Canary Capital files for a spot XRP ETF with the SEC

Canary Capital has filed S-1 registration for a spot XRP ETF with the U.S. Securities and Exchange Commission (SEC). This ETF aims to provide investors with direct exposure to XRP without the need to buy, hold, or manage the token directly. The fund will track XRP's value using the CME CF Ripple index, and it will use a mix of cold and hot wallets for XRP management.

sec.gov/Archives/edgar/data/2039505/000199937124013130/canaryxrp-s1_100824.htm

Canary Capital Group LLC is a U.S.-based investment firm focused on digital assets, particularly cryptocurrencies. Founded by Steven McClurg, a prominent figure in digital asset investments, Canary Capital provides innovative investment solutions for accredited investors. Its flagship offering is the Canary HBAR Trust, which gives investors exposure to HBAR, the native cryptocurrency of the Hedera network—a scalable, enterprise-grade blockchain.

Canary Capital has made headlines with its filing for a spot XRP exchange-traded fund (ETF) with the United States Securities and Exchange Commission (SEC) on October 8, 2024.

This move signifies a potential expansion of cryptocurrency-based financial products within traditional markets.

The proposed ETF aims to provide investors with exposure to XRP, the digital asset native to the XRP Ledger, without the need for direct purchase or management of the cryptocurrency.

Canary Capital's initiative follows similar effort by Bitwise that filed its S-1 registration on October 2, filing of XRP ETFs reflect a growing interest in integrating digital assets into conventional investment portfolios.

The ETF would track the value of XRP using the CME CF Ripple – Dollar Reference Rate, allowing shares to be traded on traditional exchanges.

This development comes amidst ongoing legal proceedings between Ripple Labs and the SEC.

SEC vs. Ripple case raises concern for XRP ETFs.

The case SEC vs. Ripple is a major legal battle between the U.S. Securities and Exchange Commission (SEC) and Ripple Labs, focusing on whether the cryptocurrency XRP should be classified as a security under U.S. law.

Here is a detailed overview:

Background

Ripple Labs is the company behind XRP, a cryptocurrency designed for fast cross-border payments.

The SEC filed a lawsuit against Ripple Labs, its CEO Brad Garlinghouse, and co-founder Chris Larsen in December 2020.

The SEC alleges that Ripple raised $1.3 billion through the sale of XRP in an unregistered securities offering.

SEC’s Arguments

Unregistered Security Offering

The SEC claims that XRP should be treated as a security, similar to stocks or bonds. Under this classification, Ripple would have been required to register their sales with the SEC.

Investor Expectations

The SEC argued that Ripple's actions led investors to believe they could profit from the efforts of Ripple Labs, aligning XRP with the Howey Test. The Howey Test is used to determine if an asset qualifies as an investment contract (security), requiring it to meet four criteria: an investment of money, in a common enterprise, with an expectation of profits, primarily from the efforts of others.

Centralized Control

The SEC emphasized that Ripple's management had significant control over XRP's distribution and the network, making it less decentralized compared to other cryptocurrencies like Bitcoin or Ethereum.

Ripple's Defense

XRP as a Currency

Ripple argues that XRP is a digital currency, similar to Bitcoin and Ethereum, which the SEC does not classify as securities. Ripple maintains that XRP has utility as a bridge currency in international payments, rather than serving as an investment vehicle.

Lack of Fair Notice

Ripple has argued that it did not receive "fair notice" from the SEC that its conduct was in violation of securities law. Ripple claims that for years, the SEC did not clearly define XRP as a security, leading to confusion in the market.

Decentralization

Ripple also claims that XRP is sufficiently decentralized, making it distinct from a traditional security. They argue that many other entities and users use XRP independently, without direction from Ripple Labs.

Partial Victory for Ripple

In July 2023, a U.S. District Judge ruled that programmatic sales of XRP (those made on public exchanges) did not constitute sales of securities, while institutional sales directly to investors did.

This was seen as a partial win for Ripple, with XRP classified as not a security when sold to the general public. This led to a surge in XRP's value and several exchanges relisting XRP.

Current Status and Implications

Unsettled Issues

While Ripple won on some counts, the SEC's arguments regarding institutional sales and direct offerings mean that Ripple still has legal challenges. The mixed ruling also left ambiguities around what constitutes a security in the crypto space.

The partial victory in July 2023 led to many cryptocurrency exchanges relisting XRP, which they had previously delisted after the SEC filed its lawsuit.

Affecting broader regulations; the mixed ruling has generated significant discussion about the need for new legislation to clarify how digital assets should be classified and regulated, as the current framework of securities law doesn't align well with decentralized technologies.

For the lastest update; on August 7, 2024, a federal judge ordered Ripple Labs to pay a little over $125 million civil penalty in its ongoing legal battle with the regulator. The SEC initially sought a nearly $2 billion penalty, while Ripple wants the fine to be capped at $10 million.

The outcome of these proceedings could have significant implications for the approval and future operation of XRP-related financial products.