Blockchain tech will not push fiat currencies aside anytime soon
Issues around cryptocurrency security and regulation mean central banks are still decades away from adopting them
Wide adoption of blockchain technology for a cryptocurrency payments system is intriguing but decades away, says the Reserve Bank.
This effectively means SA’s consumers will have to wait before they can use cryptocurrencies as a means of payment that will rival, and potentially substitute fiat currency.
“We are open-minded about the prospect of a central bank-issued digital currency, but that idea is not imminent and could be many decades away. There are various security and regulatory issues that have to be solved first,” says Francois Groepe, the Reserve Bank’s leader for Project Khokha.
The project was initiated by the Bank in response to the development of cryptocurrencies such as Bitcoin that employ blockchain technology. It began experimenting informally on blockchain in 2013 along with the Treasury, the Financial Sector Conduct Authority and the SA Revenue Service.
“In our initial meetings, we looked at Bitcoin and its effect on society which prompted us to establish an informal working group on virtual currencies. We also observed the work done by other central banks in countries like Singapore and Canada,” says Groepe.
By combining the idea of shared databases and cryptography, blockchain technology allows multiple parties to have simultaneous access to a regularly updated digital ledger that cannot be altered.
The technology is moving quickly, and many people think central banks are very risk-averse, but we are studying everything and applying our minds. We are considering the opportunities to grasp innovation ourselvesFrancois Groepe
Reserve Bank’s leader for Project Khokha
It is from this work that the Reserve Bank realised that cryptocurrencies — or crypto assets — could be distinctly separated from the underlying distributed ledger technology that allows for the tracking of every dollar or yuan through the financial system in real time.
For central banks evaluating blockchain and its technology, wholesale payments have been the most common type of experiment undertaken. The Bank’s Project Khokha is also focusing on this.
“The technology is moving quickly, and many people think central banks are very risk-averse, but we are studying everything and applying our minds. We are considering the opportunities to grasp innovation ourselves,” says Groepe.
Central-bank issued digital currencies are being developed and countries including Uruguay have started various trials, he says, but the key considerations include monetary policy transmission, financial stability and cybersecurity concerns.
However, very few central banks are considering issuing their own digital currencies for fear that it may pose a risk to financial stability. Sweden, where the use of cash is evaporating faster than in almost any other sizeable economy, is considering issuing an e-krona.
The Bank for International Settlements is concerned that “digital bank runs” could be a problem and urged central banks to proceed with caution before launching cryptocurrency projects.
There may be little consensus about the co-ordination that would be required on the regulatory front, but central bankers agree that privately issued cryptocurrencies such as Bitcoin and ethereum are not about to replace traditional currencies.
“The future of institutions like central banks hinges on holding on to public confidence and maintaining trust in money,” says Groepe.
For now, the SA Reserve Bank is working on getting the next phase of Project Khokha off the ground, which will include expanding its financial technology unit and experimenting further with its debentures on digital ledger technology.