[Federal Register Volume 90, Number 33 (Thursday, February 20, 2025)]
[Notices]
[Pages 10007-10023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-02823]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102420; File No. SR-NYSEARCA-2025-08]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 1, To List and
Trade Shares of the Grayscale XRP Trust Under NYSE Arca Rule 8.201-E
(Commodity-Based Trust Shares)
February 13, 2025.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on January 30, 2025, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') a proposed rule change to list and trade shares of the
Grayscale XRP Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares). On February 10, 2025, the Exchange filed Amendment No. 1 to
the proposed rule change, which replaced and superseded the original
filing in its entirety. The proposed rule change, as modified by
Amendment No.1, is as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change, as
modified by Amendment No. 1, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.201-E: Grayscale XRP Trust (the ``Trust''). This
Amendment No. 1 to SR-NYSEARCA-2025-08 replaces SR-NYSEARCA-2025-08 as
originally filed and supersedes such filing in its entirety. The
proposed rule change is available on the Exchange's website at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/
or trade pursuant to unlisted trading privileges ``Commodity-Based
Trust Shares.'' \4\ The Exchange proposes to list and trade shares
(``Shares'') of the Trust pursuant to NYSE Arca Rule 8.201-E.\5\
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\4\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
Trust.
\5\ The descriptions of the Trust, the Shares, and XRP contained
herein are based, in part, on the Trust's prospectus
(``Prospectus''). On January 3, 2025, the Trust submitted to the
Commission an amended Form D as a business trust. The Shares will be
of the same class and will have the same rights as shares of XRPN.
According to the Sponsors, freely tradeable shares of XRPN will
remain freely tradeable Shares on the date of the listing of the
Shares that are unregistered under the Securities Act. Restricted
shares of XRPN will remain subject to private placement restrictions
on such date, and the holders of such restricted shares will
continue to hold those Shares subject to those restrictions until
they become freely tradable Shares.
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The Trust is one of the world's largest XRP (``XRP'') investment
funds by assets under management as of the date of this filing. The
Trust has approximately $16.1 million in assets under management,\6\
and its Shares are held by American investor accounts seeking exposure
to XRP without the cost and complexity of purchasing the asset
directly. The Sponsors (as defined below) believe that allowing Shares
of the Trust to list and trade on the Exchange as an exchange-traded
product (``ETP'') (i.e., converting the Trust to a spot XRP ETP) would
provide other investors with a way to invest in XRP on a regulated
national securities exchange.
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\6\ As of January 22, 2025.
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The sponsors of the Trust are Grayscale Operating, LLC and
Grayscale Investments Sponsors, LLC (each, a ``Sponsor'' and,
collectively, the ``Sponsors''),\7\ each a Delaware limited liability
company. The Sponsors are indirect wholly owned subsidiaries of Digital
Currency Group, Inc. (``Digital Currency Group''). The trustee for the
Trust is Delaware Trust Company (``Trustee''). The custodian for the
Trust is Coinbase Custody Trust Company, LLC (``Custodian'').\8\ The
administrator and transfer agent of the Trust is expected to be BNY
Mellon Asset Servicing, a division of The Bank of New York Mellon (the
``Transfer Agent''). The distribution and marketing agent for the Trust
is expected to be Foreside Fund Services, LLC (the ``Marketing
Agent''). The index provider for the Trust is CoinDesk Indices, Inc.
(the ``Index Provider'').
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\7\ As of May 3, 2025, Grayscale Operating, LLC will cease to
act as Sponsor of the Trust and Grayscale Investments Sponsors, LLC
will be sole Sponsor of the Trust.
\8\ According to the Prospectus, Digital Currency Group owns a
minority interest in Coinbase, Inc., which is the parent company of
the Custodian, representing less than 1.0% of its equity.
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The Trust is a Delaware statutory trust, formed on August 5, 2024,
that operates pursuant to a trust agreement between the Sponsor and the
Trustee (``Trust Agreement''). The Trust has no fixed termination date.
Operation of the Trust
According to the Confidential Private Placement Memorandum (the
``Memorandum''), as will be described in the Prospectus, the Trust's
assets consist solely of XRP.\9\
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\9\ The Trust may from time to time come into possession of
Incidental Rights and/or IR Virtual Currency by virtue of its
ownership of XRP, generally through a fork in the XRP Blockchain, an
airdrop offered to holders of XRP or other similar event.
``Incidental Rights'' are rights to acquire, or otherwise establish
dominion and control over, any virtual currency or other asset or
right, which rights are incident to the Trust's ownership of XRP and
arise without any action of the Trust, or of the Sponsor or Trustee
on behalf of the Trust. ``IR Virtual Currency'' is any virtual
currency tokens, or other asset or right, acquired by the Trust
through the exercise (subject to the applicable provisions of the
Trust Agreement) of any Incidental Right. Although the Trust is
permitted to take certain actions with respect to Incidental Rights
and IR Virtual Currency in accordance with its Trust Agreement, at
this time the Trust will prospectively irrevocably abandon any
Incidental Rights and IR Virtual Currency. In the event the Trust
seeks to change this position, the Exchange would file a subsequent
proposed rule change with the Commission.
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[[Page 10008]]
Each Share represents a proportional interest, based on the total
number of Shares outstanding, in the Trust's assets as determined by
reference to the Index Price,\10\ less the Trust's expenses and other
liabilities (which include accrued but unpaid fees and expenses). The
Sponsors expect that the market price of the Shares will fluctuate over
time in response to the market prices of XRP. In addition, because the
Shares reflect the estimated accrued but unpaid expenses of the Trust,
the number of XRP represented by a Share will gradually decrease over
time as the Trust's XRP are used to pay the Trust's expenses.
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\10\ The ``Index Price'' means the U.S. dollar value of a XRP
derived from the Digital Asset Trading Platforms (as defined below)
that are reflected in the CoinDesk XRP Price Index (XRX) (the
``Index''), calculated at 4:00 p.m., New York time, on each business
day. For purposes of the Trust Agreement, the term XRP Index Price
has the same meaning as the Index Price as defined herein.
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The activities of the Trust are limited to (i) issuing ``Baskets''
(as defined below) in exchange for XRP transferred to the Trust as
consideration in connection with creations, (ii) transferring or
selling XRP as necessary to cover the ``Sponsor's Fee'' \11\ and/or
certain Trust expenses, (iii) transferring XRP in exchange for Baskets
surrendered for redemption (subject to obtaining regulatory approval
from the Commission and approval of the Sponsor), (iv) causing the
Sponsor to sell XRP on the termination of the Trust, and (v) engaging
in all administrative and security procedures necessary to accomplish
such activities in accordance with the provisions of the Trust
Agreement, the Custodian Agreement, the Index License Agreement, and
the Participant Agreements (each as defined below).
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\11\ The Sponsor's Fee means a fee, payable in XRP, which
accrues daily in U.S. dollars at an annual rate of currently 2.5%,
but which will be lowered in connection with the Trust becoming an
ETP, of the NAV Fee Basis Amount of the Trust as of 4:00 p.m., New
York time, on each day, provided that for a day that is not a
business day, the calculation of the Sponsor's Fee will be based on
the NAV Fee Basis Amount from the most recent business day, reduced
by the accrued and unpaid Sponsor's Fee for such most recent
business day and for each day after such most recent business day
and prior to the relevant calculation date. The ``NAV Fee Basis
Amount'' is calculated in the manner set forth under ``Valuation of
XRP and Determination of NAV'' below.
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The Trust will not be actively managed. It will not engage in any
activities designed to obtain a profit from, or to ameliorate losses
caused by, changes in the market prices of XRP.
The Trust is not a registered investment company under the
Investment Company Act and the Sponsors believe that the Trust is not
required to register under the Investment Company Act.
Investment Objective
According to the Memorandum, and as further described below, the
Trust's investment objective is for the value of the Shares (based on
XRP per Share) to reflect the value of the XRP held by the Trust,
determined by reference to the Index Price, less the Trust's expenses
and other liabilities. While an investment in the Shares is not a
direct investment in XRP, the Shares are designed to provide investors
with a cost-effective and convenient way to gain investment exposure to
XRP. Generally speaking, a substantial direct investment in XRP may
require expensive and sometimes complicated arrangements in connection
with the acquisition, security and safekeeping of the XRP and may
involve the payment of substantial fees to acquire such XRP from third-
party facilitators through cash payments of U.S. dollars. Because the
value of the Shares is correlated with the value of XRP held by the
Trust, it is important to understand the investment attributes of, and
the market for, XRP.
The Trust uses the Index Price to calculate its ``NAV,'' which is
the aggregate value, expressed in U.S. dollars, of the Trust's assets
(other than U.S. dollars or other fiat currency), less the U.S. dollar
value of the Trust's expenses and other liabilities calculated in the
manner set forth under ``Valuation of XRP and Determination of NAV.''
``NAV per Share'' is calculated by dividing NAV by the number of Shares
then outstanding.
Valuation of XRP and Determination of NAV
The following is a description of the material terms of the Trust
Agreement as they relate to valuation of the Trust's XRP and the NAV
calculations.\12\
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\12\ While this filing uses the terminology ``NAV,'' the term
used in the Trust Agreement is ``Digital Asset Holdings.''
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On each business day at 4:00 p.m., New York time, or as soon
thereafter as practicable (the ``Evaluation Time''), the Sponsor will
evaluate the XRP held by the Trust and calculate and publish the NAV of
the Trust. To calculate the NAV, the Sponsor will:
1. Determine the Index Price as of such business day.
2. Multiply the Index Price by the Trust's aggregate number of XRP
owned by the Trust as of 4:00 p.m., New York time, on the immediately
preceding day, less the aggregate number of XRP payable as the accrued
and unpaid Sponsor's Fee as of 4:00 p.m., New York time, on the
immediately preceding day.
3. Add the U.S. dollar value of XRP, calculated using the Index
Price, receivable under pending creation orders, if any, determined by
multiplying the number of the Baskets represented by such creation
orders by the Basket Amount and then multiplying such product by the
Index Price.\13\
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\13\ ``Baskets'' and ``Basket Amount'' have the meanings set
forth in ``Creation and Redemption of Shares'' below.
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4. Subtract the U.S. dollar amount of accrued and unpaid Additional
Trust Expenses, if any.\14\
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\14\ A ``Digital Asset Market'' is a ``Brokered Market,''
``Dealer Market,'' ``Principal-to-Principal Market'' or ``Exchange
Market,'' as each such term is defined in the Financial Accounting
Standards Board Accounting Standards Codification Master Glossary.
The ``Digital Asset Trading Platform Market'' is the global trading
platform market for the trading of XRP, which consists of
transactions on electronic Digital Asset Trading Platforms. A
``Digital Asset Trading Platform'' is an electronic marketplace
where trading participants may trade, buy and sell XRP based on bid-
ask trading. The largest Digital Asset Trading Platforms are online
and typically trade on a 24-hour basis, publishing transaction price
and volume data.
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5. Subtract the U.S. dollar value of the XRP, calculated using the
Index Price, to be distributed under pending redemption orders, if any,
determined by multiplying the number of Baskets to be redeemed
represented by such redemption orders by the Basket Amount and then
multiplying such product by the Index Price (the amount derived from
steps 1 through 5 above, the ``NAV Fee Basis Amount'').
