The information contained in this Crypto Asset Statement was last updated on October 27, 2022.
No securities regulatory authority in Canada has expressed an opinion about XRP or any of the other Crypto Contracts or Crypto Assets made available through Newton Crypto Ltd. (Newton) on the Newton Platform, including an opinion that XRP itself is not a security and/or derivative. Changes to applicable law may adversely affect the use, transfer, exchange, or value of any of your crypto assets, and such changes may be sudden and without notice.
Newton Crypto Ltd. (the “Company”) is registered as a restricted dealer in each province and territory of Canada, subject to specific terms and conditions contained in the exemptive relief decision Re Newton Crypto Ltd. dated August 15, 2022. (the “Decision Document”), which permit Newton to operate a crypto asset trading platform on which Canadian residents can buy, sell and hold crypto assets (“crypto”) that have been approved by Newton. Pursuant to the terms and conditions in the Decision Document, the Company is prohibited from listing any crypto asset that qualifies as a “security” under applicable Canadian securities laws. This Crypto Asset Statement sets out the factors reviewed by the Company in analyzing whether Ripple (“XRP”) may be a “security” under Canadian securities laws.
This overview provides a summary of certain risks associated with XRP and is not an exhaustive description or summary of these risks and, in addition, does not take into account an individual’s particular situation or risk tolerance. Investors are encouraged to conduct their own research prior to trading any crypto asset.
Newton users should read the Newton Platform Risk Statement for additional discussion of general risks associated with crypto assets made available through the Newton platform. A copy of the Newton Platform Risk Statement acknowledged by you is available in your account in the “Statements & Reports” section.
Token Description & Project Background
XRP is a crypto asset designed to migrate transactions from central databases controlled by financial institutions to a more open infrastructure while significantly cutting costs. XRP transactions are trustless, instant and cheap, putting them at an advantage for cross-border movements. Launched in 2012, the software enabling the use of XRP, the XRP Ledger, proposed a new way of operating blockchains that proponents claim is more suitable for transactions. The Bitcoin blockchain allows anyone to contribute computing power, validate transactions, and secure its software. The XRP Ledger, on the other hand, only allows select network participants to help validate transactions and secure the network. There are over 150 of these participants in the network, collectively known as the Unique Node List (UNL). At launch, 100 billion XRP tokens were premined and subsequently distributed to specific individuals, companies and the general public through gifts and giveaways. At the time, the move led to concerns surrounding its decentralization, as a few entities controlled a large supply of the coins.
In addition, XRP’s involvement in the market relies on a for-profit company called Ripple, which to this day acts as the main player in the XRP ecosystem. Ripple helps maintain the XRP Ledger and plays a pivotal role in its development while being a significant XRP token holder. Ripple was founded in September 2012 under the name OpenCoin, one year after work on what would later become the XRP Ledger had started. In 2013, OpenCoin rebranded to Ripple Labs, before the company finally settled on Ripple in 2015. The XRP Ledger was initially called the Ripple open payments system and moved to the Ripple Consensus Ledger, before becoming the XRP Ledger.
After the XRP Ledger was functioning, its developers decided to gift 80 billion tokens to a private company that would work with the community to support the cryptocurrency. That company, Ripple, claims to have been methodically selling XRP and using it to “incentivize market maker activity to increase XRP liquidity and strengthen the overall health of XRP markets.” XRP was initially the ticker symbol for “ripples” or “Ripple credits,” but over time, these names were dropped in favor of just XRP to avoid confusion.
This analysis is based solely on the regulatory guidance, decisional authority, and current state of the case-law publicly available as of the date of this Memorandum, and does not speak to regulations or regulatory interpretations that are promulgated following the date of last update of this Memorandum. There remains regulatory and legal uncertainty with respect to XRP’s status as a security as Ripple Labs and the United States Securities and Exchange Commission (the “SEC”) are currently engaged in litigation. In December 2020, the SEC filed a lawsuit against Ripple Labs, alleging that its sale of XRP — the native token of XRP Ledger that powers Ripple’s payment network — constituted an offering of unregistered securities worth over US$1.38 billion. It is difficult to product how various regulatory bodies and courts could react to any set of facts and it is possible that the Ontario Securities Commission (the “OSC”) or another relevant regulatory authority could take a position contrary to the analysis in this Memorandum. If facts were to change or new regulatory guidance, legislation, or decisional authority were to be issued, the conclusions in this Memorandum may become outdated. Based on the foregoing and as further described herein, Newton XRP does not appear to meet the qualify as a “security” under Canadian securities laws.
* Currently, Newton does not provide its users with the ability to participate in the staking or governance functions of $XRP.
