DEWALD SMIT AND JENNIFER KIDGER: Decentralised finance in SA’s banking industry could be a threat or opportunity

The advent of the first blockchain database in 2008 and the subsequent creation of crypto assets have claimed the spotlight for several reasons. Despite numerous previous attempts to create digital currencies, bitcoin was the first crypto asset that could be used as a means of payment on a decentralised, permissionless, secure and immutable network. 

Many see crypto assets only as an investment tool enabling “lucky” investors to make millions and the less fortunate to burn a hole in their portfolio value. But crypto assets are in fact the by-product of various blockchain projects and serve as a means of payment to multiple participants — also known as nodes — in a network.

Nodes are required to validate the data that is added to the network and stored in data blocks. A blockchain is deemed a secure, transparent and efficient way to share data between multiple parties. At the time of writing, about 23,000 crypto assets were in circulation. 

The game changer is the disruptive technology that blockchain encapsulates. Smart contracts, the tokenisation of assets, increased security and privacy, enhanced traceability and a decentralised structure are among the many features that are set to change the world as we know it. 

As a peer-to-peer network, blockchain could eliminate the “middleman” in many transactions. This decentralised form of finance (DeFi) might have significant ramifications for the financial services industry, potentially changing the role of financial intermediaries completely and disintermediating the current financial system.   

Globally, there has been a proliferation of studies in the DeFi space to assess the effect of this technology on the financial services industry. However, there is a dearth of research on this topic in SA. As such, we investigated the perspectives and expectations of role players in the local banking industry regarding DeFi, disintermediation and blockchain technology. We also endeavoured to gain insight into the perceived potential and advantages, obstacles, limitations and risks for the local banking industry to educate consumers on the topic. 

We interviewed key blockchain experts and decisionmakers from four leading banks and a prominent blockchain solution provider in SA earlier in the year. All participants agreed that moving from a platform to an ecosystem economy was an important potential benefit of blockchain technology. The move can enable the creation of a portable, digital identity, and therefore provide greater accessibility to financial services to many who have previously been excluded. 

Interviewees also acknowledged that blockchain technology can lead to reduced transaction costs, enable seamless and cheaper cross-border payments, minimise risk in transactions and address certain inefficiencies in the local banking industry. They noted that some of the major banks in the country have recognised the transformative potential of blockchain technology and are proactively investigating, experimenting and implementing the technology.

The participants conceded that many obstacles and limitations still prevent banks and consumers from adopting it. The main limitation for all banks is the lack of regulation worldwide. International studies have shown that without regulation DeFi will remain an exploratory concept. Now, regulation only supports physical assets and their movement, which cannot simply translate into the DeFi domain.

The government has established the Intergovernmental Fintech Working Group, including the National Treasury, Financial Sector Conduct Authority, SA Reserve Bank and Financial Intelligence Centre, which seeks to “demystify the regulatory landscape” and provide the foundation to advance new technologies. Regulatory clarity and legal certainty remain the two most critical conditions that need to be met for banks to incorporate DeFi elements into their systems. 

Educational gaps about DeFi also lead to distrust and resistance to the system. Despite these challenges, the SA banking industry has embraced blockchain technology and is actively seeking ways to experiment with and incorporate blockchain solutions into their systems.

The establishment of the SA Financial Blockchain Consortium also confirms the sense of collaboration between the leading financial institutions to ensure the local financial services industry is on par with its global counterparts.

On whether blockchain technology and the subsequent possibility of disintermediation poses a significant threat to the banking industry, most participants felt that though disintermediation is not an immediate threat, it might be in the long term. They agreed that banks’ relevance is at risk should they not act now and incorporate this innovation.

Conversely, many interviewees regarded blockchain technology as an opportunity. If used correctly, banks can strategically avoid disintermediation and leverage blockchain technology to retain their pivotal role in society.

The future banking system could look quite different, and banks might be led to adopt a blockchain technology ecosystem. This will result in a wide spectrum of transferring value, which is the core function of banks, and will require banks to become highly specialised service providers.

This may mean they need to partner with trusted blockchain service providers or collaborate with their competitors. This need to join forces seems to be a central theme, as co-operation between banks and regulatory bodies in establishing a clear legal and regulatory framework is also of vital importance. Banks must also educate consumers. Widespread understanding and acceptance may reduce the resistance to change and ease the integration of blockchain technology.

Though DeFi could be a catalyst for disintermediation, the major SA banks believe that by evolving and adopting blockchain technology they can avoid this threat, thereby retaining their role in the future of finance.

• Smit is a lecturer in the department of business management at Stellenbosch University. Kidger was a BCom honours student in the same department in 2023. They write in their personal capacities.