What Are XRP ETFs — Plus What to Know About the Pending SEC Applications

The first Ripple ETF proposals were filed in October 2024. Here’s what to know about a potential XRP ETF.

Introduction

Following the successful launches of Bitcoin and Ethereum exchange-traded funds (ETFs), attention has now turned to XRP, the digital currency of Ripple’s blockchain network, as two investment firms filed for XRP ETF approvals with the US Securities and Exchange Commission (SEC) in October 2024.

In this article, we explore the current landscape of cryptocurrency ETFs, fundamentals of XRP ETFs, the potential benefits and risks associated with these investment products, and the regulatory challenges that lie ahead. 

What Is an XRP ETF?

An XRP ETF is a financial product designed to track the price of XRP, the digital asset native to the XRP Ledger. This investment vehicle allows traders to gain exposure to XRP’s price movements without the need to directly purchase, store, or manage the cryptocurrency itself. Like other ETFs, an XRP ETF would be traded on traditional stock exchanges, making it accessible to a wider range of traders through their existing brokerage accounts.

Key Features of XRP ETFs

1. Price Tracking: The primary function of an XRP ETF is to mirror the price movements of XRP as closely as possible. This is typically achieved by the fund holding actual XRP or using derivative instruments tied to the cryptocurrency’s value.

2. Exchange-Traded: Unlike buying XRP directly from a cryptocurrency exchange, shares of an XRP ETF can be bought and sold on traditional stock exchanges during regular market hours.

3. Regulatory Oversight: XRP ETFs would be subject to regulatory oversight by financial authorities.

4. Potential for Institutional Investment: The creation of XRP ETFs could open the door for institutional investors who may be restricted from directly holding cryptocurrencies.

Recent Developments in XRP ETF Filings

The race to launch the first XRP ETF has intensified, with two notable entries:

Bitwise Asset Management’s Filing:

• Bitwise, a leading cryptocurrency asset manager, took a significant step by registering an XRP investment vehicle in Delaware.

• The company followed up by submitting a Form S-1 registration statement to the SEC, marking the first official attempt to launch an XRP ETF.

Canary Capital’s Entry:

• Canary Capital, a new player in the crypto investment space, has also expressed interest in crypto ETFs.

• The firm, founded by Steven McClurg (former Valkyrie Funds co-founder), filed an S-1 form with the SEC for its proposed Canary XRP ETF.

Motivations Behind XRP ETF Proposals

The push for XRP ETFs is driven by several factors:

1. Market Demand: An increase of trader interest in gaining exposure to XRP through traditional investment vehicles.

2. Institutional Accessibility: ETFs could open the door for institutional investors who are restricted from directly holding cryptocurrencies.

3. Regulatory Clarity: Successful ETF launches could potentially provide more regulatory clarity for XRP and the broader cryptocurrency market.

4. Competitive Advantage: Asset managers are keen to establish themselves in the growing cryptocurrency ETF space.

What About the Ripple vs SEC Case?

Understanding the regulatory status of XRP is crucial for assessing the prospects of XRP ETFs. The ongoing legal battle between the SEC and Ripple Labs regarding the classification of XRP as a security has created significant regulatory uncertainty.

A 2024 court decision ruled that some of Ripple’s XRP sales may constitute securities offerings, while others did not, adding complexity to XRP’s regulatory status. The classification of XRP as a commodity or security remains a contentious issue, which could have implications for ETF approval.

The Current Landscape of Cryptocurrency ETFs

The cryptocurrency ETF landscape has significantly evolved in recent years, with several major milestones paving the way for broader adoption of these investment vehicles.

Bitcoin ETFs: The Pioneers

Bitcoin ETFs were the first to break ground in the cryptocurrency ETF space. After years of regulatory hurdles, the US SEC approved the first spot Bitcoin ETFs in January 2024. This landmark decision opened up the opportunity for institutional and retail investors to gain exposure to Bitcoin through a regulated, traditional investment vehicle.

Key points about Bitcoin ETFs:

• Multiple providers simultaneously launched 11 Bitcoin ETFs, including BlackRock, Fidelity, and Grayscale.

• These funds have attracted billions of dollars in assets under management (AUM) within months of launch.

• The success of Bitcoin ETFs has set a precedent for other cryptocurrency ETFs to follow.

