South Africa Reserve Bank wants to test CBDC based on native currency

South Africa has joined the list of countries looking to create a state-backed digital currency after it was announced that the South Africa Reserve Bank (SARB) is discussing the possible introduction of a native cryptocurrency.

SARB has invited bids from private companies to develop the infrastructure necessary for a central bank digital currency, or CBDC. A tender notice on SARB’s website read: A request for expression of interest from prospective solution providers in anticipation of a feasibility project for the issuance of electronic legal tender.

South Africa is considered to be crypto-friendly. The Global Digital Report 2019 has ranked South Africa as the top country for ownership of cryptocurrency. The survey found that 10.7 percent of internet users in the country own cryptocurrency.

Highlighting the importance of financial inclusion as another benefit of cryptocurrencies, SARB pinpointed that digital currencies can have a positive effect on the country’s weak by banking the unbanked.

Next phase of research

The fintech unit within SARB that investigates emerging trends and tests how viable they are is behind this development. SARB’s Currency Management Department has been researching the potential for an electronic legal tender since 2016. This would be a domestic, general purpose central bank digital currency issued and backed by the SARB.

Until now, the research by the Reserve Bank has been conducted to understand the implications of electronic legal tender. However, the next phase of the development is testing the use cases for this technology and analysing its impact within various environments.

At the beginning of January, SARB released a new consultation paper focusing on crypto assets in the country.

Accessible without a bank account

One of the considerations published by SARB is: Consumers must be able to own and transact in CBDC without the need for a bank account.

The fact that the Reserve Bank wants the digital currency to be accessible without need for a bank account is particularly interesting as it brings to question what will happen to the banks if it is indeed adopted.

SARB probably wants to go down this route for the sake of financial inclusion as the banking system tends to leave a large number of citizens unable to access financial services. The Reserve Bank probably also noticed the impact of mobile money on financial inclusion in neighbouring countries, Zimbabwe and Kenya.

Challenges of shifting from fiat to a CBDC

The attendees of the closed meeting held by SARB deliberated on the challenges that a possible shift of reliance from fiat to a CBDC could have.

For one thing, such a system gives the public access to funds directly issued by the central bank and could impede on the activities of the commercial banks which bank the populace. In simpler terms, the central bank will manage the country’s cash and its digital representation right on its centralized ledgers, leaving little or no job for commercial banks.

Another difficulty debated at the meeting concerns the ideal method of distributing such a cryptocurrency without adversely affecting the current supply of SA Rand.

To solve these problems and successfully execute the project, the SARB called on the country’s fintech firms and stakeholders to contribute ideas on how to launch the SA cryptocurrency without threats to the banking system.

It is no longer news that digital currencies are a technology for both now and the future. We have witnessed massive adoption in the last decade by individuals, companies, and even countries.