- Ripple says that banks can unlock $5 trillion of funds dormant in nostro/vostro accounts through the use of XRP for international payments
- Financial experts think otherwise as they found reasons as to why Ripple arguments are not true
- Experts think that Ripple misunderstood the status of those dormant funds
A principal claim made by Ripple for XRP is that it could free up 5 trillion dollars that is “sitting dormant” in bank vostro and nostro accounts around the world. According to Ripple, this “ties up capital that can be used in more productive ways.”
Ripple said bridging currency for foreign payments could allow banks and payment providers to “free up the assets that would normally be committed to funding nostro accounts around the world.” This can be made possible through the use of digital assets like XRP.
How Ripple Plans to Make This Possible
Ripple state that the faster the transaction, the faster the recipient will get fully settled funds and the more a sender is protected against risks of volatility. With high throughput, it enables a more stable volume of exchange for all market participants.
Ripple has xRapid, which offers on-demand liquidity through the use of XRP. Through real-time facilitation and lower cost transactions across currencies, xRapid can help reduce the risks. Enterprise clients can thus unlock the full potential of cross-border payments without tying down funds.
The Problem with Ripple’s Plans
There’s just one problem with Ripple’s idea. There are finance experts who think that it is not true.
According to them, this is because nostro/vostro accounts are transaction accounts. Banks hold these “checking” accounts with each other. Vostro means your account with me, while Nostro means my account with you. Every nostro account has an equivalent vostro at another bank.
While Ripple thinks that nostro/vostro balances could be put to better use, it does not say where it gets the $5tn figure from. Some are worried that Ripple misunderstood the status of those funds. These funds are indeed locked up for a reason and that is so they can’t form part of the liquidity reserve of the banks. However, that is due to the fact that banks are already committed to making payments that are coming due. The money is due to be paid to someone else and is not something that is yours to use. Therefore, there is no way that the money in nostro accounts is dormant.
Just like the money in your checking account, the Nostro account balances are also moving balances.
This means that Ripple cannot eliminate the real problems that are caused by risk-averse banks pulling out of correspondent banking in minor currencies. They also think that if there is a use case for XRP, it is about providing international payment facilities in those countries which are threatened with being shut out of correspondent banking networks.
Therefore, by eliminating what they referred to as “dormant funds”, Ripple is just trying to solve a problem that does not exist.