XRP’s Impact: How It Could Derail Ripple’s National Trust Bank Charter
Ripple Labs Pursues National Trust Bank Charter Amid Regulatory Landscape for Stablecoins
Ripple’s Application for a National Trust Bank Charter
Ripple Labs has submitted a request to the Office of the Comptroller of the Currency (OCC) to obtain a charter as a national trust bank. Should the US GENIUS Act for stablecoins be enacted, Ripple could opt for its RLUSD stablecoin to be under federal regulation. Presently, this stablecoin is issued through Standard Custody & Trust, a trust bank regulated in New York. This article delves into the motivations behind Ripple’s application and a significant concern regarding its XRP holdings that could jeopardize its chances of approval.
Ripple’s CEO, Brad Garlinghouse, expressed on social media that obtaining this charter would provide both state and federal oversight, establishing a new standard for trust within the stablecoin sector.
The Rationale Behind Dual Banking Charters
A pertinent question arises: why pursue two banking charters? The straightforward answer lies in risk management; Ripple anticipates rapid growth for its stablecoin and recognizes the necessity for OCC regulation sooner rather than later.
Ripple has consistently aimed to cater to institutional clients, and achieving national bank status would enhance its credibility. The existing legal framework with Standard Custody & Trust effectively safeguards the reserves backing the stablecoin. Recently, it was reported that Standard Custody has also applied for a master account with the Federal Reserve.
Advantages of a Federal Reserve Master Account
Acquiring a master account could offer two significant advantages. It would enable the bank to facilitate payments directly, eliminating the need to rely on other banks for transactions. Additionally, it could allow the bank to maintain part or all of its stablecoin reserves at the Federal Reserve. However, this might face opposition from the Trump administration, which prefers stablecoin reserves to be held in US Treasuries. The influence of political dynamics on this decision-making process remains to be seen.
The Federal Reserve has outlined a tiered approach for applying for a master account. Banks regulated by the Federal Reserve are classified as Tier 1 and find it relatively easy to obtain a master account. Those supervised by the OCC fall into Tier 2 and face more scrutiny, while state-regulated banks are categorized as Tier 3, facing a more challenging application process with a higher likelihood of rejection. This tiered system clarifies Ripple’s dual strategy.
Navigating Potential Challenges in the Application Process
Ripple may encounter hurdles in securing a national trust charter. To date, only one crypto firm, Anchorage Digital, has successfully obtained such a license. Even if Ripple’s application is approved, the process could be lengthy. However, obtaining an OCC charter would enhance its chances of acquiring a master account.
In the short term, Ripple plans to continue utilizing Standard Custody while pursuing a master account. In the medium term, it aims to navigate the OCC national trust route.
The GENIUS Act stipulates that only stablecoins exceeding $10 billion must be federally regulated, and Ripple is still far from reaching that threshold. Nevertheless, the application serves as proactive preparation. If granted the charter, Ripple could opt for federal regulation even if its stablecoin remains below the required limit, but it would have to adhere to that choice once made.
The XRP Dilemma: A Banking Conundrum
While Ripple Labs seeks to establish itself as a national trust bank, it faces a significant challenge: its substantial XRP cryptocurrency holdings on its balance sheet.
International banking regulations, known as Basel III, impose strict requirements on crypto assets. For instance, if a bank holds $100 million in Bitcoin or XRP, it must reserve an equivalent $100 million in capital as a safety net. This means that for every dollar held in crypto, a dollar must be set aside. The situation is further complicated by regulations that prohibit counting “intangible assets” as legitimate capital. Intangible assets include items like brand names, patents, and cryptocurrencies.
Consequently, Ripple faces a dual challenge. It must reserve capital to cover its XRP holdings, yet it cannot count XRP as part of its capital base.
Exploring Solutions to the XRP Challenge
One might wonder why Ripple doesn’t simply remove XRP from its balance sheet to resolve this issue. However, Ripple has acquired several companies (such as Hidden Road, Standard Custody, and Metaco), often paying more than the value of their assets, resulting in “goodwill.” This goodwill, also classified as an intangible asset, further reduces the capital available.
After accounting for these deductions, Ripple Labs may find itself lacking sufficient tangible capital to qualify as a bank.
However, Ripple employs a team of experts who may have devised solutions that are not immediately apparent. Additionally, there exists a simpler alternative that could eliminate the XRP dilemma altogether.
Instead of applying directly through Ripple Labs, the company could channel the federal charter through Standard Custody or another subsidiary. This approach mirrors Anchorage Digital’s strategy, where the national trust charter is held by a subsidiary, keeping the parent company’s balance sheet distinct from banking regulations.
This subsidiary strategy would allow Ripple to maintain its dual-track approach: continuing to operate RLUSD through Standard Custody in the short term while pursuing a Federal Reserve master account. If necessary, Ripple could convert Standard Custody into the federally chartered entity, thereby sidestepping the Basel III complications, although this would limit Ripple’s options for obtaining a Fed master account.
