Reserve Bank shares details about a digital South African rand

The South African Reserve Bank has been experimenting with the implementation of a digital rand, with it offering significant opportunities for payment innovation while preserving monetary sovereignty. 

Despite these opportunities, Reserve Bank deputy governor Rashad Cassim said there is no compelling need for its immediate implementation. 

Speaking to the Gordon Institute of Business Science (GIBS), Cassim explained that money flows and markets are becoming increasingly abstract. 

Much of the modern economy, including financial flows, is now electronic and digital, with payments increasingly happening through smartphones and computer screens. 

“The layer that is hardest to picture is what sits beneath all of this: the financial market infrastructures (FMIs), commonly referred to as the plumbing of the financial system,” Cassim said. 

“These are the intermediaries that move money and other assets between buyers and sellers, such as payment systems.” 

While this space is overlooked, Cassim explained that much innovation happens in this space. Payments are becoming increasingly digital, cheap, and instantaneous. 

“While South Africa has been at the frontier of wholesale payments relative to many of its peers, we have lagged in keeping pace with innovation in fast retail payments and the move to real-time fast payments,” Cassim said. 

The Reserve Bank has worked to solve this through PayShap and by taking over Bankserv Africa to create a payments utility now called PayInc. 

Cassim said this has created challenges for the Reserve Bank, in that innovation is being driven by the private sector, and it is increasingly looking to create decentralised financial systems. 

The increased role of the private sector in payments innovation and control of financial flows raises questions around monetary sovereignty, Cassim explained. 

Efficient Group chief economist Dawie Roodt recently warned about the potential outcome of ongoing innovation and the failure of South Africa’s regulatory authorities to keep up. 

Roodt warned that outdated foreign exchange regulations, for example, could see individuals ditch the rand for stablecoins and effectively circumvent the traditional financial system. 

This poses a significant risk for the Reserve Bank as it controls South Africa’s money supply, and its primary mandate is to protect the value of the rand. 

If individuals are able to circumvent the rand, this authority is effectively eroded. This has led some to call for the creation of a digital rand to maintain control over the money supply.

The Reserve Bank and a digital rand

The Reserve Bank has launched several proof-of-concept experiments in recent years to test distributed ledger technology (DLT) and central bank digital currencies (CBDC). 

Cassim explained that this began in 2018 with Project Khokha to test what the technology can do in practice and where its limits lie. 

Cassim explained that this is part of the Reserve Bank’s efforts to understand how public digital money might function in a modernised economy. 

Exploring a retail CBDC was a logical step in a world where private digital instruments, including stablecoins, are growing.

This puts more pressure on central banks to provide a safe, public digital money that supports payment innovation and preserves monetary sovereignty, Cassim said. 

The first project showed that a DLT network could move tokenised central bank money and settle trades in a controlled environment.

It also revealed that there are significant tradeoffs between privacy and efficiency, with the system offering protection for users at the expense of efficient clearing. 

“Keeping transactions private is possible, but it complicates design and slows the system,” Cassim explained. 

“Having legal clarity on when a payment is ‘final’ on a decentralised system is also essential, and DLT systems do not automatically interoperate with existing payment infrastructure.”

This pushed the bank to launch Project Khokha 2 to analyse how scaled payments could work with DLT and CBDCs. 

The follow-up project included the use of a wholesale CBDC issued by the Reserve Bank and a stablecoin-like token issued by commercial bank participants. 

This tried to create a real-world operating environment and broaden participation, with the bank even running hands-on experiments. 

The experiments culminated in the Reserve Bank publishing its position publicly on the role of a CBDC for retail payments. 

“In essence, our view is that, while a retail CBDC is technically feasible and could support innovation while ensuring continued public access to central bank money, there is no compelling need for its immediate implementation,” Cassim said. 

“Instead, the compelling need is to modernise the payment system to give every South African fast, simple and secure digital payments.”