6. Subtract the U.S. dollar amount of the Sponsor's Fee that
accrues for such business day, as calculated based on the NAV Fee Basis
Amount for such business day.
In the event that the Sponsor determines that the primary
methodology used to determine the Index Price is not an appropriate
basis for valuation of the Trust's XRP, the Sponsor will utilize the
cascading set of rules as described in ``Determination of the Index
Price When Index Price is Unavailable'' below.
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XRP and the XRP Network \15\
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\15\ The description of XRP and the XRP Network in this section
was provided by the Sponsors and is based on the Memorandum.
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According to the Memorandum, XRP is a decentralized network of
computers that operates on cryptographic protocols. No single entity
owns or operates the XRP Network, the infrastructure of which is
collectively maintained by a decentralized user base. The XRP Network
allows people to exchange tokens of value, called XRP, which are
recorded on a public transaction ledger. XRP can be used to pay for
goods and services, including to send a transaction on the XRP Network,
or it can be converted to fiat currencies, such as the U.S. dollar, at
rates determined on Digital Asset Trading Platforms or in individual
end-user-to-end-user transactions under a barter system. The XRP
Network is based on a shared public ledger, similar to the Bitcoin
network. However, the XRP Network differentiates itself from other
digital asset networks in that its stated primary function is
transactional utility, not store of value. The XRP Network is designed
to be a global real-time payment and settlement system. As a result,
the XRP Network and XRP aim to improve the speed at which parties on
the network may transfer value while also reducing the fees and delays
associated with the traditional methods of interbank payments.
The XRP Network's intended function is to allow users or businesses
to conduct cross-currency transactions securely and quickly. A
conventional cross-currency transaction often requires liquidity
providers to work across several currency pairs to facilitate the
transaction, which increases transaction costs and can be time-
intensive, particularly when transacting between two rarely traded
currency pairs. To reduce the costs and time associated with such
transactions, XRP functions as a bridge token; it facilitates liquidity
between any two currencies by acting as a bridge between such
currencies. In an XRP-facilitated transaction, instead of working
across several currency pairs, liquidity providers use XRP to transfer
value between two currencies. Two types of parties are required for a
transaction to occur on the XRP Network: (a) ``gateways,'' which are
typically a financial intermediary, such as a bank, exchange or money
transmitter that allows customers to put money into and remove money
from the XRP Network system; and (b) market makers that facilitate
liquidity in the system. Gateways serve as the first link in the chain
between the sender and the recipient when the sender wants to make a
payment and the last link in the chain when the sender wants to receive
a payment. Gateways accept payments, issue balances to the distributed
ledger maintained by Ripple Labs, and redeem ledger balances against
the payments they hold when fiat currency is withdrawn. Gateways share
one global ledger on the XRP Network. Market makers on the XRP Network
hold balances in multiple currencies and connect multiple gateways,
thus facilitating payments between users where no direct trust exists
by enabling exchanges of value across gateways. As of August 2024, more
than 100 financial institutions have signed up to use the XRP Network.
Similar to the Bitcoin network, anyone can join and start using the
XRP Network; however, unlike the Bitcoin network, which operates on a
fully permissionless blockchain, the XRP Network is maintained by a
Trusted Nodes List that accepts or rejects transactions on the ``XRP
Ledger.'' As of August 2024, the default configuration for the XRP
Network has two Trusted Nodes Lists: one published by the XRP
Foundation and one published by Ripple Labs. Typically, these default
Trusted Nodes Lists are very similar to one another or even identical.
As of August 2024, Ripple Labs runs only 1 of the 35 validators in the
default Trusted Nodes Lists.
XRP can be used to pay transaction fees incurred in cross-currency
transactions, with one transaction costing approximately 0.00001 XRP.
This transaction fee payment via XRP acts as a safeguard against the
system being overwhelmed by any single active participant trying to put
through millions of transactions at once, thus promoting the system's
functionality. Within the XRP Network's currency exchange, XRP are
traded freely against other currencies, and its market price fluctuates
against dollars, euros, yen, Bitcoins and other digital and non-digital
currencies and assets.
The initial creation of XRP was controlled by Ripple Labs, and
Ripple Labs retains a central role in managing the supply and
distribution of XRP due to the large quantity of XRP it retains. Ripple
Labs does not sell, exchange, transmit or retain custody of XRP for
consumers or the public at large, but rather commits XRP to the system
so that it can be used to facilitate payments among institutions as a
``bridge token'' and for transaction fees. The value of XRP is
determined by the supply of, and demand for, XRP on exchanges where XRP
is traded or in private end-user-to-end-user transactions, much of
which is driven by speculation.
Although Ripple Labs and the XRP Foundation continue to exert
significant influence over the direction of the development of the XRP
Network, like the Bitcoin network and the Ethereum network, the XRP
Network is decentralized and does not require governmental authorities
or financial institution intermediaries to create, transmit or
determine the value of XRP.
Overview of the XRP Network's Operations
In order to own, transfer or use XRP directly on the XRP Network
(as opposed to through an intermediary, such as a custodian), a person
generally must have internet access to connect to the XRP Network. XRP
transactions may be made directly between end-users without the need
for a third-party intermediary. To prevent the possibility of double-
spending XRP, a user must notify the XRP Network of the transaction by
broadcasting the transaction data to its network peers. The XRP Network
provides confirmation against double-spending by memorializing every
transaction in the XRP Ledger, which is publicly accessible and
transparent. This memorialization and verification against double-
spending is accomplished through the XRP Network validation process,
which compares XRP Ledger data, including recent transaction
information, across the XRP Network.
Summary of an XRP Transaction
Prior to engaging in XRP transactions directly on the XRP Ledger, a
user generally must first install on its computer or mobile device a
XRP Network software program that will allow the user to generate a
private and public key pair associated with a XRP address. The XRP
Network software program and the XRP address also enable the user to
connect to the XRP Network and transfer XRP to, and receive XRP from,
other users.
Each XRP Network address, or wallet, is associated with a unique
``public key'' and ``private key'' pair. To receive XRP, the XRP
recipient must provide its public key to the party initiating the
transfer. This activity is analogous to a recipient for a transaction
in U.S. dollars providing a routing address in wire instructions to the
payor so that cash may be wired to the recipient's account. The payor
approves the transfer to the address provided by the recipient by
``signing'' a transaction that consists of the recipient's public key
with the private key of the address from where the payor is
transferring the XRP.
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The recipient, however, does not make public or provide to the sender
its related private key.
Neither the recipient nor the sender reveals their private keys in
a transaction, because the private key authorizes transfer of the funds
in that address to other users. Therefore, if a user loses his or her
private key, the user may permanently lose access to the XRP contained
in the associated address. Likewise, XRP is irretrievably lost if the
private key associated with them is deleted and no backup has been
made. When sending XRP, a user's XRP Network software program must
validate the transaction with the associated private key. In addition,
since every computation on the XRP Network requires processing power,
there is a transaction fee involved with the transfer that is paid by
the payor. The resulting digitally validated transaction is sent by the
user's XRP Network software program to the XRP Network validators to
allow transaction confirmation.
Some XRP transactions are conducted ``off-blockchain'' and are
therefore not recorded in the XRP Ledger. These ``off-blockchain
transactions'' involve the transfer of control over, or ownership of, a
specific digital wallet holding XRP or the reallocation of ownership of
certain XRP in a pooled-ownership digital wallet, such as a digital
wallet owned by a Digital Asset Trading Platform. In contrast to on-
blockchain transactions, which are publicly recorded on the XRP Ledger,
information and data regarding off-blockchain transactions are
generally not publicly available. Therefore, off-blockchain
transactions are not truly XRP Network transactions in that they do not
involve the transfer of transaction data on the XRP Network and do not
reflect a movement of XRP between addresses recorded in the XRP Ledger.
For these reasons, off-blockchain transactions are subject to risks as
any such transfer of XRP ownership is not protected by the protocol
behind the XRP Network or recorded in, and validated through, the
ledger mechanism.
Consensus and Validation Process
The XRP Network is kept running by many distributed servers, called
nodes, that process transactions. A transaction begins when a user's
XRP Network software signs and transmits transaction information to
nodes, which relay these candidate transactions throughout the XRP
Network for processing.
The nodes on the XRP Network are either tracking nodes or
validating nodes. Tracking nodes receive and relay information to the
other nodes. Validating nodes perform the same functions as tracking
nodes and additionally contribute to advancing the XRP Ledger by
validating transactions.
Before a transaction is validated, nodes on the network share
information about candidate transactions that have not yet been
recorded to the XRP Ledger. Through the consensus process, validating
nodes agree on which candidate transactions will be considered for
inclusion to the XRP Ledger. Nodes communicate and update proposals
until a supermajority of validating nodes agree on the same set of
candidate transactions, at which point the transactions will be
validated and the nodes will begin the consensus process for the next
group of candidate transactions.
XRP Supply
Unlike other digital assets such as Bitcoin, which are solely
created through a progressive mining process, 100 billion XRP were
created in connection with the launch of the XRP Network. The initial
100 billion XRP were distributed as follows:
Ripple Labs: 80 billion XRP, or 80% of the initial supply,
were allocated to Ripple Labs for operational costs incurred in the
facilitation of the growth and development of the XRP Network.
Core team and co-founders: 20 billion XRP, or 20% of the
initial supply, were allocated to the XRP Network core team and co-
founders to compensate for their early efforts in the development of
the XRP Network.
According to the XRP Network protocol, beyond the initially issued
XRP amount, no additional XRP can be created. Based on publicly
available data, out of the 100 billion initially issued XRP,
approximately 62 billion have entered circulation, distributed across
approximately 6 million wallets, with the top 10 largest wallets
holding approximately 17% of the circulating supply.\16\
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\16\ Figures are as of the date of filing. See e.g., https://www.coinlore.com/coin/ripple/richlist & https://xrpscan.com/balances.
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By the end of 2017, to add a level of predictability and
transparency about how much XRP can enter the market each month and
therefore impact the price of XRP, Ripple Labs placed 55 billion XRP of
its 80 billion XRP allocation into a cryptographically-secured escrow
account, which utilizes smart contracts to ``lock'' such escrowed XRP
until a certain time, or until certain conditions have been met. Such
escrow contracts are used to establish contracts of 1 billion XRP, each
of which is set to expire in succession on the first day of every month
beginning in January 2018. As each contract expires, the XRP will
become available for Ripple Labs' use. Ripple Labs expects to use XRP
to continue incentivizing market makers to offer tighter spreads
between currency pairs in exchange for XRP and to sell XRP to
institutional investors. Unused XRP at the end of each month reenters
the escrow cycle and is placed into a new escrow account for future
release based on expiration dates that Ripple Labs discloses upon re-
escrow. This mechanism is intended to ensure that a large number of XRP
will not enter the market at one time and lead to a substantial
reduction in the price of XRP (collectively, the ``Escrow System'').
