Will There Be an XRP ETF? The Ripple vs. SEC Case Evolves

The outcome of the legal conflict may create a “ripple effect” across the crypto universe.

TwitterTwitterTwitter
kent
|
Research Lead
Reviewed by: etf.com Staff
,
Edited by: James Rubin

The latest developments in a four-year-old case between the Securities and Exchange Commission and Ripple Labs, the developer of the XRP cryptocurrency, could bear on applications filed earlier this month by Bitwise and Canary Capital for spot XRP funds.  

The SEC has argued that Ripple’s sale of XRP constitutes an unregistered securities offering, while Ripple asserts that XRP is a currency, not a security. 

In July 2023, three years after the SEC filed a lawsuit, a federal judge ruled in favor of Ripple. Last month, the regulator filed a “notice of appeal” to the Second Circuit Court of Appeals court, arguing the earlier decision countered “decades of Supreme Court precedent and securities law.” On Thursday, Ripple filed a cross appeal to ensure that its positions are maintained.  

The appeals process could take months to resolve and might determine whether financial products like an XRP ETF—which would allow mainstream investors to gain exposure to XRP—are approved in the future.  

Earlier this year, the SEC pivoted from its longstanding objections to ETFs based on crypto spot prices to approve funds based on the performance of bitcoin and ether, the two largest digital assets by market value.  

Approval of an ETF focused on XRP, the seventh largest crypto by market capitalization, could lead to increased demand and liquidity for the asset. The SEC is also weighing proposals for funds based on the spot price of Solana, the fifth largest crypto.  

What Is XRP?

XRP is a cryptocurrency created by Ripple, a technology company that aims to facilitate cross-border payments. It is designed to be a fast, efficient, and scalable digital asset. Unlike Bitcoin, which uses a proof-of-work consensus mechanism, XRP uses a consensus mechanism called XRP Ledger (XRPL). This allows for faster transaction speeds and lower transaction costs.  

XRP Key Features and Benefits

  • Purpose: XRP was created to solve the inefficiencies of the traditional banking system, particularly the slow, expensive nature of cross-border payments. Ripple's goal is to enable seamless, near-instant global money transfers for banks and financial institutions.  
  • Transaction speed: XRP transactions are extremely fast, typically settling within three-five seconds, making it much quicker than other cryptocurrencies like Bitcoin or Ethereum, as well as traditional banking systems. 
  • Low transaction fees: XRP offers very low transaction fees compared to other cryptocurrencies, which is a key reason it is used for moving large sums across borders. 
  • Supply: XRP has a fixed supply of 100 billion tokens, of which a significant portion is held by Ripple Labs. Unlike bitcoin, where new coins are mined over time, all XRP tokens were created at inception. 
  • Decentralized ledger: While Ripple controls a large portion of XRP, the XRP Ledger is decentralized, with independent validators approving transactions. The consensus protocol used ensures that XRP transactions are verified without relying on a traditional mining process. 
  • Use case in banking: Ripple has partnered with numerous financial institutions to integrate XRP as a liquidity bridge in its RippleNet network, allowing for faster and cheaper cross-border payments between banks and payment providers. 

What Is the XRP SEC Case? The ‘Ripple Effect’ 

The latest developments in the ongoing legal battle between Ripple and the SEC continue to capture attention. On Oct. 9, the SEC officially filed an appeal with the Second Circuit Court of Appeals, aiming to overturn parts of a prior ruling by Judge Analisa Torres that had been favorable to Ripple.  

The SEC's goal is to have Ripple's sales of XRP classified as securities, which would have wide-reaching implications, a “ripple effect” as many call it, for the cryptocurrency market, as it could set a regulatory precedent for how digital assets are treated under U.S. securities law. 

On Oct. 10, Ripple Labs announced it would file a cross-appeal in its ongoing case against the SEC, as part of an effort to maintain its legal defenses as the SEC's own appeal in the case winds its way through an appeals court. 

Ripple remains confident in its position, with its leadership suggesting they have strong grounds to challenge the SEC's claims. Ripple’s Chief Legal Officer, Stuart Alderoty, and CEO Brad Garlinghouse have both criticized the SEC's approach, stating that their legal arguments lack merit and calling for clearer regulatory guidelines instead of enforcement through litigation. 

"We're really doing that to make sure that we leave nothing on the table, including the argument that there cannot be an investment contract without there being the essential rights and obligations found in a contract," said Alderoty, as reported by Coindesk, a cryptocurrency news and analysis platform. 

The case is particularly significant because it will influence how other cryptocurrencies may be regulated. If the SEC's appeal is successful, it could lead to stricter regulatory scrutiny of crypto assets, potentially affecting Ripple's business and the value of XRP. 

Additionally, Ripple may file a cross-appeal to challenge parts of the original ruling that classified its institutional XRP sales as securities, with a decision on this expected by mid-October. 

Will There Be an XRP ETF?

As of Oct. 11, no direct XRP ETF was available in the U.S. market, but investors had indirect exposure to the digital asset through a closed-end fund, the Grayscale XRP Trust (XRX). Bitwise and Canary Capital have filed with the SEC to gain approval to create a spot XRP ETF, which would be structured similarly to the existing spot bitcoin ETFs and ethereum ETFs. Some observers of crypto investments have speculated that Grayscale might convert its fund into an ETF.  

The primary obstacle to the launch of an XRP ETF lies in regulatory uncertainty, particularly due to the ongoing legal battle between Ripple and the SEC. If XRP is ultimately not deemed a security and regulatory clarity improves, it could lead to the development of an XRP-focused ETF or its inclusion in broader crypto ETFs

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.