Business Maverick


The rand is going digital – and the Reserve Bank is open for suggestions

Central bankers have always been protective of the currencies they keep. Stability is a top priority, which has made them rather cautious about solutions that threaten that position. Yet, lately, they’ve thrown that caution to the wind as more regulators actively start experimenting with the idea of cryptocurrencies and the underlying blockchain technology. Even the SA Reserve Bank is warming up to the idea of digital currency. And it has asked the industry to help it come up with the best ideas.

Central banks are generally considered among the most prudent institutions in the world, but a report published in March 2019 by the World Economic Forum states that monetary authorities, perhaps surprisingly so, are some of the first adopters of distributed ledger technology (DLT).

The waters of blockchain are being tested at different levels though, and according to the World Economic Forum those actively investigating possibilities are all looking to win efficiencies, enhance security and find ways to include more people in the financial system on their banking and payments platforms.

SA’s Project Khokha has two honourable mentions in the World Economic Forum report. It relates how in 2019 the SA Reserve Bank successfully executed payments over its wholesale payment network via a DLT network.

The trial run included all the retail banks — and the Reserve Bank wanted them all to gain practical experience on aspects of using blockchain in a realistic test environment where different deployment models were used. It also wanted to better understand how the SA Multiple Option Settlement system would integrate with a DLT. The system is the Reserve Bank’s automated interbank network, which allows local banks to settle their obligations among one another in real time.

Just like Project Khoka, stage pilots of other central banks have also focused on wholesale digital currency for domestic use.

The findings were announced to the public in July 2018, shortly after the Intergovernmental Fintech Working Group was formed. Key members from the Reserve Bank, the Financial Sector Conduct Authority, Financial Intelligence Centre, National Treasury and the SA Revenue Service were brought together, at the beginning of 2018, tasked with formulating policy on private cryptocurrencies and DLT.

But the Reserve Bank’s research into electronic money options goes even further back than that. In a holding statement, it says that the Currency Management Department has been conducting extensive research to understand the case for such an electronic form of cash, named electronic legal tender, since 2016.

That became apparent when the Reserve Bank issued an Expression of Interest on 29 April 2019 on the feasibility of a central bank digital currency as electronic legal tender. It was published on its website largely under the radar of the general public. And with national elections being a further distraction, even less attention was paid to the related briefing held on 14 May. The bank met potential tender vendors to discuss the scope of the project, how it would be executed and its design principles.

The Reserve Bank denied Business Maverick’s request for an interview on the matter with Currency Management Department head Johann Bence, but did provide a copy of the holding statement via email. It stated:

SARB does not presently have a formal position on the feasibility of issuing an Electronic Legal Tender (ELT), however, it is proactively seeking to understand the policy considerations of issuance, and to understand the associated implications of such issuance.

The research conducted to date focused primarily on developing an understanding of the various forms of public and private virtual currencies, as well as the potential implications, should a central bank decide to issue a general purpose CBDC.”

It says that the next phase will be practical hands-on experimentation with potential design models, taking all the security and risk aspects into consideration.

The closing date for the expression of interest is 6 June 2019.

The experiment forms part of the Reserve Bank’s attempts to modernise the national payment network and deepen financial inclusion. Both these current shortcomings are adding cost pressures to its efforts in managing the country’s cash. And it’s a fortune.

A study by Genesis and MasterCard found that cash has cost consumers in SA about R23-billion or 0.52% of GDP, carried mostly by poorer communities. Cash is particularly prevalent among low-income earners who have lower access to digital channels and who live in communities where digital payments are not always accepted.

The Reserve Bank believes a digital currency could enable innovation and access, while still maintaining price and financial stability.

It is important to understand that the Reserve Bank is not proposing “private or decentralised cryptocurrency” here, such as Bitcoin. It says it doesn’t consider it a unit of measure or stable value at all, which is the basic requirement of money. As a matter of fact, the Reserve Bank doesn’t even refer to the term “cryptocurrency”. It prefers the word “cybertoken”.

Bridget King, director in the finance and banking practice at Cliffe Dekker Hofmeyr, says what is currently being considered is an electronic representation of the national currency to complement or operate alongside physical rand notes and coins.