Additionally, Ripple Labs reports information about its XRP
holdings at the beginning of the quarter and last day of the quarter
(the ``Market Reports''). In these reports, Ripple Labs discloses XRP
that it currently has available in its wallets and XRP that is subject
to escrow lockups that will be released each month. Based on publicly
available data, approximately 38 billion XRP are escrowed as of the
date hereof.
Despite the programmatic nature of the Escrow System and Market
Reports, Ripple Labs still retains control over a significant portion
of XRP, which can impact market dynamics if large amounts are sold. For
instance, if Ripple Labs sells its full 1 billion XRP allocation in a
month, that would be expected to have a larger impact on the price of
XRP than if Ripple Labs allows its 1 billion XRP allocation to expire
in a month and have it reenter the escrow cycle. The concentration of
XRP in the hands of Ripple Labs and early stakeholders has led to
perceptions of centralization, which could affect the marketplace's
confidence in XRP and the price of XRP.
Modifications to the XRP Network
Although the XRP Network's protocol is an open source project, it
is largely managed by Ripple Labs and the XRP Foundation, which
generally have control over amendments to, and the development of, the
protocol's source code. Therefore, it is generally the Ripple Labs
developers that are able to access and alter the XRP Network source
code and, as a result, they are responsible for official releases of
updates and other changes to the XRP Network's source code. The release
of updates to the XRP Network's source code does not guarantee that the
updates will be automatically adopted. Users and nodes must accept any
changes made to the XRP Network's
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source code by downloading the proposed modifications.
A modification of the XRP Network's source code is effective only
with respect to the XRP Network users and nodes that download it. If a
modification is accepted by only a percentage of users and nodes, a
division in the XRP Network will occur such that one network will run
the premodification source code and the other network will run the
modified source code. Such a division is known as a ``fork.''
Consequently, as a practical matter, a modification to the source code
becomes part of the XRP Network only if accepted by participants
collectively having most of the processing power on the XRP Network.
Forms of Attack Against the XRP Network
All networked systems are vulnerable to various kinds of attacks.
As with any computer network, Digital Asset Networks contain certain
flaws. For example, the XRP Network is currently vulnerable to a ``51%
attack'' where, if a validator or group of validators acting in concert
were to gain control of more than 50% of the hash rate for the
applicable digital asset, a malicious actor would be able to gain full
control of the network and the ability to manipulate such digital
asset's blockchain.
In addition, many Digital Asset Networks have been subjected to a
number of denial of service attacks, which has led to temporary delays
in block creation and in the transfer of digital assets. Any similar
attacks on the XRP Network that impacts the ability to transfer such
digital asset could have a material adverse effect on the price of such
digital asset and the value of an investment in the Shares of such
Trust.
Custody of the Trust's XRP
Digital assets and digital asset transactions are recorded and
validated on blockchains, the public transaction ledgers of a digital
asset network. Each digital asset blockchain serves as a record of
ownership for all of the units of such digital asset, even in the case
of certain privacy-preserving digital assets, where the transactions
themselves are not publicly viewable. All digital assets recorded on a
blockchain are associated with a public blockchain address, also
referred to as a digital wallet. Digital assets held at a particular
public blockchain address may be accessed and transferred using a
corresponding private key.
Key Generation
Public addresses and their corresponding private keys are generated
by the Custodian in secret key generation ceremonies at secure
locations inside faraday cages, which are enclosures used to block
electromagnetic fields and thus mitigate against attacks. The Custodian
uses quantum random number generators to generate the public and
private key pairs.
Once generated, private keys are encrypted, separated into
``shards,'' and then further encrypted. After the key generation
ceremony, all materials used to generate private keys, including
computers, are destroyed. All key generation ceremonies are performed
offline. No party other than the Custodian (including the Trust itself)
has access to the private key shards of the Trust.
Key Storage
Private key shards are distributed geographically in secure vaults
around the world, including in the United States. The locations of the
secure vaults may change regularly and are kept confidential by the
Custodian for security purposes.
The ``Digital Asset Account'' is a segregated custody account
controlled and secured by the Custodian to store private keys, which
allows for the transfer of ownership or control of the Trust's XRP on
the Trust's behalf. The Digital Asset Account uses offline storage, or
``cold,'' mechanisms to secure the Trust's private keys. The term cold
storage refers to a safeguarding method by which the private keys
corresponding to digital assets are disconnected and/or deleted
entirely from the internet. Cold storage of private keys may involve
keeping such keys on a non-networked (or ``air-gapped'') computer or
electronic device or storing the private keys on a storage device (for
example, a USB thumb drive) or printed medium (for example, papyrus,
paper, or a metallic object). A digital wallet may receive deposits of
digital assets but may not send digital assets without use of the
digital assets' corresponding private keys. In order to send digital
assets from a digital wallet in which the private keys are kept in cold
storage, either the private keys must be retrieved from cold storage
and entered into an online, or ``hot,'' digital asset software program
to sign the transaction, or the unsigned transaction must be
transferred to the cold server in which the private keys are held for
signature by the private keys and then transferred back to the online
digital asset software program. At that point, the user of the digital
wallet can transfer its digital assets.
Security Procedures
The Custodian is the custodian of the Trust's private keys (which,
as noted above, facilitate the transfer of ownership or control of the
Trust's XRP) in accordance with the terms and provisions of the
custodian agreement by and between the Custodian, the Sponsor and the
Trust (the ``Custodian Agreement''). Transfers from the Digital Asset
Account require certain security procedures, including, but not limited
to, multiple encrypted private key shards, usernames, passwords and 2-
step verification. Multiple private key shards held by the Custodian
must be combined to reconstitute the private key to sign any
transaction in order to transfer the Trust's assets. Private key shards
are distributed geographically in secure vaults around the world,
including in the United States.
As a result, if any one secure vault is ever compromised, this
event will have no impact on the ability of the Trust to access its
assets, other than a possible delay in operations, while one or more of
the other secure vaults is used instead. These security procedures are
intended to remove single points of failure in the protection of the
Trust's assets.
Transfers of XRP to the Digital Asset Account will be available to
the Trust once processed on the Blockchain.
Subject to obtaining regulatory approval to operate a redemption
program and authorization of the Sponsor, the process of accessing and
withdrawing XRP from the Trust to redeem a Basket by an Authorized
Participant will follow the same general procedure as transferring XRP
to the Trust to create a Basket by an Authorized Participant, only in
reverse.
The Sponsor will maintain ownership and control of the Trust's XRP
in a manner consistent with good delivery requirements for spot
commodity transactions.
XRP Value
Digital Asset Trading Platform Valuation
The value of XRP is determined by the value that various market
participants place on XRP through their transactions. The most common
means of determining the value of a XRP is by surveying one or more
Digital Asset Trading Platforms where XRP is traded publicly and
transparently (e.g., Coinbase, Crypto.com, LMAX Digital, Kraken and
Bitstamp).
[[Page 10012]]
Digital Asset Trading Platform Public Market Data
On each online Digital Asset Trading Platform, XRP is traded with
publicly disclosed valuations for each executed trade, measured by one
or more fiat currencies such as the U.S. dollar or euro or by the
widely used cryptocurrency Bitcoin. Over-the-counter dealers or market
makers do not typically disclose their trade data.
As of September 30, 2024, the Digital Asset Trading Platforms
included in the Index were Coinbase, Crypto.com, LMAX Digital, Kraken
and Bitstamp. As further described below, the Sponsors and the Trust
reasonably believe each of these Digital Asset Trading Platforms are in
material compliance with applicable U.S. federal and state licensing
requirements and maintain practices and policies designed to comply
with anti-money laundering (``AML'') and know-your-customer (``KYC'')
regulations.
Coinbase: A U.S.-based trading platform registered as a money
services business (``MSB'') with the Financial Crimes Enforcement
Network (``FinCEN'') and licensed as a virtual currency business under
the New York State Department of Financial Services (``NYDFS'')
BitLicense as well as a money transmitter in various U.S. states.
Crypto.com: A Singapore-based trading platform registered as an MSB
with FinCEN and licensed as a money transmitter in various U.S. states.
Crypto.com does not hold a BitLicense.
LMAX Digital: A U.K.-based trading platform registered as a broker
with Financial Conduct Authority. LMAX Digital does not hold a
BitLicense.
Kraken: A U.S.-based trading platform registered as an MSB with
FinCEN and licensed as a money transmitter in various U.S. states.
Kraken does not hold a BitLicense.
Bitstamp: A U.K.-based trading platform registered as an MSB with
FinCEN and licensed as a virtual currency business under the NYDFS
BitLicense as well as a money transmitter in various U.S. states.
Currently, there are several Digital Asset Trading Platforms
operating worldwide and online Digital Asset Trading Platforms
represent a substantial percentage of XRP buying and selling activity
and provide the most data with respect to prevailing valuations of XRP.
These trading platforms include established trading platforms such as
trading platforms included in the Index which provide a number of
options for buying and selling XRP. The below table reflects the
trading volume in XRP and market share of the XRP-U.S. dollar trading
pairs of each of the Digital Asset Trading Platforms included in the
Index as of September 30, 2024 (collectively, ``Constituent Trading
Platforms''), using data since the inception of the Trust's operations:
------------------------------------------------------------------------
XRP Trading Platforms included in Market share \1\
the index as of September 30, 2024 Volume (XRP) (%)
------------------------------------------------------------------------
Coinbase.......................... 1,390,594,237 49.19
Crypto.com........................ 708,146,379 25.05
Kraken............................ 268,454,941 9.50
LMAX Digital...................... 203,020,459 7.18
Bitstamp.......................... 190,473,389 6.74
-------------------------------------
Total U.S. Dollar-XRP trading 2,760,689,405 97.66
pair.........................
------------------------------------------------------------------------
\1\ Market share is calculated using trading volume (in XRP) for certain
Digital Asset Trading Platforms including, Coinbase, Crypto.com, LMAX
Digital, Kraken and Bitstamp, as well as certain other large U.S.-
dollar denominated Digital Asset Trading Platforms that were not
included in the Index as of September 30, 2024, including Bitfinex and
Gemini.
The Index and the Index Price
The Index is a U.S. dollar-denominated composite reference rate for
the price of XRP. The Index is designed to (1) mitigate the effects of
fraud, manipulation and other anomalous trading activity from impacting
the XRP reference rate, (2) provide a real-time, volume-weighted fair
value of XRP and (3) appropriately handle and adjust for non-market
related events.
The Index Price is determined by the Index Provider through a
process in which trade data is cleansed and compiled in such a manner
as to algorithmically reduce the impact of anomalistic or manipulative
trading. This is accomplished by adjusting the weight of each data
input based on price deviation relative to the observable set, as well
as recent and long-term trading volume at each venue relative to the
observable set.
The value of the Index is calculated and disseminated on a 24-hour
basis and will be available on a continuous basis via a major market
data vendor.
