Lesetja Kganyago, governor of South Africa's Reserve Bank. (Gem Atkinson/Bloomberg via Getty Images)
Regulators around the world are testing the implications of blockchain technology and digital currencies on the traditional financial system — and recent efforts signal that the South African Reserve Bank (Sarb) will not be left behind.
Reserve Bank governor Lesetja Kganyago indicated as much on Wednesday, at the release of the findings of the second phase of Project Khokha. The project, which was initiated in 2018, investigates the impact of distributed ledger technology, most commonly used to trade and store cryptocurrencies, on centralised banking.
Central banks, Kganyago said, must plan an active role in shaping the potential move to distributed ledger technology-based markets, “pondering the implications of innovation, promoting responsible innovation for the public good and informing an appropriate policy and regulatory response”.
Distributed ledger technology may have a massive impact on the future of centralised banking. The technology could render the centralised digital ledger — used by the traditional financial system to record the transfer of assets — obsolete.
Project Khokha’s first phase replicated interbank clearing and settlements using a distributed ledger. If successfully implemented, a distributed ledger could be used to make real-time interbank transfers by bypassing the central bank as an intermediary, the project found. The results of the project showed that the typical daily volume of the South African payments system could be processed in less than two hours with full confidentiality.
The second phase of the project tested the issuing, clearing and settling of debentures — a type of bond or other debt instrument that is unsecured by collateral — on a distributed ledger using tokenised money. Project Khokha 2 found that the debenture token market benefitted from having a wholesale central bank digital currency, which reduced settlement risk.
Distributed ledger technology allows securities to be issued in tokenised form, prompting several central banks to explore the viability of tokenised central bank money in financial markets.
“Such exploration — although largely conceptual at this stage — is important given the growth in technological innovation and the use of new forms of payment instruments facilitated by the rapid pace of innovation,” Kganyago said on Wednesday.
Central bank digital currencies are a popular example of tokenisation and have already been rolled out in a number of countries, including Nigeria. The eNaira was launched and activated last October.
Last year, the Reserve Bank announced it too is studying the feasibility of a central bank digital currency for retail use. “We recognise that digital currency innovation cannot be explored in isolation,” Kganyago said.
“The Sarb continues to draw on the insights emerging from various initiatives, including
(but not limited to) our ongoing study into the feasibility, desirability and appropriateness of a retail central bank digital currency, to enrich our understanding of digital currency implications.”
The governor also flagged the existential threat that the decentralisation of the financial system may pose to the Reserve Bank, noting that “some may ask whether central banks and regulators will still be relevant in a world based on some of the decentralised principles explored in Project Khokha”.
“From a regulatory perspective, I think it is unlikely that decentralised markets will be
suitable in all instances or that decentralisation will guarantee the achievement of
public policy objectives such as consumer protection, financial stability as well as
safety and soundness, which fall within the mandates of central banks and regulators,” Kganyago added.
“The role of central banks, regulators and policymakers should, however, evolve with
financial markets to ensure that we continue to fulfil our mandates in future financial
markets.”
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