Reserve Bank is experimenting with 'digital rand' in South Africa

The South African Reserve Bank (SARB) says it is still studying and testing a central bank digital currency (CBDC), but it is focusing on a specific use case and is not looking to be a world leader in the format.

Speaking on a panel at the annual World Economic Forum (WEF) meeting in Davos, Switzerland (18 January), SARB governor Lesetja Kganyago stated that South Africa would be “very fast followers” in terms of the development and implementation of central bank currencies, learning from other countries that are ahead in development.

He stated that the decision to recognise and prepare the SARB for digital currencies is a critical step toward the organization’s aim of modernization. According to the governor, a digital economy is emerging, and central banks throughout the world must reconsider their roles.

A CBDC is a digital counterpart of a country’s fiat currency that is issued and regulated by the central bank of that country. They have the potential to be utilised for cashless transactions, improving financial inclusion and allowing central banks to conduct monetary policy in innovative ways.

The new system’s use case is still being debated and studied. However, Kganyago identified two reasons for further research into the technology:

• The possibility to make national payments more efficient than the current real-time gross settlement (RTGS) system.
• Being able to deal with domestic market failures better.

The SARB and other central banks believe that the economic climate is changing; nevertheless, the demand side must also be recognised.

“Does the public actually need it?” Kganyago asked.

“You need national conversations about the role of the new system; big issues about regulation and governance need to be discussed alongside the need for public choice,” he said.

He told the panel that while South Africa’s accomplishments may appear minor in contrast to what other nations have accomplished, it was a significant victory for the central bank.

According to Kganyago, the Reserve Bank used CBDCs to bring in all South African banks, accounting for 90% of all settlements – and made full settlements within two hours.

Kganyago stated that SARB was able to push large amounts of money around member states of the Southern African Development Community (SADC) in a trial looking into the application of CBDCs in cross-border transactions; however, key challenges arose when each country wished to settle the transaction in their own currency.

Trials in the CBDC domain hint to faster payments, particularly cross-border payments. According to Kgnaygao, there is a lot of incumbency in the existing system.

Moving $100 across borders, for example, might wind up costing $60 by the time it arrives at its destination and the transaction is completed, according to Kganyago.

“Making small payments across borders is (currently) very difficult.”

CBDC debate in South Africa heated up in 2022.

South Africa is one of the most costly G20 countries for cross-border payments, and making them more accessible and inexpensive has been a long-term goal.

The governor revealed in April 2022 that SARB was experimenting with digital money and distributed ledger technology, which is often utilised on the blockchain to promote transaction transparency.

The central bank’s Project Khoka 2 sought to investigate the application of tokenized money, blockchains, and digital currency in South Africa. As part of this endeavour, the SARB has created two new types of money since its inception:

• A tokenized form of central bank money to conduct transactions between central banks and,
• A stablecoin issued to commercial banks to purchase SARB debentures to raise capital.