Constituent Trading Platform Selection
According to the Memorandum, the Digital Asset Trading Platforms
that are included in the Index are selected by the Index Provider
utilizing a methodology that is guided by the International
Organization of Securities Commissions (``IOSCO'') principles for
financial benchmarks. For a trading platform to become a Constituent
Trading Platform, it must satisfy each of the criteria listed below
(the ``Inclusion Criteria''):
Sufficient USD or USDC liquidity relative to the size of
the listed assets;
No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the trading
platform's eligibility requirements to trade;
No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
Real-time price discovery;
Limited or no capital controls; \17\
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\17\ ``Capital controls'' in this context means governmental
sanctions that would limit the movement of capital into, or out of,
the jurisdiction in which such Digital Asset Trading Platforms
operate.
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Transparent ownership including a publicly-known ownership
entity;
Publicly available language and policies addressing legal
and regulatory compliance in the U.S., including KYC, AML and other
policies designed to comply with relevant regulations that might apply
to it;
Be a trading platform that is licensed and able to service
investors in one or more of the following jurisdictions:
[cir] United States
[cir] United Kingdom
[cir] European Union
[cir] Hong Kong
[cir] Singapore; and
Offer programmatic spot trading of the trading pair \18\
and reliably publish trade prices and volumes on a real-time basis
through Rest and Websocket APIs.
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\18\ Trading platforms with programmatic trading offer traders
an application programming interface that permits trading by sending
programmed commands to the trading platform.
---------------------------------------------------------------------------
A Digital Asset Trading Platform is removed as a Constituent
Trading
[[Page 10013]]
Platform when it no longer satisfies the Inclusion Criteria. The Index
Provider does not currently include data from over-the-counter markets
or derivatives platforms among the Constituent Trading Platforms.
According to the Memorandum, over-the-counter data is not currently
included because of the potential for trades to include a significant
premium or discount paid for larger liquidity, which creates an uneven
comparison relative to more active markets. There is also a higher
potential for over-the-counter transactions to not be arms-length, and
thus not be representative of a true market price.
The Index Provider and the Sponsor have entered into the index
license agreement, dated as of February 1, 2022 (as amended, the
``Index License Agreement''), governing the Sponsor's use of the Index
Price.\19\ Pursuant to the terms of the Index License Agreement, the
Index Provider may adjust the calculation methodology for the Index
Price without notice to, or consent of, the Trust or its shareholders.
The Index Provider may decide to change the calculation methodology to
maintain the integrity of the Index Price calculation should it
identify or become aware of previously unknown variables or issues with
the existing methodology that it believes could materially impact its
performance and/or reliability. The Index Provider has sole discretion
over the determination of Index Price and may change the methodologies
for determining the Index Price from time to time. Shareholders will be
notified of any material changes to the calculation methodology or the
Index Price in the Trust's current reports and will be notified of all
other changes that the Sponsor considers significant in the Trust's
periodic or current reports. The Sponsor will determine the materiality
of any changes to the Index Price on a case-by-case basis, in
consultation with external counsel.
---------------------------------------------------------------------------
\19\ Upon entering into the Index License Agreement, the Sponsor
and the Index Provider terminated the license agreement between the
parties dated as of February 28, 2019.
---------------------------------------------------------------------------
The Index Provider may change the trading venues that are used to
calculate the Index or otherwise change the way in which the Index is
calculated at any time. For example, the Index Provider has scheduled
quarterly reviews in which it may add or remove Constituent Trading
Platforms that satisfy or fail the Inclusion Criteria. The Index
Provider does not have any obligation to consider the interests of the
Sponsor, the Trust, the shareholders, or anyone else in connection with
such changes. While the Index Provider is not required to publicize or
explain the changes or to alert the Sponsor to such changes, it has
historically notified the Trust (and other subscribers to the Index) of
any material changes to the Constituent Trading Platforms, including
any additions or removals, contemporaneous with its issuance of press
releases in connection with the same. The Sponsor will notify investors
of any such material event by filing a current report on Form 8-K.
Although the Index methodology is designed to operate without any
manual intervention, rare events would justify manual intervention.
Intervention of this kind would be in response to non-market-related
events, such as the halting of deposits or withdrawals of funds on a
Digital Asset Trading Platform, the unannounced closure of operations
on a Digital Asset Trading Platform, insolvency or the compromise of
user funds. In the event that such an intervention is necessary, the
Index Provider would issue a public announcement through its website,
API and other established communication channels with its clients.
Determination of the Index Price
The Index applies an algorithm to the price of XRP on the
Constituent Trading Platforms calculated on a per second basis over a
24-hour period. The Index's algorithm is expected to reflect a four-
pronged methodology to calculate the Index Price from the Constituent
Trading Platforms:
Volume Weighting: Constituent Trading Platforms with
greater liquidity receive a higher weighting in the Index, increasing
the ability to execute against (i.e., replicate) the Index in the
underlying spot markets.
Price-Variance Weighting: The Index Price reflects data
points that are discretely weighted in proportion to their variance
from the rest of the Constituent Trading Platforms. As the price at a
particular trading platform diverges from the prices at the rest of the
Constituent Trading Platforms, its weight in the Index Price
consequently decreases.
Inactivity Adjustment: The Index Price algorithm penalizes
stale activity from any given Constituent Trading Platform. When a
Constituent Trading Platform does not have recent trading data, its
weighting in the Index Price is gradually reduced until it is de-
weighted entirely. Similarly, once trading activity at a Constituent
Trading Platform resumes, the corresponding weighting for that
Constituent Trading Platform is gradually increased until it reaches
the appropriate level.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Index only includes
executed trades in its calculation and the Index only includes
Constituent Trading Platforms that charge trading fees to its users in
order to attach a real, quantifiable cost to any manipulation attempts.
The Index Provider re-evaluates the weighting algorithm on a
periodic basis, but maintains discretion to change the way in which an
Index Price is calculated based on its periodic review or in extreme
circumstances and does not make the exact methodology to calculate the
Index Price publicly available. Nonetheless, the Sponsors believe that
the Index is designed to limit exposure to trading or price distortion
of any individual Digital Asset Trading Platform that experiences
periods of unusual activity or limited liquidity by discounting, in
real-time, anomalous price movements at individual Digital Asset
Trading Platforms.
The Sponsors believe the Index Provider's selection process for
Constituent Trading Platforms as well as the methodology of the Index
Price's algorithm provides a more accurate picture of XRP price
movements than a simple average of Digital Asset Trading Platform spot
prices, and that the weighting of XRP prices on the Constituent Trading
Platforms limits the inclusion of data that is influenced by temporary
price dislocations that may result from technical problems, limited
liquidity or fraudulent activity elsewhere in the XRP spot market. By
referencing multiple trading venues and weighting them based on trade
activity, the Sponsors believe that the impact of any potential fraud,
manipulation or anomalous trading activity occurring on any single
venue is reduced.
If the Index Price becomes unavailable, or if the Sponsor
determines in good faith that such Index Price does not reflect an
accurate price for XRP, then the Sponsor will, on a best efforts basis,
contact the Index Provider to obtain the Index Price directly from the
Index Provider. If after such contact such Index Price remains
unavailable or the Sponsor continues to believe in good faith that such
Index Price does not reflect an accurate price for XRP, then the
Sponsor will employ a cascading set of rules to determine the Index
Price, as described below in ``Determination of the Index Price When
Index Price is Unavailable.''
The Trust values its XRP for operational purposes by reference to
the Index Price. The Index Price is the value of XRP as represented by
the Index,
[[Page 10014]]
calculated at 4:00 p.m., New York time, on each business day.
Illustrative Example
For the purposes of illustration, outlined below are examples of
how the attributes that impact weighting and adjustments in the
aforementioned methodology may be utilized to generate the Index Price
for a digital asset. For example, Constituent Trading Platforms used to
calculate the Index Price of the digital asset may include trading
platforms such as Coinbase, Kraken, LMAX Digital, and Crypto.com.
The Index Price algorithm, as described above, is designed to
account for manipulation at the outset by only including data from
executed trades on Constituent Trading Platforms that charge trading
fees. Then, the below-listed elements may impact the weighting of the
Constituent Trading Platforms on the Index Price as follows:
Volume Weighting: Each Constituent Trading Platform will
be weighted to appropriately reflect the trading volume share of the
Constituent Trading Platform relative to all the Constituent Trading
Platforms during this same period. For example, an average hourly
weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase, Kraken,
LMAX Digital, and Crypto.com, respectively, would represent each
Constituent Trading Platform's share of trading volume during the same
period.
Inactivity Adjustment: Assume that a Constituent Trading
Platform represented a 14% weighting on the Index Price of the digital
asset, which is based on the per-second calculations of its trading
volume and price-variance relative to the cohort of Constituent Trading
Platforms included in such Index, and then went offline for
approximately two hours. The index algorithm would automatically
recognize inactivity and start de-weighting the Constituent Trading
Platform at the 3-minute mark and continue to do so over a 7-minute
period until its influence was effectively zero, 10 minutes after
becoming inactive. As soon as trading activity resumed at the
Constituent Trading Platform, the index algorithm would re-weight it to
the appropriate weighting based on trading volume and price-variance
relative to the cohort of Constituent Trading Platforms included in the
Index. Due to the period of inactivity, it would re-weight the
Constituent Trading Platform activity to a weight lower than its
original weighting--for example, to 12%.
Price-Variance Weighting: The price-variance weighting
adjustment is a relative measure of each Constituent Trading Platform
versus the cohort of Constituent Trading Platforms. The further the
price at a Constituent Trading Platform is from the mean price of the
cohort, the less influence that trading platform's price will have on
the algorithm that produces the Index Price, as the trading platform
data is discretely weighted in proportion to their variance from the
rest of the trading platforms on a per-second basis and there is no
minimum threshold the variance must meet for this adjustment to take
place. For example, assume that for a one-hour period, the digital
asset's execution prices on one Constituent Trading Platform were
trading more than 7% higher than the average execution prices on
another Constituent Trading Platform. The algorithm is designed to
automatically detect the anomaly (price variance) and reduce that
specific Constituent Trading Platform's weighting during that one-hour
period, ensuring a spot reference price that is more reflective of
broader market activity.
Determination of the Index Price When Index Price Is Unavailable
The Sponsor uses the following cascading set of rules to calculate
the Index Price when the Index Price is unavailable.\20\ For the
avoidance of doubt, the Sponsor will employ the below rules
sequentially and in the order as presented below, should one or more
specific rule(s) fail:
---------------------------------------------------------------------------
\20\ The Sponsor updated these rules on January 11, 2022.
---------------------------------------------------------------------------
1. Index Price = The price set by the Index as of 4:00 p.m., New
York time, on the valuation date.\21\ If the Index becomes unavailable,
or if the Sponsor determines in good faith that the Index does not
reflect an accurate price, then the Sponsor will, on a best efforts
basis, contact the Index Provider to obtain the Index Price directly
from the Index Provider. If after such contact the Index remains
unavailable or the Sponsor continues to believe in good faith that the
Index does not reflect an accurate price, then the Sponsor will employ
the next rule to determine the Index Price. There are no predefined
criteria to make a good faith assessment and it will be made by the
Sponsor in its sole discretion.
---------------------------------------------------------------------------
\21\ The valuation date is any day for which the value of the
XRP in the Trust may be calculated utilizing the Index Price.