Newton’s Decision Document and KYP Policy
As set out in the Decision Document and the Company’s KYP Policy, the Company determines whether a crypto asset available to be bought and sold on its platform is a security and/or derivative and is being offered in compliance with securities and derivatives laws, which include but are not limited to:
- consideration of statements made by any regulators or securities regulatory authorities of the Applicable Jurisdictions, other regulators of the International Organization of Securities Commissions, or the regulator with the most significant connection to a crypto asset about whether the crypto asset, or generally about whether the type of crypto asset, is a security and/or derivative; and
- if the Company determines it to be necessary, obtaining legal advice as to whether the crypto asset is a security and/or derivative under securities legislation of each jurisdiction in Canada there it is so registered.
The Company’s Decision Document also requires Newton to monitor ongoing developments related to crypto assets available on its platform that may cause a crypto asset’s legal status as a security and/or derivative or the assessment conducted by Newton to change.
In assessing whether a crypto asset is a “security”, the Company will look at the Ontario Securities Act (the “Act”), and, generally, use the U.S. Supreme Court factors of the Howey Test for determining whether a transaction qualifies as an “investment contract” to serve as guidance (i.e., if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others”) where the Act is not conclusive.
The Howey Test
The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract.” If a transaction is found to be an investment contract, it’s considered a “security”. The origins of the Howey Test date back to 1946 when SEC v. W.J. Howey Co. reached the Supreme Court. Since its creation, the Howey Test has been the legal doctrine for determining whether transactions are investment contracts.
Under the Howey Test, a transaction qualifies as a security if it involves the following four elements:
- An investment of money
- In a common enterprise
- A reasonable expectation of profit
- Derived from the efforts of others
To be considered a security, a transaction must meet all four prongs of the Howey Test.
For example, while Bitcoin meets the Howey Test’s first prong, it doesn’t satisfy the second and third elements--with Bitcoin, there is no common enterprise where investors are pooling their funds, there’s no promoter or issuer, and an investor’s success isn’t reliant on the efforts of others. As opposed to being a security, Bitcoin, which has never sought public funds to help develop its technology, is considered an asset in a similar vein as gold or diamonds (i.e., a commodity rather than a security).
Application of Howey Test to XRP
In its litigation, the SEC has claimed that the purchase of XRP is an investment in a common enterprise. Presumably, this includes Ripple and its token holders and that a purchase of XRP remains an investment in the common enterprise through vertical or horizontal commonality. However, one factor that has been noted by many legal experts is the lack of any price correlation of the XRP token with Ripple. Further, Ripple lacks any ability to control or influence the price of XRP. Also, no testimony can prove that XRP holders depended on or acted on Ripple Labs’ efforts.
While an investment in XRP would meet the first, third and fourth prongs of the test, it appears that XRP does not pass the second prong in that it cannot be considered a security without contracts as there is no “investment contract” that would grant rights to investors. Further, the value of XRP is entirely independent from the value of Ripple, and Ripple possesses no unique proprietary information about XRP that it could use to harm or benefit potential holders of the crypto asset. That is, without a contract, an investor in XRP cannot be said to have invested in a “common enterprise”.
Just as the Treasury Department periodically issues new dollars, cryptocurrencies issue new electronic credits. BTC and ETH are issued through a Byzantine process tied to the maintenance of their electronic ledgers: Users who validate transactions are rewarded with newly created crypto units. Unlike BTC and ETH, Ripple, created a finite number of XRP units and sells them in batches according to a predetermined schedule, and the SEC viewed these batch releases as akin to issuances of securities simply because Ripple can take the money earned during each issuance to fund other aspects of its business. Ripple’s issuance of XRP therefore does not meet the legal definition of an “investment contract.” A holder of XRP is engaged in no more of a “common enterprise” with Ripple than a holder of a dollar is with the U.S. Treasury.
Fluctuation in the value of an XRP does not foster the expectation of “profits solely from the efforts of the promoter” Ripple, because that rise and fall is not tied to Ripple, but rather the health of the currency and the macroeconomic factors that influence the price of XRP
Newton, in assessing whether a particular crypto asset is a “security” will also look at or consider the following factors:
- statements made by any regulators or securities regulatory authorities of the Provinces and Territories of Canada, the SEC, and other regulators in IOSCO-member jurisdictions, or the regulator with the most significant connection to a crypto asset about whether the crypto asset, or generally about whether the type of crypto asset, is a security and/or derivative; 4
- the crypto asset’s “Crypto Rating Council” (the “CRC”) rating, if any;
- whether any other major North American crypto trading platforms (i.e., Coinbase, Voyager Digital, Wealthsimple) offer the crypto asset to North American users;
- the degree of the crypto asset’s decentralization; and
- if the Ultimate Designated Person or Chief Compliance Officer of the Company determines it to be necessary, an opinion of external legal counsel on the crypto asset.
