHG), Grayscale Digital Large Cap Fund LLC (OTCQX: GDLC), Grayscale Ethereum Trust (ETH) (OTCQX: ETHE), and Grayscale Ethereum Classic Trust (ETC) (OTCQX: ETCG).

Stakeholder Impact

• Shareholders benefit from the increased net asset value and NAV per share.
• The Sponsor receives fees for managing the Trust.
• The Custodian safeguards the Trust's XLM holdings.
• Authorized Participants facilitate the creation of shares.

Key Dates

Keywords

Grayscale Stellar Lumens Trust, XLM, Stellar Lumens, Digital Asset, Cryptocurrency, Trust, Investment, Financial Report, Net Assets, Sponsor's Fee