---------------------------------------------------------------------------
2. Index Price = The price set by Coin Metrics Real-Time Rate (the
``Secondary Index'') as of 4:00 p.m., New York time, on the valuation
date (the ``Secondary Index Price''). The Secondary Index Price is a
real-time reference rate price, calculated using trade data from
constituent markets selected by Coin Metrics, Inc. (the ``Secondary
Index Provider''). The Secondary Index Price is calculated by applying
weighted-median techniques to such trade data where half the weight is
derived from the trading volume on each constituent market and half is
derived from inverse price variance, where a constituent market with
high price variance as a result of outliers or market anomalies
compared to other constituent markets is assigned a smaller weight. If
the Secondary Index becomes unavailable, or if the Sponsor determines
in good faith that the Secondary Index does not reflect an accurate
price, then the Sponsor will, on a best efforts basis, contact the
Secondary Index Provider to obtain the Secondary Index Price directly
from the Secondary Index Provider. If after such contact the Secondary
Index remains unavailable or the Sponsor continues to believe in good
faith that the Secondary Index does not reflect an accurate price, then
the Sponsor will employ the next rule to determine the Index Price.
There are no predefined criteria to make a good faith assessment and it
will be made by the Sponsor in its sole discretion.
3. Index Price = The price set by the Trust's principal market (as
defined in the Memorandum) (the ``Tertiary Pricing Option'') as of 4:00
p.m., New York time, on the valuation date. The Tertiary Pricing Option
is a spot price derived from the principal market's public data feed
that is believed to be consistently publishing pricing information as
of 4:00 p.m., New York time, and is provided to the Sponsor via an
application programming interface. If the Tertiary Pricing Option
becomes unavailable, or if the Sponsor determines in good faith that
the Tertiary Pricing Option does not reflect an accurate price, then
the Sponsor will, on a best efforts basis, contact the Tertiary Pricing
Provider to obtain the Tertiary Pricing Option directly from the
Tertiary Pricing Provider. If after such contact the Tertiary Pricing
Option remains unavailable after such contact or the Sponsor continues
to believe in good faith that the Tertiary Pricing Option does not
reflect an accurate price, then the Sponsor will employ the next rule
to determine the Index Price. There are no predefined criteria to make
a good faith assessment and it will be made by the Sponsor in its sole
discretion.
4. Index Price = The Sponsor will use its best judgment to
determine a good faith estimate of the Index Price. There are no
predefined criteria to make a good faith assessment and it will be
[[Page 10015]]
made by the Sponsor in its sole discretion.
In the event of a fork, the Index Provider may calculate the Index
Price based on a digital asset that the Sponsor does not believe to be
an appropriate asset of the Trust (i.e., a digital asset other than
XRP).\22\ In this event, the Sponsor has full discretion to use a
different index provider or calculate the Index Price itself using its
best judgment. In such an event, the Exchange will submit a proposed
rule filing to contemplate the assets that would subsequently be held
by the Trust.
---------------------------------------------------------------------------
\22\ According to the Prospectus, the XRP Network operates using
open-source protocols, meaning that any user can download the
software, modify it and then propose that the users and validators
of XRP adopt the modification. When a modification is introduced and
a substantial majority of users and validators' consent to the
modification, the change is implemented and the network remains
uninterrupted. However, if less than a substantial majority of users
and validators' consent to the proposed modification, and the
modification is not compatible with the software prior to its
modification, the consequence would be what is known as a ``hard
fork'' of the XRP Network, with one group running the pre-modified
software and the other running the modified software. The effect of
such a fork would be the existence of two versions of XRP running in
parallel, yet lacking interchangeability.
---------------------------------------------------------------------------
The Sponsor may, in its sole discretion, select a different index
provider, select a different index price provided by the Index
Provider, calculate the Index Price by using the cascading set of rules
set forth above, or change the cascading set of rules set forth above
at any time.\23\
---------------------------------------------------------------------------
\23\ The Sponsor will provide notice of any such changes in the
Trust's periodic or current reports and, if the Sponsor makes such a
change other than on an ad hoc or temporary basis, will file a
proposed rule change with the Commission.
---------------------------------------------------------------------------
The Structure and Operation of the Trust Protects Investors
As described below, the Sponsors believe the structure and
operation of the Trust is designed to mitigate fraudulent and
manipulative acts and practices, and to protect investors and the
public interest. The Sponsors accordingly believe the Commission should
approve the listing and trading of Shares of the Trust.
Design of the Index
The Sponsors believe the Index represents an effective means to
mitigate the impact of potential fraud and manipulation on the
reference price for XRP. The Index operates materially similarly to
CoinDesk Bitcoin Price Index (XBX). The Trust has priced its Shares
based on the Index since the launch of the Trust. The Sponsors believe
that the Index can (i) mitigate the effects of fraud, manipulation and
other anomalous trading activity on the XRP reference rate, (ii)
provide a real-time, volume-weighted fair value of XRP and (iii)
appropriately handle and adjust for non-market related events.
As described in more detail below, the Sponsors believe that the
Index accomplishes those objectives in the following ways:
1. The Index tracks the Digital Asset Trading Platform Market price
through trading activity at ``U.S.-Compliant Trading Platforms''; \24\
---------------------------------------------------------------------------
\24\ ``U.S.-Compliant Trading Platforms'' are trading platforms
in the Digital Asset Trading Platform Market that are required to
comply with applicable U.S. federal and state licensing requirements
and practices regarding AML and KYC regulations. All Constituent
Trading Platforms are U.S.-Compliant Trading Platforms. ``Non-U.S.-
Compliant Trading Platforms'' are all other trading platforms in the
Digital Asset Trading Platform Market. As of the date of this
filing, the U.S.-Compliant Trading Platforms that the Index Provider
considered for inclusion in the Index were Bitfinex, Bitstamp,
Coinbase, Crypto.com, Gemini, Kraken and LMAX Digital. From these
U.S.-Compliant Trading Platforms, the Index Provider then applies
additional Inclusion Criteria to determine the Constituent Trading
Platforms.
---------------------------------------------------------------------------
2. The Index mitigates the impact of instances of fraud,
manipulation, and other anomalous trading activity in real-time through
systematic adjustments;
3. The Index is constructed and maintained by an expert third-party
index provider, allowing for prudent handling of non-market-related
events; and
4. The Index mitigates the impact of instances of fraud,
manipulation, and other anomalous trading activity concentrated on any
one specific trading platform through a cross-trading platform
composite index rate.
1. The Index tracks the Digital Asset Trading Platform Market price
through trading activity at ``U.S.-Compliant Trading Platforms.''
To reduce the risk of fraud, manipulation, and other anomalous
trading activity from impacting the Index, only U.S.-Compliant Trading
Platforms are eligible to be included in the Index.
The Index maintains a minimum number of three trading platforms and
a maximum number of eight trading platforms to track the Digital Asset
Trading Platform Market while offering replicability for traders and
market makers.\25\
---------------------------------------------------------------------------
\25\ According to the Sponsors, the more trading platforms
included in the Index, the more ability there is for traders and
market makers to trade against the Index by arbitraging price
differences. For example, in the event of variances between XRP
prices on Constituent Trading Platforms and non-Constituent Trading
Platforms, arbitrage trading opportunities would exist. These
discrepancies generally consolidate over time, as price differences
across trading platforms are realized and capitalized upon by
traders and market makers.
---------------------------------------------------------------------------
U.S.-Compliant Trading Platforms possess safeguards that protect
against fraud and manipulation. For example, U.S.-Compliant Trading
Platforms regulated by the NYDFS under the BitLicense program are
required to have regulatory requirements to implement measures designed
to effectively detect, prevent, and respond to fraud, attempted fraud,
market manipulation, and similar wrongdoing, and to monitor, control,
investigate and report back to the NYDFS regarding any wrongdoing.\26\
These trading platforms also have the following obligations: \27\
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\26\ See, e.g., ``DFS Takes Action to Deter Fraud and
Manipulation in Virtual Currency Markets,'' available at: https://www.dfs.ny.gov/about/press/pr1802071.htm.
\27\ See ``New York's Final ``BitLicense'' Rule: Overview and
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk,
available at: https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf.
---------------------------------------------------------------------------
Submission of audited financial statements including
income statements, statements of assets/liabilities, insurance, and
banking;
Compliance with capitalization requirements set at NYDFS's
discretion;
Prohibitions against the sale or encumbrance to protect
full reserves of custodian assets;
Fingerprints and photographs of employees with access to
customer funds;
Retention of a qualified Chief Information Security
Officer and annual penetration testing/audits;
Documented business continuity and disaster recovery plan,
independently tested annually; and
Participation in an independent exam by NYDFS.
Other U.S.-Compliant Trading Platforms have voluntarily implemented
certain measures to protect against common forms of market
manipulation.\28\
---------------------------------------------------------------------------
\28\ As of the date of this filing, two of the six Constituent
Trading Platforms, Bitstamp and Coinbase, are regulated by NYDFS.
---------------------------------------------------------------------------
Furthermore, all U.S.-Compliant Trading Platforms are considered
MSBs that are subject to FinCEN's federal and state reporting
requirements that provide additional safeguards. For example,
unscrupulous traders may be less likely to engage in fraudulent or
manipulative acts and practices on trading platforms that (1) report
suspicious activity to FinCEN as money services businesses, (2) report
to state regulators as money transmitters, and/or (3) require customer
identification through KYC procedures. U.S.-
[[Page 10016]]
Compliant Trading Platforms are required to: \29\
---------------------------------------------------------------------------
\29\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsarequirements-msbs.
---------------------------------------------------------------------------
Identify people with ownership stakes or controlling roles
in the MSB;
Establish a formal Anti-Money Laundering (AML) policy in
place with documentation, training, independent review, and a named
compliance officer;
Implement strict customer identification and verification
policies and procedures;
File Suspicious Activity Reports (SARs) for suspicious
customer transactions;
File Currency Transaction Reports (CTRs) for cash-in or
cash-out transactions greater than $10,000; and
Maintain a five-year record of currency exchanges greater
than $1,000 and money transfers greater than $3,000.
2. The Index mitigates the impact of instances of fraud,
manipulation, and other anomalous trading activity in real-time through
systematic adjustments.
The Index is calculated once every second according to a systematic
methodology that relies on observed trading activity on the Constituent
Trading Platforms. While the precise methodology underlying the Index
is currently proprietary, the key elements of the Index are outlined
below:
Volume Weighting: Constituent Trading Platforms with
greater liquidity receive a higher weighting in the Index, increasing
the ability to execute against (i.e., replicate) the Index in the
underlying spot markets.
Price-Variance Weighting: The Index reflects data points
that are discretely weighted in proportion to their variance from the
rest of the Constituent Trading Platforms. As the price at a
Constituent Trading Platform diverges from the prices at the rest of
the Constituent Trading Platforms, its weight in the Index consequently
decreases.
Inactivity Adjustment: The Index algorithm penalizes stale
activity from any given Constituent Trading Platform. When a
Constituent Trading Platform does not have recent trading data, its
weighting in the Index is gradually reduced, until it is de-weighted
entirely. Similarly, once trading activity at the Constituent Trading
Platform resumes, the corresponding weighting for that Constituent
Trading Platform is gradually increased until it reaches the
appropriate level.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Index only includes
executed trades in its calculation and the Index only includes
Constituent Trading Platforms that charge trading fees to its users in
order to attach a real, quantifiable cost to any manipulation attempts.