Looking at the four factors above:
- Statements made by any regulators: While, as indicated above, the SEC has weighed in on XRP’s status and as the SEC is currently engaged in litigation with Ripple on XRP’s status as a security and whether XRP’s ICO was a distribution of securities, it should be noted that:
- the UK Treasury does not classify XRP as a security. Rather, XRP is grouped with Bitcoin (BTC) and Ethereum (ETH) and categorized as unregulated tokens, which contrasts with the U.S. definition. In the UK, XRP is therefore viewed as a non-security. More specifically, XRP, BTC, and ETH are regarded as crypto assets that are used primarily as a means of exchange. The report specifically refers to them as “exchange tokens,” a sub-category under "unregulated tokens." According to the official guidelines, the UK Treasury (Her Majesty’s Treasury) does not classify XRP as a security. Rather, XRP is grouped with Bitcoin (BTC) and Ethereum (ETH) and categorized as unregulated tokens, which contrasts with the U.S. definition.
- Japan's Financial Services Agency (FSA), the country's securities regulator, has confirmed that it views XRP as a cryptocurrency and not as a security. "FSA regards XRP as a cryptocurrency based on definitions of the Payment Services Act," the Japanese regulator told The Block in an email in January 2021. (https://www.theblock.co/post/90922/japan-fsa-xrp-comments-cryptocurrency) Nomura Research Institute has also published a report, saying that according to the Japanese Payment Services Act, a "widely accepted interpretation" is that XRP is a crypto asset and not a security
- CRC rating: The CRC has currently rated XRP as a 4, with 5 being the highest possible score (and indicative that the crypto asset in question is likely a security). From the CRC’s FAQ: “Each question in the CRC framework is assigned a points-based weighting to reflect its relative importance, the sum of which create scores for each Howey factor. Those scores are then scaled into a final rating between 1 and 5. A score of 5 results when an asset appears to have many characteristics that are consistent with the Howey-test factors. It is probably more likely, relative to lower-scored assets, to implicate the U.S. securities laws (and, by extension, other securities laws). A score of 1 results when an asset appears to have few characteristics that are consistent with the Howey-test factors. It is probably less likely, relative to higher-scored assets, to implicate U.S. Securities laws. The scores are scaled; a score of 4, for example, does not mean that four prongs of the Howey test are met. A score above the median asset rating does not mean there is a 50% or greater possibility of classification as a security. [emphasis added].
- Currently, a number of other North American crypto trading platforms and exchanges list XRP, including the following crypto trading platforms or exchanges in:
- the United States: Binance, Huobi Globall, Bithumb, Bitstamp, FTX, Kraken, Bitfinex, Poloniex, eToro, Liquid, WazirX, and Phemex; and
- Canada: Bitstamp, Bitfinex, Coinsquare, Kraken, Bittrex Global, NDAX, and Netcoins.
Risks of XRP
Like an investment in other crypto assets, an investment in $XRP includes the following general risks: (i) volatility risk and liquidity risk, (ii) short history risk, (iii) demand risk, (iv) forking risk, (v) code defects, (vi) regulatory risk, (vii) electronic trading risk, and (viii) cyber security risk.
For additional information of general risks associated with crypto assets, you may refer to the Newton Platform Risk Statement.
Please note that these risks and the associated summaries or overviews provided for each herein are not intended to be an exhaustive discussion pertaining to all such risks and, in addition, there may be other risks that come with exposure to XRP. We encourage all Newton users to perform their own due diligence to assess the risks associated with XRP and to determine whether this level of risk is acceptable to them. Neither XRP nor Newton guarantees the value of XRP, and holders of XRP will not have any recourse to XRP or Newton if the value of XRP declines for any reason whatsoever.
Newton’s Evaluation Process
Newton has reviewed and assessed XRP prior to making it available on the Newton Platform and has concluded that XRP is not a security or derivative under Canadian securities legislation; however, there is a risk that this conclusion could change in the future and that, in such event, Newton will be required to halt, suspend, and then remove XRP from its platform as described in the Newton Platform Risk Statement.
Further, as indicated above, no Canadian securities regulatory authority has expressed an opinion about XRP, including an opinion that XRP is not itself a security and/or derivative.
Although it is of the opinion of our company that XRP is not a security, there is an ongoing lawsuit between the founder of XRP, Ripple Labs, and the United States SEC, precisely regarding the question of whether it is a security. As of October 2022, a final decision has not been made on this lawsuit in question. However, if the judicial system rules against Ripple and regulators do indeed begin to classify XRP as an unregulated security, there is the possibility that exchanges and crypto trading platforms would be forced to delist and cease all support for XRP.
Based on publicly available information Newton has reviewed XRP, including, but not limited to, a review of the following:
- The creation, governance, usage, and design of XRP, including the source code, security, and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that created XRP.
- The supply, demand, maturity, utility, and liquidity of XRP.
- Material technical risks associated with XRP, including any code defects, security breaches and other threats concerning XRP and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them.
- Legal and regulatory risks associated with XRP, including (i) any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of XRP, and (ii) statements made by any securities regulatory authorities in Canada, other regulators in IOSCO-member jurisdictions, or the regulator with the most significant connection to XRP about whether XRP or generally about whether the type of crypto asset, is a security and/or derivative.
A link to the XRP White Paper is available at the following link.