By James Browning
Johannesburg - Many countries and international organisations have, over the last few years, been investigating forms of centralised digital currencies, spurred on by the rise of decentralised finance and China’s experiments with implementing a Central Bank Digital Currency (CBDC).
Not to be left behind, the South African Reserve Bank (SARB) has been participating in international cooperation efforts with partners such as the Bank for International Settlements and conducting its own exploration of digital currency technology.
On April 6, the SARB released the report for Project Khokha 2, which investigated the potential of using blockchain technology for high-value wholesale transactions between commercial banks and other institutions.
The project was launched in February last year, followed by the announcement in May of a study into the feasibility of a South African CBDC, which is slated to be completed sometime this year.
In light of the SARB’s interest in digital currency and the media attention its reports have attracted, it may be worthwhile to look at what a CBDC is and its implications for government, the financial sector, and citizens.
A CBDC is digital money backed and issued directly by a central bank. While the dominance of digital banking has made money transfer seem mostly frictionless to the average person, moving money requires a tangled system of banks holding debt, payment processors, financial clearing houses, and international exchange systems.
A CBDC system would greatly simplify this, with all transactions happening on a digital cryptographic ledger in real time. Banks would still have a role to play as credit and investment providers but would no longer act as the kind of primary facilitators of all financial exchanges as they have become. A CBDC system would initially work alongside cash, but most policy reports are aimed at the eventual discontinuation of physical money.
Public reports from central banks and global organisations paint the adoption of CBDC systems in quite a positive light and present many potential benefits.
A primary talking point is increasing financial inclusion. By removing the need for bloated and costly financial infrastructure, CBDCs can be used to provide services for those who either cannot or struggle to access traditional banking institutions.
An essential feature of a digital currency is its programmability. A CBDC makes it far easier for governments to implement financial policies as they have access to the flow of money and the ability to interact with it directly. You won’t need to file a tax return when deductions can be automatically baked into all transactions (and even if they weren’t, Sars would have a complete record of every payment you make). Traffic departments needn’t send you your speeding tickets in the mail. The amount can be deducted from your national account if you don’t contest the fine.
Interestingly, this fine control that a CBDC allows for could be a dream for economic redress policies, enabling the hand of policy to directly manipulate the economic machine both at the level of institutions and individuals.
The centralised transparency of a CDBC has been lauded in reports for its ability to curb money laundering, financial fraud, terrorist financing and illegal activity in general by empowering the state to see, record and authorise all digital transactions.
A centralised bank system would remove third party risks, such as customers losing their assets when a financial provider goes bankrupt or when there is a run on banks during a crisis.
An institutional move away from physical money would also combat South Africa’s rampant cash-in-transit heists.
The main draw of centralised currency for the average person is reducing costs by cutting out the banking middlemen. Private payment processors would no longer be necessary, and the associated transaction fees would disappear. Most central bank reports tout reduced international transfer costs and delays as a major benefit of CBDCs. The reports from central banks argue that this system creates more value for the citizen, with service costs going to the government to be utilised for the public good rather than private profit.
The benefits of a Central Bank Digital Currency stem from the two broad changes such a system would create – the disempowerment of private banks and the marked increase in state agency. Central banks promise that a CBDC would reduce costs, blunt illegal activity and increase inclusion. However, this all comes with a caveat that will have been getting louder and louder in the heads of any South African reading through all this. The benefits of a centralised solution are only possible with a competent centralised authority, and faith in state integrity has been ailing for a long while.
An ideal CBDC may allow South Africans to stop queueing up for hours when grants can be deposited directly into a personal account by state coffers or protect vulnerable people from predatory unregulated financial services. However, the creation and implementation of this idyllic kind of system locally would be a lot more difficult than the simple and polished reports from international financial organisations make it sound.
A centralised system may combat money laundering, but we cede the final say of which transactions are legitimate to the state. The public would give up its privacy, while crooked government officials would no longer need to worry about third parties having records of their dealings. If the state is the wholesale lender of first resort, it controls which banks get funding.
Providing services for the “unbanked” is a fantastic goal, but who designs and maintains this system along with the infrastructure it will require? If the goal is to reach those unserviced by the current system, can we trust the current system to build something better? Cutting out the middleman may reduce costs, but does the state have the same incentive to provide quality services that private financial providers do? Whose eminently bribe-able hands will be manning the economic wheel with uncontested power?
Without a highly functioning central authority coupled with international cooperation, any benefits of a CBDC for the average citizen will either never materialise or will be crushed under the weight of a hugely increased capacity for the abuse of state power.
The SARB’s CBDC feasibility report should be released later this year, but it’s clear that significant systemic changes would be necessary to make such a system remotely practically possible and worth the associated risks.