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SA banks to trial second phase of SARB's blockchain project

Sibahle Malinga
By Sibahle Malinga, ITWeb senior news journalist.
Johannesburg, 12 Feb 2021

SA’s big four banks have been selected among the entities that will be trialling Project Khokha 2, a proof-of-concept project which aims to explore the use of digital currency, blockchain and tokenised money in SA.

In a statement, the Intergovernmental Fintech Working Group (IFWG) announced the launch of Project Khokha 2, the second phase of a project designed to simulate a “real-world” trial of a distributed ledger technology (DLT)-based payments system.

It is a continuation of the first phase, which took place in 2018, focused on providing participants with practical experience on various aspects of using DLT in a realistic test environment where different deployment models were used.

Distributed ledgers are a family of technologies where participating nodes in a network each update their copy of a common set of data. Blockchains are a type of distributed ledger where transactions are organised into consecutive groups, or blocks, that are cryptographically secured.

The IFWG was set up in 2018 by a group of local financial sector regulators led by the South African Reserve Bank (SARB), whose members include the Financial Intelligence Centre, Financial Sector Conduct Authority, the National Credit Regulator, National Treasury and the South African Revenue Service.

According to the IFWG, Project Khokha 2 will issue, clear and settle debentures on DLT using tokenised money in a minimum viable product to inform policy and regulatory reflections.

“The project will produce a public report highlighting the insights gained on a number of policy and regulatory challenges introduced by such innovation,” says the IFWG.

“This is in line with the IFWG’s objectives to promote responsible innovation and provide regulatory clarity on financial technology innovation in support of its members’ mandates, including stable and resilient financial markets.”

Although the first phase of the project was successful, SARB explained at the time that the implementation of a production-ready system requires deeper understanding of long-term complexities that were not within the scope of the initial project.

Key considerations that need to be addressed, going forward, include the evaluation of supporting frameworks and other systems that integrate with the wholesale system, as well as the legal, regulatory and compliance factors.

In addition to SA’s big four banks, other participants that will join the IFWG on Project Khokha 2 include Investec, the Johannesburg Stock Exchange and central securities depository platform Strate.

“Industry participants will be able to purchase the debentures with a wholesale central bank-issued digital currency (wCBDC) and a wholesale digital settlement token (wToken). The wToken can be seen as a privately issued stable coin used for interbank settlement,” notes the IFWG.

Game-changer for SA

Project Khokha 2 formed part of the discussions at the “Future of Money” webinar held last night, by Wits University’s Joburg Centre for Software Engineering.

One of the speakers at the event was Monica Singer, SA lead for Consensys, one of the biggest blockchain companies in the world, which also champions the adoption of blockchain technology in Africa.

Singer hailed the success of Project Khokha 1 and highlighted the benefits of Project Khokha 2, if it is also trialled as retail CBDC and not only as wholesale CBDC.

A “retail”CBDC, she explained, would be used as a digital extension of cash by all people and companies, and reflect in real-time in digital currency accounts, whereas a “wholesale” CBDC could be used only by permitted institutions as a settlement asset in the interbank market.

“Project Khokha, if tested in retail digital, would be a game-changer for SA,” commented Singer.

“When central banks’ digital currency gets implemented broadly, the most amazing thing that will happen is that all South African citizens would have a digital currency account which would eliminate the challenges we see as a result of people carrying cash: ATM bombings, people being robbed of their cash, and citizens waiting long hours in queues trying to receive their social grants. It’s upsetting to see what’s going on in SA departments, home affairs, the traffic departments and so many sectors we could be fixing with this technology.”

Singer is of the view that the decentralisation of finance, which is currently unfolding, is going to be a game-changer globally, in a world where 1.7 billion people have been left out of the banking system because they were unable to open a bank account.

“We are in a stage where this technology is going to evolve and everyone in the world is eventually going to have access to it no matter their age group or status,” she added.

According to IFWG, three firms have also been chosen to partner on the project: Accenture, Deloitte and tokenised solutions firm Block Markets Africa.

“Accenture will be responsible for developing the wCBDC for Project Khokha 2 and Block Markets Africa was selected to produce the DLT-based debentures as well as the wToken for the project. Deloitte will document the insights gained from Project Khokha 2 in a public report,” says IFWG.