21Shares has made unscheduled reconstitutions to two crypto basket ETPs, removing Ripple’s XRP as an underlying component from its ‘Bitwise Select 10’ and ‘Crypto Basket Index’ products.
The SEC has filed a complaint in US District Court against XRP’s developer, Ripple Labs.
The move is aimed at shielding investors from liquidity issues and potential losses in XRP following an announcement from the SEC that it would be suing the cryptocurrency’s developer, Ripple Labs, over unlawfully selling the token to retail investors.
On 22 December, the SEC filed a complaint in the Southern District Court of New York, alleging that XRP is actually a security and, as such, its unregistered issuance broke federal securities laws.
Ripple raised approximately $1.38 billion through the sale of XRP tokens over the past seven years. According to the SEC, the firm then used the proceeds to “fund its operations without disclosing how it was doing so, or the full extent of its payments to others to assist in its efforts to develop a ‘use’ for XRP and maintain XRP secondary trading markets.”
Marc P. Berger, Deputy Director of the SEC’s Enforcement Division, said, “The registration requirements are designed to ensure that potential investors – including, importantly, retail investors – receive important information about an issuer’s business operations and financial condition.
“Here, we allege that Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result investors lacked information to which they were entitled.”
XRP’s price has fallen more than 50% since the SEC filed its complaint and is trading around $0.21 per token, as of 30 December.
Ripple plans to defend the charges, potentially setting up a multi-year court battle against the SEC.
Intervention
The two affected ETPs are the 21Shares Bitwise Select 10 ETP (KEYS SW) and the 21Shares Crypto Basket Index ETP (HODL SW). KEYS and HODL house $5 million and $45m in assets under management, respectively, and each ETP comes with an expense ratio of 2.50%.
KEYs tracks the Bitwise Select 10 Large Cap Crypto Index which consists of the five largest cryptocurrencies by market cap – as of the beginning of December, the constituents were Bitcoin (49.0%), Ethereum (27.2%), XRP (16.4%), Bitcoin Cash (4.0%), and Litecoin (3.3%). On 23 December, the index underwent a special review. XRP was removed and its weight was redistributed amongst the remaining constituents.
HODL, meanwhile, tracks the 21Shares Crypto Basket Index which consists of the top ten cryptocurrencies ranked by inflation-adjusted market capitalization – as of the beginning of December, the largest constituents were Bitcoin (78.5%), Ethereum (10.8%), XRP (3.7%), Bitcoin Cash (1.9%), and Litecoin (1.4%). On 24 December, the index also underwent a special review. XRP was removed and its weight was redistributed proportionally to Bitcoin and Ethereum.
Hany Rashwan CEO and Chairman of 21Shares, commented, “As part of our quick intervention, the board was able to remove XRP using its broad network of liquidity providers in order to liquidate its XRP position with the ultimate aim of reducing market impact and protecting investors.
“Thanks to our trusted partners, our main objective remains to replicate accurately our index and we were able to successfully conduct this ad hoc task despite the difficult trading conditions.”
Investors should be warned of the potential for future volatility in single crypto-asset ETPs tracking XRP. These include the 21Shares Ripple XRP ETP (AXRP SW) and CoinShares’ XRP Tracker (COINXRPE NGM), each housing around $5m AUM.