The Index Provider reviews and periodically updates the Constituent
Trading Platforms included in the Index by utilizing a methodology that
is guided by the IOSCO principles for financial benchmarks.
3. The Index is constructed and maintained by an expert third-party
index provider, allowing for prudent handling of non-market-related
events.
The Index Provider reviews and periodically updates which trading
platforms are included in the Index by utilizing a methodology that is
guided by the IOSCO principles for financial benchmarks.
According to the Index methodology, for a trading platform to
become a Constituent Trading Platform, it must satisfy each of the
following Inclusion Criteria:
Sufficient USD or USDC liquidity relative to the size of
the listed assets;
No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the trading
platform's eligibility requirements to trade;
No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
Real-time price discovery;
Limited or no capital controls;
Transparent ownership including a publicly-known ownership
entity;
Publicly available language and policies addressing legal
and regulatory compliance in the U.S., including KYC, AML and other
policies designed to comply with relevant regulations that might apply
to it;
Be a trading platform that is licensed and able to service
investors in one or more of the following jurisdictions:
[cir] United States
[cir] United Kingdom
[cir] European Union
[cir] Hong Kong
[cir] Singapore; and
Offer programmatic spot trading of the trading pair and
reliably publish trade prices and volumes on a real-time basis through
Rest and Websocket APIs.
Although the Index methodology is designed to operate without any
human interference, rare events would justify manual intervention.
Manual intervention would only be in response to ``non-market-related
events'' (e.g., halting of deposits or withdrawals of funds,
unannounced closure of trading platform operations, insolvency,
compromise of user funds, etc.). In the event that such an intervention
is necessary, the Index Provider would issue a public announcement
through its website, API and other established communication channels
with its clients.\30\
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\30\ To the extent any such intervention has a material impact
on the Trust, the Sponsor will also issue a public announcement.
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4. The Index mitigates the impact of instances of fraud,
manipulation and other anomalous trading activity concentrated on any
one specific trading platform through a cross-trading platform
composite index rate.
The Index is based on the price and volume data of multiple U.S.-
Compliant Trading Platforms that satisfy the Index Provider's Inclusion
Criteria. By referencing multiple trading venues and weighting them
based on trade activity, the impact of any potential fraud,
manipulation, or anomalous trading activity occurring on any single
venue is reduced. Specifically, the effects of fraud, manipulation, or
anomalous trading activity occurring on any single venue are de-
weighted and consequently diluted by non-anomalous trading activity
from other Constituent Trading Platforms.
Although the Index is designed to accurately capture the market
price of XRP, third parties may be able to purchase and sell XRP on
public or private markets not included among the constituent Digital
Asset Trading Platforms of the Index, and such transactions may take
place at prices materially higher or lower than the Index Price.
Moreover, there may be variances in the prices of XRP on the various
Digital Asset Trading Platforms, including as a result of differences
in fee structures or administrative procedures on different Digital
Asset Trading Platforms. For example, based on data provided by the
Index Provider, on any given day from August 8, 2024 to September 30,
2024, the maximum differential between the 4:00 p.m., New York time
spot price of any single Digital Asset Trading Platform included in the
Index and the Index Price was 0.28% and the average of the maximum
differentials of the 4:00 p.m., New York time spot price of each
Digital Asset Trading Platform included in the Index and the Index
Price was 0.22%. During this same period, the average differential
between the 4:00 p.m., New York time spot prices of all the Digital
Asset Trading Platforms included in the Index and the Index Price was
0.001%. All Digital Asset Trading Platforms that were included in the
Index throughout
[[Page 10017]]
the period were considered in this analysis.
Since September 5, 2024, the Trust has consistently priced its
Shares at 4:00 p.m., E.T. based on the Index Price. While that
methodology has been known to the market, the Sponsors believe that,
even if efforts to manipulate the price of XRP at 4:00 p.m., E.T. were
successful on any particular trading platform, such activity had a
negligible effect on the pricing of the Trust, due to the controls
embedded in the structure of the Index.
Accordingly, the Sponsors believe that the Index has proven its
ability to (i) mitigate the effects of fraud, manipulation and other
anomalous trading activity on the XRP reference rate, (ii) provide a
real-time, volume-weighted fair value of XRP and (iii) appropriately
handle and adjust for non-market related events.
Creation and Redemption of Shares
Authorized Participants may submit orders to create or redeem
Shares under procedures for ``Cash Orders.''
The Authorized Participants will deliver only cash to create Shares
and will receive only cash when redeeming Shares. Further, Authorized
Participants will not directly or indirectly purchase, hold, deliver,
or receive XRP as part of the creation or redemption process or
otherwise direct the Trust or a third party with respect to purchasing,
holding, delivering, or receiving XRP as part of the creation or
redemption process.
The Trust will create Shares by receiving XRP from a third party
that is not the Authorized Participant, and the Trust, or an affiliate
of the Trust (and in any event not the Authorized Participant), is
responsible for selecting the third party to deliver the XRP. Further,
the third party will not be acting as an agent of the Authorized
Participant with respect to the delivery of the XRP to the Trust nor
acting at the direction of the Authorized Participant with respect to
the delivery of the XRP to the Trust. The Trust will redeem Shares by
delivering XRP to a third party that is not the Authorized Participant,
and the Trust, or an affiliate of the Trust (and in any event not the
Authorized Participant), is responsible for selecting the third party
to receive the XRP. Further, the third party will not be acting as an
agent of the Authorized Participant with respect to the receipt of the
XRP from the Trust nor acting at the direction of the Authorized
Participant with respect to the receipt of the XRP from the Trust.
Cash Orders are made through the participation of a Liquidity
Provider \31\ who obtains or receives XRP in exchange for cash, and are
facilitated by the Transfer Agent and Grayscale Investments Sponsors,
LLC, acting in its capacity as the Liquidity Engager. Liquidity
Providers are not party to the Participant Agreements (as defined
below) and are engaged separately by the Liquidity Engager.
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\31\ A ``Liquidity Provider'' means one or more eligible
companies that facilitate the purchase and sale of XRP in connection
with creations or redemptions pursuant to Cash Orders. The Liquidity
Providers with which Grayscale Investments Sponsors, LLC, acting
other than in its capacity as the Sponsor (in such other capacity,
the ``Liquidity Engager'') will engage in XRP transactions are third
parties that are not affiliated with the Sponsor or the Trust and
are not acting as agents of the Trust, the Sponsor, or any
Authorized Participant, and all transactions will be done on an
arms-length basis. Except for the contractual relationships between
each Liquidity Provider and Grayscale Investments Sponsors, LLC in
its capacity as the Liquidity Engager, there is no contractual
relationship between each Liquidity Provider and the Trust, the
Sponsor, or any Authorized Participant. When seeking to buy XRP in
connection with creations or sell XRP in connection with
redemptions, the Liquidity Engager will seek to obtain commercially
reasonable prices and terms from the approved Liquidity Providers.
Once agreed upon, the transaction will generally occur on an ``over-
the-counter'' basis.
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According to the Registration Statement, the Trust creates Baskets
(as described below) of Shares only upon receipt of XRP and redeems
Shares only by distributing XRP. ``Authorized Participants'' are the
only persons that may place orders to create and redeem Baskets. Each
Authorized Participant must (i) be a registered broker-dealer and (ii)
enter into an agreement with the Sponsor and Transfer Agent that
provides the procedures for the creation and redemption of Baskets and
for the delivery of XRP required for the creation and redemption of
Baskets via a Liquidity Provider (each, a ``Participant Agreement'').
An Authorized Participant may act for its own account or as agent for
broker-dealers, custodians and other securities market participants
that wish to create or redeem Baskets. Shareholders who are not
Authorized Participants will only be able to create or redeem their
Shares through an Authorized Participant.
The Trust issues Shares to and redeems Shares from Authorized
Participants on an ongoing basis, but only in one or more ``Baskets''
(with a Basket being a block of 10,000 Shares). The Trust will not
issue fractions of a Basket.
The creation and redemption of Baskets will be made only in
exchange for the delivery to the Trust, or the distribution by the
Trust, of the number of whole and fractional XRP represented by each
Basket being created or redeemed, which is determined by dividing (x)
the number of XRP owned by the Trust at 4:00 p.m., New York time, on
the trade date of a creation or redemption order, after deducting the
number of XRP representing the U.S. dollar value of accrued but unpaid
fees and expenses of the Trust (converted using the Index Price at such
time, and carried to the eighth decimal place), by (y) the number of
Shares outstanding at such time (with the quotient so obtained
calculated to one one-hundred-millionth of one XRP (i.e., carried to
the eighth decimal place)), and multiplying such quotient by 10,000
(the ``Basket Amount''). The U.S. dollar value of a Basket is
calculated by multiplying the Basket Amount by the Index Price as of
the trade date (the ``Basket NAV''). The Basket NAV multiplied by the
number of Baskets being created or redeemed is referred to as the
``Total Basket NAV.'' All questions as to the calculation of the Basket
Amount will be conclusively determined by the Sponsor and will be final
and binding on all persons interested in the Trust. The number of XRP
represented by a Share will gradually decrease over time as the Trust's
XRP are used to pay the Trust's expenses. As of September 30, 2024,
each Share represented approximately 19.9659 XRP.
The creation of Baskets requires the delivery by the Authorized
Participant of a cash amount equivalent to the Total Basket Amount and
the redemption of Baskets requires the distribution to the Authorized
Participant of a cash amount equivalent to the Total Basket Amount.
Although the Trust creates Baskets only upon the receipt of XRP,
and redeems Baskets only by distributing XRP, an Authorized Participant
will submit Cash Orders, pursuant to which the Authorized Participant
will deposit cash with, or accept cash from, the Transfer Agent in
connection with the creation and redemption of Baskets.
Cash Orders will be facilitated by the Transfer Agent and Liquidity
Engager, acting other than in its capacity as Sponsor. On an order-by-
order basis, the Liquidity Engager will engage one or more Liquidity
Providers to obtain or receive XRP in exchange for cash in connection
with such order, as described in more detail below.
Unless the Sponsor requires that a Cash Order be effected at actual
execution prices (an ``Actual Execution Cash Order''),\32\ each
Authorized
[[Page 10018]]
Participant that submits a Cash Order to create or redeem Baskets (a
``Variable Fee Cash Order'') \33\ will pay a fee (the ``Variable Fee'')
based on the Total Basket NAV, and any price differential of XRP
between the trade date and the settlement date will be borne solely by
the Liquidity Provider until such XRP have been received or liquidated
by the Trust. The Variable Fee is intended to cover all of a Liquidity
Provider's expenses in connection with the creation or redemption
order, including any XRP trading platform fees that the Liquidity
Provider incurs in connection with buying or selling XRP. The amount
may be changed by the Sponsor in its sole discretion at any time, and
Liquidity Providers will communicate to the Sponsor in advance the
Variable Fee they would be willing to accept in connection with a
Variable Fee Cash Order, based on market conditions and other factors
existing at the time of such Variable Fee Cash Order.
