One of the principal claims made by Ripple for XRP is that it would free up $5tn that is “sitting dormant” in bank nostro/vostro accounts around the world. In a blogpost, Ripple says that this “ties up capital that could be used in more productive ways.” Using a digital asset such as XRP as a bridging currency for foreign payments could, according to Ripple, enable banks and payment providers to “free up the assets that would normally be committed to funding nostro accounts around the world.”
There’s only one problem with this. It’s not true.
Brad Garlinghouse, chief executive officer of Ripple Labs Inc., speaks during a Bloomberg Television interview at the Goldman Sachs Technology and Internet Conference in San Francisco, California, U.S., on Tuesday, Feb. 13, 2018. Garlinghouse said XRP and others should be referred to as "digital assets" rather than cryptocurrencies during an event last week. Photographer: David Paul Morris/Bloomberg© 2018 Bloomberg Finance LP
First, here is a primer on nostro/vostro accounts. They are transaction accounts – what you and I know as “checking” accounts – that banks hold with each other. “Nostro” means “my account with you”: “vostro” means “your account with me”. For every nostro at one bank, there is an equivalent vostro at another bank. Remember this as you read the next few paragraphs.
Consider an American bank that needs to make payments in Euros to a European bank. It opens a Euro account at the European bank – this is its “vostro” account. That vostro account is a Euro deposit account in a European bank. In this respect it is just like a retail deposit account in a European bank. It is debt, not capital. It is also “on call,” since the American bank can withdraw funds at any time. And it doesn’t have to contain a large amount of money. It only needs to hold enough money to meet forthcoming payment obligations.
Like other deposit accounts, vostro accounts a...