Banks have largely remained on the sidelines when it comes to holding XRP directly, even as interest in the digital asset continues to grow. This hesitation was not due to: lack of utility or demand but to stringent regulatory capital rules that made owning XRP economically impractical for regulated institutions.

However, there is a slight adjustment in how XRP is treated under global banking rules could remove this barrier and change the way banks interact with cryptocurrency.

Why banks can’t hold XRP

The main obstacle preventing banks from holding XRP was its treatment under the global banking framework known as Basel III. Basel III is an international regulatory framework developed after the 2008 financial crisis that introduces higher quality and quantity of capital requirements in the international banking sector.

At the moment, XRP currently falls under Type 2 cryptocurrency exposure under Basel III, which is established with rules for higher-risk assets. Under these regulations, most cryptocurrencies, including XRP, fall into the high-risk category, which carries a punitive capital requirement. Banks are required to apply a risk weight of 1,250% to such assets, which means they must set aside significantly more capital than the value of XRP itself.

This means that under Basel III, for every dollar of XRP exposure, a bank must have $12.50 in capital. This lively was recently explained by a cryptocurrency commentator named Stern Drew on the X social media platform.

In a post on X, Drew explained that capital inefficiency alone is responsible for years of institutional volatility. The problem wasn’t demand or technology, but the regulatory treatment of capital that made holding XRP irrational from a balance sheet perspective.

Regulatory inflection point

The conversation around XRP’s regulatory status is becoming increasingly critical for its long-term prospects. Interestingly, Drew’s analysis goes further, pointing to what he describes as an inflection point that markets may be missing. Now that legal and regulatory clarity surrounding cryptocurrencies is improving, XRP may be reclassified to a lower risk category under Basel III.

The end game is that XRP is on a clear path to being a tier 1 digital asset for global institutions that mainly deals with tokenized established assets and stablecoins with sturdy mechanisms. If such reclassification occurs, the economy will change immediately. XRP will become acceptable for direct balance sheet exposure, allowing banks to hold, deploy and settle using the asset without the need for excessive capital.

This is not a discussion about short-term price movements, but about the capital mechanics that determine whether vast pools of institutional money can do so participate in owning XRP at all. In this case, banks’ provision of XRP liquidity would shift from off-balance sheet utilize to direct institutional ownership.

Featured image created with Dall.E, chart from Tradingview.com