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\32\ With respect to a creation or redemption pursuant to an
Actual Execution Cash Order, as between the Trust and an Authorized
Participant, the Authorized Participant is responsible for the
dollar cost of the difference between the XRP price utilized in
calculating Total Basket NAV on the trade date and the price at
which the Trust acquires or disposes of the XRP on the settlement
date. If the price realized in acquiring or disposing of the
corresponding Total Basket Amount is higher than the Total Basket
NAV, the Authorized Participant will bear the dollar cost of such
difference, in the case of a creation, by delivering cash in the
amount of such shortfall (the ``Additional Creation Cash'') to the
Cash Account or, in the case of a redemption, with the amount of
cash to be delivered to the Authorized Participant being reduced by
the amount of such difference (the ``Redemption Cash Shortfall'').
If the price realized in acquiring the corresponding Total Basket
Amount is lower than the Total Basket NAV, the Authorized
Participant will benefit from such difference, with the Trust
promptly returning cash in the amount of such excess (the ``Excess
Creation Cash'') to the Authorized Participant.
\33\ Unless the Sponsor determines otherwise in its sole
discretion based on market conditions and other factors existing at
the time of such Cash Order, all creations and redemptions pursuant
to Cash Orders are expected to be executed as Variable Fee Cash
Orders, and any price differential of XRP between the trade date and
the settlement date will be borne solely by the Liquidity Provider
until such XRP have been received by the Trust.
---------------------------------------------------------------------------
Alternatively, the Sponsor may require that a Cash Order be
effected as an Actual Execution Cash Order, in its sole discretion
based on market conditions and other factors existing at the time of
such Cash Order, and under such circumstances, any price differential
of XRP between the trade date and the settlement date will be borne
solely by the Authorized Participant until such XRP have been received
or liquidated by the Trust.
In the case of creations, to transfer the Total Basket Amount to
the Trust's Digital Asset Account, the Liquidity Provider will transfer
XRP to one of the public key addresses associated with the Digital
Asset Account and as provided by the Sponsor. In the case of
redemptions, the same procedure is conducted, but in reverse, using the
public key addresses associated with the wallet of the Liquidity
Provider and as provided by such party. All such transactions will be
conducted on the XRP Blockchain and parties acknowledge and agree that
such transfers may be irreversible if done incorrectly.
Authorized Participants do not pay a transaction fee to the Trust
in connection with the creation or redemption of Baskets, but there may
be transaction fees associated with the validation of the transfer of
XRP by the XRP Network, which will be paid by the Custodian in the case
of redemptions and the Authorized Participant or the Liquidity Provider
in the case of creations. Service providers may charge Authorized
Participants administrative fees for order placement and other services
related to creation of Baskets. As discussed above, Authorized
Participants will also pay the Variable Fee in connection with Variable
Fee Cash Orders. Under certain circumstances, Authorized Participants
may also be required to deposit additional cash in the Cash Account, or
be entitled to receive excess cash from the Cash Account, in connection
with creations and redemptions pursuant to Actual Execution Cash
Orders. Authorized Participants will receive no fees, commissions or
other form of compensation or inducement of any kind from either the
Sponsor or the Trust and no such person has any obligation or
responsibility to the Sponsor or the Trust to effect any sale or resale
of Shares.
The following is a summary of the procedures for the creation and
redemption of Baskets.
Creation Procedures
On any business day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Baskets.
Cash Orders for creation must be placed with the Transfer Agent no
later than 1:59:59 p.m., New York time.
The Sponsor may in its sole discretion limit the number of Shares
created pursuant to Cash Orders on any specified day without notice to
the Authorized Participants and may direct the Marketing Agent to
reject any Cash Orders in excess of such capped amount. In exercising
its discretion to limit the number of Shares created pursuant to Cash
Orders, the Sponsor expects to take into consideration a number of
factors, including the availability of Liquidity Providers to
facilitate Cash Orders and the cost of processing Cash Orders.
Creations under Cash Orders will take place as follows, where ``T''
is the trade date and each day in the sequence must be a business day.
Before a creation order is placed, the Sponsor determines if such
creation order will be a Variable Fee Cash Order or an Actual Execution
Cash Order, which determination is communicated to the Authorized
Participant.
------------------------------------------------------------------------
Settlement date (T+1, or T+2,
Trade date (T) as established at the time of
order placement)
------------------------------------------------------------------------
The Authorized Participant The Authorized
places a creation order with the Participant delivers to the
Transfer Agent. Cash Account: \1\
The Marketing Agent accepts (x) in the case of a Variable
(or rejects) the creation order, which Fee Cash Order, the Total
is communicated to the Authorized Basket NAV, plus any Variable
Participant by the Transfer Agent. Fee; or
The Sponsor notifies the (y) in the case of an Actual
Liquidity Provider of the creation Execution Cash Order, the
order.. Total Basket NAV, plus any
The Sponsor determines the Additional Creation Cash, less
Total Basket NAV and any Variable Fee any Excess Creation Cash, if
and Additional Creation Cash as soon applicable (such amount, as
as practicable after 4:00 p.m., New applicable, the ``Required
York time. Creation Cash'').
The Liquidity Provider
transfers the Total Basket
Amount to the Trust's Digital
Asset Account.
Once the Trust is in
simultaneous possession of (x)
the Total Basket Amount and
(y) the Required Creation
Cash, the Trust issues the
aggregate number of Shares
corresponding to the Baskets
ordered by the Authorized
Participant, which the
Transfer Agent holds for the
benefit of the Authorized
Participant.
[[Page 10019]]
Cash equal to the
Required Creation Cash is
delivered to the Liquidity
Provider from the Cash
Account.
The Transfer Agent
delivers Shares to the
Authorized Participant by
crediting the number of
Baskets created to the
Authorized Participant's DTC
account.
------------------------------------------------------------------------
\1\ The ``Cash Account'' means the account maintained by the Transfer
Agent for purposes of receiving cash from, and distributing cash to,
Authorized Participants in connection with creations and redemptions
pursuant to Cash Orders. For the avoidance of doubt, the Trust shall
have no interest (beneficial, equitable or otherwise) in the Cash
Account or any cash held therein.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place a redemption order
specifying the number of Baskets to be redeemed.
The redemption of Shares pursuant to Cash Orders will only take
place if approved by the Sponsor in writing, in its sole discretion and
on a case-by-case basis. In exercising its discretion to approve the
redemption of Shares pursuant to Cash Orders, the Sponsor expects to
take into consideration a number of factors, including the availability
of Liquidity Providers to facilitate Cash Orders and the cost of
processing Cash Orders.
Cash Orders for redemption must be placed no later than 1:59:59
p.m., New York time on each business day. The Authorized Participants
may only redeem Baskets and cannot redeem any Shares in an amount less
than a Basket.
Redemptions under Cash Orders will take place as follows, where
``T'' is the trade date and each day in the sequence must be a business
day. Before a redemption order is placed, the Sponsor determines if
such redemption order will be a Variable Fee Cash Order or an Actual
Execution Cash Order, which determination is communicated to the
Authorized Participant.
------------------------------------------------------------------------
Settlement date (T+1 (or T+2 on
Trade date (T) case by case basis, as approved
by Sponsor))
------------------------------------------------------------------------
The Authorized Participant The Authorized
places a redemption order with the Participant delivers Baskets
Transfer Agent. to be redeemed from its DTC
The Marketing Agent accepts account to the Transfer Agent.
(or rejects) the redemption order, The Liquidity Provider
which is communicated to the delivers to the Cash Account:
Authorized Participant by the Transfer (x) in the case of a Variable
Agent. Fee Cash Order, the Total
The Sponsor notifies the Basket NAV less any Variable
Liquidity Provider of the redemption Fee; or
order.. (y) in the case of an Actual
The Sponsor determines the Execution Cash Order, the
Total Basket NAV and, in the case of a actual proceeds to the Trust
Variable Fee Cash Order, any Variable from the liquidation of the
Fee, as soon as practicable after 4:00 Total Basket Amount (such
p.m., New York time. amount, as applicable, the
``Required Redemption Cash'').
Once the Trust is in
simultaneous possession of (x)
the Total Basket Amount and
(y) the Required Redemption
Cash, the Transfer Agent
cancels the Shares comprising
the number of Baskets redeemed
by the Authorized Participant.
The Custodian sends
the Liquidity Provider the
Total Basket Amount, and cash
equal to the Required
Redemption Cash is delivered
to the Authorized Participant
from the Cash Account.
------------------------------------------------------------------------
Suspension or Rejection of Orders and Total Basket Amount
The creation or redemption of Shares may be suspended generally, or
refused with respect to particular requested creations or redemptions,
during any period when the transfer books of the Transfer Agent are
closed or if circumstances outside the control of the Sponsor or its
delegates make it for all practicable purposes not feasible to process
creation orders or redemption orders or for any other reason at any
time or from time to time.\34\ The Transfer Agent may reject an order
or, after accepting an order, may cancel such order if: (i) such order
is not presented in proper form as described in the Participant
Agreement, (ii) the transfer of the Total Basket Amount comes from an
account other than a XRP wallet address that is known to the Custodian
as belonging to a Liquidity Provider or (iii) the fulfillment of the
order, in the opinion of counsel, might be unlawful, among other
reasons. None of the Sponsor or its delegates will be liable for the
suspension, rejection or acceptance of any creation order or redemption
order.
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\34\ Extenuating circumstances outside of the control of the
Sponsor and its delegates or that could cause the transfer books of
the Transfer Agent to be closed are outlined in the Participant
Agreement and include, for example, public service or utility
problems, power outages resulting in telephone, telecopy and
computer failures, acts of God such as fires, floods or extreme
weather conditions, market conditions or activities causing trading
halts, systems failures involving computer or other information
systems, including any failures or outages of the XRP Network,
affecting the Authorized Participant, the Sponsor, the Trust, the
Transfer Agent, the Marketing Agent and the Custodian and similar
extraordinary events.
---------------------------------------------------------------------------
Availability of Information
The Trust's website (https://grayscale.com/crypto-products/grayscale-xrp-trust/) will include quantitative information on a per
Share basis updated on a daily basis, including, (i) the current NAV
per Share daily and the prior business day's NAV per Share and the
reported closing price of the Shares; (ii) the mid-point of the bid-ask
price \35\ as of the time the NAV per Share is calculated (``Bid-Ask
Price'') and a calculation of the premium or discount of such price
against such NAV per Share; and (iii) data in chart format displaying
the frequency distribution of discounts and premiums of the daily Bid-
Ask Price
[[Page 10020]]
against the NAV per Share, within appropriate ranges, for each of the
four previous calendar quarters (or for as long as the Trust has been
trading as an ETP if shorter). In addition, on each business day the
Trust's website will provide pricing information for the Shares.
---------------------------------------------------------------------------
\35\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day NAV.