If an ELT was issued as legal tender in SA, all merchants in SA would be obliged to accept payments tendered by consumers in ELT,” she says.

Unlike crypto assets such as Bitcoin, the SA ELT would represent fiat currency, owned by the Reserve Bank, intermediated through banks and other financial intermediaries.”

She says the South African Reserve Bank Act dates to 1989 and empowers the Reserve Bank to mint coins and make banknotes, but does not expressly contemplate the minting or making of digital currency.

Presumably legislative steps would be taken to pave the way for the issuing of digital SA ELT.”

Farzam Ehsani, co-founder and CEO of, says if the Reserve Bank decides to use cryptography to underpin a new form of the rand, it would be a third kind that would come into existence.

We already have physical notes and coins (the first form) and digital rand (the second form) which is what you see on your banking app. The ‘crypto’ will be number three.”

Ehsani, the former head of RMB’s fintech hub, FOUNDeRY, and who now runs the largest blockchain enabled digital wallet service in the country, says “one of the main appeals of blockchain technology and the tokens that emerge from them is that they are the first public infrastructure that allows for the digital peer-to-peer transfer of value”.

Just like the internet allows for free-flowing and near-instantaneous communication among any two individuals on the planet that have a connection, cryptocurrencies can be transferred between two individuals cheaply and quickly without any need for a costly intermediary.

The middlemen of the current financial system are charging exorbitant rates (sometimes up to 20%) on cross-border transactions for example,” Ehsani says.

He says established blockchains such as Bitcoin and Ethereum bypass the man-made divisions that create a tremendous amount of friction in the financial system.

Indeed, the entire concept of cross-border payments become as silly as the concept of a cross-border email when viewed in the light of the crypto ecosystem,” he adds.

There is still much to clarify and many jurisdictions are yet to put out an opinion on how they treat cryptocurrencies or digital currency in general,” Ehsani says.

Local authorities, however, have put forward a consultation paper on regulating “crypto assets” recently, which at this stage will require businesses operating in this space to register themselves with the authorities as a first step.

Earle Loxton, founder and CEO of DCX Capital, custodian of SA’s first digital currency index, says it is encouraging to see the Reserve Bank showing serious interest in blockchain, since platforms such as DCX are beholden to the Financial Sector Conduct Authority and the Reserve Bank to create a progressive regulatory framework to operate in.

A well-regulated environment is what our clients expect, especially the larger family offices and institutional investor,” he says.

Like many of our counterparts in the crypto sector, DCX self-regulates in the absence of that clarity, especially around international prescriptions like Know Your Customer (KYC) and Anti Money Laundering.

Furthermore, having a fully collateralised rand-denominated stable coin as a medium of exchange on the DCX platform would enhance the ease of trading between our crypto index coin and physical rand.”

He explains that Stablecoins are crypto-assets that have price stability characteristics that make it suitable for short-term and medium-term use as a unit of account and store of value.

In April 2019, the International Monetary Fund and the World Bank launched a private blockchain and quasi-cryptocurrency named “Learning Coin” for their staff members and stakeholders to better understand the emerging technology. It is not accessible outside this network and has no monetary value.

There are, however, a handful of nations that have done it for real.

In 2015, Tunisia became the first country in the world to issue a blockchain-based national currency named eDinar. Senegal issued its blockchain-based eCFA in 2016. If proven efficient, it might be rolled out to other West African Economic and Monetary Union members including Cote d’Ivoire, Burkina Faso, Benin, Togo, Mali, Niger and Guinea-Bissau.

The Marshall Islands, which is in free association with the US, and uses the dollar as currency, added crypto-tender dubbed “sovereign” to its mix in March 2018.

And finally, there is Venezuela, whose intentions are more sinister. The Petromoneda was launched at the end of 2018 and is backed by the country’s mineral reserves, with the sole intention of avoiding US sanctions.

It doesn’t matter what the motivation is for currency going digital, the World Economic Forum predicts that over the next four years many central banks will start using DLT to improve processes and economic welfare. DM