Digital currency not a rival yet, says Bank
PROJECT KHOKHA BEGAN EXPERIMENTING INFORMALLY ON BLOCKCHAIN IN 2013 WITH THE TREASURY AND SARS
Wide adoption of blockchain technology for a cryptocurrency payments system is intriguing but decades away, says the Reserve Bank.
This effectively means SA’s consumers will have to wait before they can use cryptocurrencies as a means of payment that will rival, and potentially substitute for, fiat currency.
“We are open-minded about the prospect of a central bankissued digital currency, but that idea is not imminent and could be many decades away.
“There are various security and regulatory issues that have to be solved first,” says Francois Groepe, the Reserve Bank’s leader for Project Khokha.
The project was initiated by the Bank in response to the development of cryptocurrencies such as bitcoin, which employ blockchain technology.
It began experimenting informally on blockchain in 2013 with the Treasury, the Financial Sector Conduct Authority and the SA Revenue Service. “We looked at bitcoin and its effect on society, which prompted us to establish an informal working group on virtual currencies. We also observed the work done by other central banks in countries like Singapore and Canada,” says Groepe.
By combining shared databases and cryptography, blockchain technology allows multiple parties to have simultaneous access to a regularly updated digital ledger that cannot be altered.
It is from this work that the Reserve Bank realised that cryptocurrencies — or crypto assets — could be distinctly separated from the underlying distributed ledger technology that allows for the tracking of every dollar or yuan through the financial system in real time.
For central banks evaluating blockchain and its technology, wholesale payments have been the most common type of experiment undertaken. Project Khokha is also focusing on this.
“The technology is moving quickly, and many people think central banks are very riskaverse, but we are studying everything and applying our minds. We are considering the opportunities to grasp innovation ourselves,” says Groepe.
Digital currencies issued by central banks are being developed, and countries including Uruguay have started trials, he says, but the key considerations include monetary policy transmission, financial stability and cyber security concerns.
However, very few central banks are considering issuing their own digital currencies for fear that this may pose a risk to financial stability. Sweden, where the use of cash is evaporating faster than in almost any other sizeable economy, is considering issuing an e-krona.
The Bank for International Settlements is concerned that “digital bank runs” could be a problem and has urged central banks to proceed with caution before launching cryptocurrency projects.
There may be little consensus about the coordination that would be required on the regulatory front, but central bankers agree that privately issued cryptocurrencies such as bitcoin and ethereum are not about to replace traditional currencies.
“The future of institutions like central banks hinges on holding on to public confidence and maintaining trust in money,” says Groepe.
For now, the Reserve Bank is working on getting the next phase of Project Khokha off the ground, which will include expanding its financial technology unit and experimenting further with its debentures on digital ledger technology.