South Africa has taken another step towards implementing its central bank digital currency (CBDC), as the South African Reserve Bank (SARB) has completed a technical proof of concept for the project.
The project titled Project Khokha 2 (PK2) is the second phase of SARB’s Project Khokha (PK1), launched in 2018. It experimented with distributed ledger technology (DLT) for interbank payment settlementsuccessfully replicating the banks’ “SAMOS” real-time gross settlement system.
This second phase, PK2, went live in February 2021 and tested the DLT with clearing, trading, and settlement within the proof-of-concept environment.. Industry participants included Absa, FirstRand, JSE Limited, Nedbank and Standard Bank, which formed the Intergovernmental Fintech Working Group (IFWG).
Using technology, the SARB tested the issuance of debt instruments and enabled two payment options for settlement, a wholesale central bank digital currency (wCBDC) and a wholesale settlement token (wToken), a form of private money issued by a commercial bank.
The proof of concept developed two DLT platforms, one that served as a decentralized trading platform and another that managed the CBDC.
A two-way bridge similar to those used in decentralized finance (DeFi) when sending cryptocurrencies through different blockchains was also built.which allows the portability of CBDCs between the two platforms.
The results of the project revealed the regulatory, business and operational implications that DLT would have in the market. A SARB statement outlined that the technology would streamline functions performed by separate infrastructures onto a single platform, potentially reducing cost and complexity..
In the report, SARB notes that new DLT platforms will need to be integrated with legacy systems, and the costs of implementing the new platform will be borne by banks.
According to the SARB, it will be necessary to establish new standards, updated best practices and new support systems for the DLT infrastructure. The reserve bank mentioned that the legacy and DLT systems would always have to work in parallel, stating:
“A transition to a DLT-based system requires careful planning and execution and may involve running a DLT-based system in parallel to the existing system for some time, perhaps indefinitely.”
Also technical risks related to the reliability and security of software bridging between platforms, and the use of CBDC on networks other than the two used in the proof of concept were noted as issues for further consideration.
The SARB states that further work will be carried out to study the results of this phase of the project and the legal status of wCBDC, which will be used to inform policy and regulatory responses to DLT and CBDC in financial markets.
He also hinted that another phase of the Khokha Project could be started to “build on the work of PK2performing live transactions in a sandbox environment in a different use case.”
Since May 2021, South Africa has also started a preliminary study on a retail CBDC focused on its “convenience and suitability”. No exact date has been set for the completion of the study, but the SARB says it will be sometime in 2022.
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