---------------------------------------------------------------------------
One or more major market data vendors, will provide an intra-day
indicative value (``IIV'') per Share updated every 15 seconds, as
calculated by the Exchange or a third party financial data provider
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m.,
E.T.). The IIV will be calculated using the same methodology as the NAV
per Share of the Trust (as described above), specifically by using the
prior day's closing NAV per Share as a base and updating that value
during the NYSE Arca Core Trading Session to reflect changes in the
value of the Index during the trading day.
The IIV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real-time update of the NAV per
Share, which will be calculated only once at the end of each trading
day. The IIV will be widely disseminated on a per Share basis every 15
seconds during the NYSE Arca Core Trading Session by one or more major
market data vendors. In addition, the IIV will be available through on-
line information services.
The NAV for the Trust will be calculated by the Sponsor once a day
and will be disseminated daily to all market participants at the same
time. To the extent that the Sponsor has utilized the cascading set of
rules described in ``Index Price'' above, the Trust's website will note
the valuation methodology used and the price per XRP resulting from
such calculation. Quotation and last-sale information regarding the
Shares will be disseminated through the facilities of the Consolidated
Tape Association (``CTA'').
Quotation and last sale information for XRP will be widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. In addition, real-time price (and volume) data
for XRP is available by subscription from Reuters and Bloomberg. The
spot price of XRP is available on a 24-hour basis from major market
data vendors, including Bloomberg and Reuters. Information relating to
trading, including price and volume information, in XRP will be
available from major market data vendors and from the trading platforms
on which XRP are traded. The normal trading hours for Digital Asset
Trading Platforms are 24-hours per day, 365-days per year.
On each business day, the Sponsor will publish the Index Price, the
Trust's NAV, and the NAV per Share on the Trust's website as soon as
practicable after its determination. If the NAV and NAV per Share have
been calculated using a price per XRP other than the Index Price for
such Evaluation Time, the publication on the Trust's website will note
the valuation methodology used and the price per XRP resulting from
such calculation.
The Trust will provide website disclosure of its NAV daily. The
website disclosure of the Trust's NAV will occur at the same time as
the disclosure by the Sponsor of the NAV to Authorized Participants so
that all market participants are provided such portfolio information at
the same time. Therefore, the same portfolio information will be
provided on the public website as well as in electronic files provided
to Authorized Participants. Accordingly, each investor will have access
to the current NAV of the Trust through the Trust's website, as well as
from one or more major market data vendors.
The value of the Index, as well as additional information regarding
the Index, will be available on a continuous basis.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services.
Information regarding the previous day's closing price and trading
volume information for the Shares will be published daily in the
financial section of newspapers.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting
and entry of orders in equity securities traded on the NYSE Arca
Marketplace is $0.01, with the exception of securities that are priced
less than $1.00, for which the MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting
as registered Market Makers in Commodity-Based Trust Shares to
facilitate surveillance. The Exchange represents that, for initial and
continued listing, the Trust will be in compliance with Rule 10A-3 \36\
under the Act, as provided by NYSE Arca Rule 5.3-E. A minimum of
100,000 Shares of the Trust will be outstanding at the commencement of
trading on the Exchange.
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\36\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the Act, the Trust relies on the exemption
contained in Rule 10A-3(c)(7).
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Trading Halts
With respect to trading halts, the Exchange may halt or suspend
trading in the Shares of the Trust in accordance with its rules.
Additionally, trading in Shares of the Trust will be halted if the
circuit breaker parameters in NYSE Arca Rule 7.12-E have been reached.
Trading also may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable.
The Exchange may halt trading during the day in which an
interruption to the dissemination of the IIV or the value of the Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption. In addition, if the Exchange
becomes aware that the NAV per Share is not disseminated to all market
participants at the same time, it will halt trading in the Shares until
such time as the NAV per Share is available to all market participants.
Surveillance
The Exchange represents that trading in the Shares of the Trust on
the Exchange will be subject to the existing trading surveillances
administered by the Exchange, as well as cross-market surveillances
administered by the Financial Industry Regulatory Authority (``FINRA'')
on behalf of the Exchange, which are designed to detect potential
violations of Exchange rules and applicable federal securities laws
with respect to the Shares of the Trust trading on the Exchange.\37\
The Exchange represents that these procedures are adequate to properly
monitor Exchange
[[Page 10021]]
trading of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and federal securities laws with respect
to the Shares of the Trust trading on the Exchange.
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\37\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The existing surveillances referred to above generally focus on
detecting securities trading outside their normal trading patterns,
which could be indicative of manipulative or other violative activity
with respect to the Shares of the Trust. When such situations are
detected, surveillance analysis follows and investigations are opened,
where appropriate, to review the behavior of all relevant parties for
all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate regarding trading in the Shares with other markets and
other entities that are members of the Intermarket Surveillance Group
(``ISG''). The Exchange or FINRA, on behalf of the Exchange, or both,
may obtain trading information regarding trading in the Shares and XRP
derivatives from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares and XRP
derivatives from markets and other entities with which the Exchange has
in place a comprehensive surveillance sharing agreement (``CSSA'').\38\
The Exchange is also able to obtain information from ETP Holders
regarding their trading (as principal or agent) in the Shares and any
underlying XRP, options on XRP futures, or any other XRP
derivatives.\39\
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\38\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Trust may trade on markets that are members of ISG or with which the
Exchange has in place a CSSA.
\39\ See NYSE Arca Rule 10.8210.
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In addition, under NYSE Arca Rule 8.201-E(g), an ETP Holder acting
as a registered Market Maker in the Shares is required to provide the
Exchange with information relating to its accounts for trading in any
underlying commodity, related futures or options on futures, or any
other related derivatives. Commentary .04 of NYSE Arca Rule 11.3-E
requires an ETP Holder acting as a registered Market Maker, and its
affiliates, in the Shares to establish, maintain and enforce written
policies and procedures reasonably designed to prevent the misuse of
any material nonpublic information with respect to such products, any
components of the related products, any physical asset or commodity
underlying the product, applicable currencies, underlying indexes,
related futures or options on futures, and any related derivative
instruments (including the Shares). As a general matter, the Exchange
has regulatory jurisdiction over its ETP Holders and their associated
persons, which include any person or entity controlling an ETP Holder.
To the extent the Exchange may be found to lack jurisdiction over a
subsidiary or affiliate of an ETP Holder that does business only in
commodities or futures contracts and that subsidiary or affiliate is a
member of another regulatory organization, the Exchange could obtain
information regarding the activities of such subsidiary or affiliate
through surveillance sharing agreements with regulatory organizations
to the extent the Exchange has such an agreement with that regulatory
organization.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the index, portfolio, or reference assets of the
Trust, (b) limitations on index or portfolio holdings or reference
assets, or (c) the applicability of Exchange listing rules specified in
this rule filing shall constitute continued listing requirements for
listing the Shares on the Exchange.
The Sponsor has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an ``Information Bulletin'' of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
the procedures for creations of Shares in Baskets; (2) NYSE Arca Rule
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to
learn the essential facts relating to every customer prior to trading
the Shares; (3) information regarding how the value of the Index and
NAV are disseminated; (4) the possibility that trading spreads and the
resulting premium or discount on the Shares may widen during the
Opening and Late Trading Sessions, when an updated IIV will not be
calculated or publicly disseminated; (5) the requirement that members
deliver a prospectus to investors purchasing newly issues Shares prior
to or concurrently with the confirmation of a transaction; and (6)
trading information. The Exchange notes that investors purchasing
Shares directly from the Trust will receive a prospectus.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses as described in the Memorandum.
The Information Bulletin will disclose that information about the
Shares of the Trust is publicly available on the Trust's website.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \40\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\40\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Rule 8.201-E. The
Exchange has in place certain surveillance procedures that are adequate
to properly monitor trading in the Shares on the Exchange in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to the Shares of the Trust
trading on the Exchange. The Exchange or FINRA, on behalf of the
Exchange, or both, will communicate as needed regarding trading in the
Shares with other markets that are members of the ISG, and the Exchange
or FINRA, on behalf of the Exchange, or both, may obtain trading
information regarding trading in the Shares from such markets. In
addition, the Exchange may obtain information regarding trading in the
Shares from markets with which the Exchange has in place a CSSA. Also,
pursuant to NYSE Arca rules, the Exchange is able to obtain information
from ETP Holders regarding their trading (as principal or agent) in the
Shares and any underlying
[[Page 10022]]
XRP, options on XRP futures, or any XRP derivatives.
The proposed rule change is also designed to prevent fraudulent and
manipulative acts and practices in connection with trading in the
Shares on the Exchange because it (1) tracks the Digital Asset Trading
Platform Market price through trading activity at U.S.-Compliant
Trading Platforms; (2) mitigates the impact of instances of fraud,
manipulation, and other anomalous trading activity in real-time through
systematic adjustments; (3) is constructed and maintained by an expert
third-party index provider, allowing for prudent handling of non-
market-related events; and (4) mitigates the impact of instances of
fraud, manipulation, and other anomalous trading activity concentrated
on any one specific trading platform through a cross-trading platform
composite index rate. The Trust has used the Index to price the Shares
since the launch of the Trust, and the Index has proven its ability to
(i) mitigate the effects of fraud, manipulation and other anomalous
trading activity from impacting the XRP reference rate, (ii) provide a
real-time, volume-weighted fair value of XRP and (iii) appropriately
handle and adjust for non-market related events.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that there is a considerable amount of XRP price and market information
available on public websites and through professional and subscription
services. Investors may obtain, on a 24-hour basis, XRP pricing
information based on the spot price for XRP from various financial
information service providers. The closing price and settlement prices
of XRP are readily available from the Digital Asset Trading Platforms
and other publicly available websites. In addition, such prices are
published in public sources, or on-line information services such as
Bloomberg and Reuters. The NAV per Share will be calculated daily and
made available to all market participants at the same time. The Trust
will provide website disclosure of its NAV daily. One or more major
market data vendors will disseminate for the Trust on a daily basis
information with respect to the most recent NAV per Share and Shares
outstanding. In addition, if the Exchange becomes aware that the NAV
per Share is not disseminated to all market participants at the same
time, it will halt trading in the Shares until such time as the NAV is
available to all market participants. Quotation and last-sale
information regarding the Shares will be disseminated through the
facilities of the CTA. The IIV will be widely disseminated on a per
Share basis every 15 seconds during the NYSE Arca Core Trading Session
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major
market data vendors. The Exchange represents that the Exchange may halt
trading during the day in which an interruption to the dissemination of
the IIV or the value of the Index occurs. If the interruption to the
dissemination of the IIV or the value of the Index persists past the
trading day in which it occurred, the Exchange will halt trading no
later than the beginning of the trading day following the interruption.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares on the Exchange and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a CSSA. In addition, as
noted above, investors will have ready access to information regarding
the Trust's NAV, IIV, and quotation and last sale information for the
Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product, and the first such product
based on XRP, which will enhance competition among market participants,
to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NYSEARCA-2025-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NYSEARCA-2025-08. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or
[[Page 10023]]
withhold entirely from publication submitted material that is obscene
or subject to copyright protection. All submissions should refer to
file number SR-NYSEARCA-2025-08 and should be submitted on or before
March 13, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-02823 Filed 2-19-25; 8:45 am]
BILLING CODE 8011-01-P