Ethereum ETFs: Following Bitcoin’s Footsteps

Building on the success of Bitcoin ETFs, Ethereum ETFs were the next to gain regulatory approval. These funds, which track the price of Ether (ETH), the native cryptocurrency of the Ethereum network, launched in July 2024.

Notable aspects of Ethereum ETFs:

• They provide exposure to the second-largest cryptocurrency by market capitalisation.
• Ethereum ETFs have also seen significant inflows, though not quite at the same level as Bitcoin ETFs.

The Push for Broader Cryptocurrency ETFs

The success of Bitcoin and Ethereum ETFs has sparked interest in creating ETFs for other cryptocurrencies. Asset managers and investors are now eyeing opportunities in a wider range of digital assets, including XRP.

Emerging trends in the cryptocurrency ETF space:

• Increased interest in creating ETFs for altcoins (cryptocurrencies other than Bitcoin).

• Exploration of multi-asset cryptocurrency ETFs that provide exposure to a basket of digital currencies.

• Growing demand for cryptocurrency ETFs in international markets, with several countries outside the US approving or considering these investment products.

Regulatory Landscape

Despite the progress made with Bitcoin and Ethereum ETFs, the regulatory environment for cryptocurrency ETFs remains complex and evolving. The SEC and other regulatory bodies continue to scrutinise proposed cryptocurrency ETFs, particularly those based on less established or more controversial digital assets.

Challenges and Considerations

Despite the enthusiasm, the path to XRP ETF approval faces some hurdles:

1. Regulatory Uncertainty: The ongoing legal battle between Ripple and the SEC creates uncertainty about XRP’s regulatory status.

2. Liquidity and Price Discovery: Ensuring sufficient liquidity and accurate price discovery for the underlying asset is crucial for ETF approval.

Potential Impact of XRP ETFs on the Cryptocurrency Market

The launch of XRP ETFs could noticeably influence XRP’s price and market dynamics. The ETFs could attract new investors, potentially driving up demand for XRP, and increased institutional involvement might lead to more stable XRP prices over time.

ETFs could also improve price discovery for XRP and reduce arbitrage opportunities across different XRP trading venues. Additionally, the creation and redemption process of ETFs could enhance overall market liquidity for XRP.

Institutional Adoption

XRP ETFs could serve as a catalyst for broader institutional adoption of XRP and cryptocurrencies, as ETFs provide a familiar and regulated investment vehicle for institutional investors.

XRP ETFs could become a tool for institutions looking to diversify their cryptocurrency exposure beyond Bitcoin and Ethereum, and SEC approval of XRP ETFs could enhance the perceived legitimacy of XRP as an investment asset.

Retail Investor Participation

The introduction of XRP ETFs could also impact retail investor participation in the XRP market:

1. Easier Access: Retail investors can gain exposure to XRP through their existing brokerage accounts.
   
2. Reduced Technical Barriers: ETFs eliminate the need for retail investors to navigate cryptocurrency exchanges and wallets.
   
3. Potential for Retirement Accounts: XRP ETFs could potentially be included in retirement accounts, opening up new investment avenues for retail investors.
   
4. Increased Awareness: The launch of XRP ETFs could raise general awareness about XRP and its potential use cases.

Market Infrastructure and Ecosystem Development

The presence of XRP ETFs could drive developments in the broader XRP ecosystem:

1. Improved Custody Solutions: The need for secure custody of large XRP holdings could spur innovations in custody technology.
   
2. Regulatory Developments: The ETF approval process could lead to clearer regulatory guidelines for XRP and similar digital assets.
   
3. Cross-Border Payments: Increased institutional involvement could accelerate the adoption of XRP for cross-border payments and remittances.

Conclusion

The potential approval of XRP ETFs could mark a significant milestone in the evolving landscape of cryptocurrency investment. As seen with Bitcoin and Ethereum ETFs, the introduction of XRP ETFs could drive broader institutional adoption, enhance liquidity, and provide easier access for retail investors. 

However, regulatory challenges, particularly related to XRP’s ongoing legal status with the US SEC, remain a key hurdle. Traders interested in these products should stay informed about the regulatory developments and consider both the risks and rewards of entering this space. As with any investment, careful research and due diligence are essential before making decisions in the dynamic and often volatile world of cryptocurrency.

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