Central Bank Digital Currency Case Study – South Africa (Rand)

Bitcoin and cryptocurrencies are booming and interest by individuals, corporations and even governments is increasing.

Presently, up to 80% of banks globally are exploring or trying to implement Central Bank Digital Currency (CBDC). Countries like China are amongst the leading countries on this quest.

Many South Africans are joining the crypto space by finding ways to buy BTC. There’s even been talk of the South African government exploring the possibilities of introducing a Rand-backed cryptocurrency in the future. In this article, we’ll explore what CBDC is and how a Rand-backed cryptocurrency could work. You can also find out the state of cryptocurrency trading in South Africa in 2021.

The Bank of England was the first to publicly declare they’d be looking into the possibility of creating a central bank digital currency. Then the People’s Bank of China followed suit. And then, countries like Canada, Singapore, and South Africa in no particular order.

Although many of these countries have tried to run pilot programs and are at various stages of research, there is not a single country using CBDC at the moment. Perhaps, China would have their CBDC up and running by the 2022 Belgium Olympics. South Africa, on the other hand, also recently announced a test run of the second phase of Project Khokha.

What is CBDC? 

First, CBDC is not the same as cryptocurrency. The two concepts are fundamentally different. CBDC is fiat money that is digitally based and backed by the central bank of a country. A CBDC must be recognized as a means of payment, store of value, and legal tender by all in that country or at least used for settlement between banks. 

Put simply –

CBDC is digital money issued by the central bank of a country.

It is important to note that CBDCs across the globe will vary and differ from one country to another. A country’s CBDC could be blockchain-based, distributed ledger technology, or even a centralized database. CBDC could be different again based on each country’s legislation.

CBDCs that are blockchain-based will be represented in tokens. And since they are government-backed, they would effectively become legal tender.

There is a fundamental difference between cryptocurrencies like Bitcoin and CBDC. While a cryptocurrency like Bitcoin is decentralized, borderless, permissionless, not government or state-backed & trustless, CBDC, on the other hand, is border sensitive, backed by the state, and requires a centralized body for issuance. You can buy bitcoin and use it to make payment anywhere in the world but you can’t do the same with a CBDC.

What could be the likely features of Rand-backed Cryptocurrency?

  • It can only be issued by the South African Reserve Bank (SARB).
  • Rand-backed crypto may be peer-to-peer enabled.
  • It would have a traceable transaction record.
  • Rand-backed cryptocurrency would need to be stable in order to be usable as a medium of exchange.
  • It would be complementary to fiat currency but not a replacement.
  • Consumers would need to have the means to access, use and transact with the CBDC without a bank account to cater to the unbanked part of the population. 
  • Rand-backed CBDC would have to be accepted as a means of payment for transactions by small, medium, large businesses as well as government agencies unless it was only used by banks for settlements with other banking institutions.  

Easily accessible without a bank account

According to the South Africa Reserve Bank, users could exchange CBDC without a conventional bank account. This way, a Rand-backed digital cryptocurrency will give the average South African access to financial service without going through the banking system.

The banks and the banking system have left a sizable chunk of South Africans financially excluded. A study from the World Bank says over 60% of Sub-Saharan Africans do not have bank accounts and financial inclusion access. This has been one area that P2P trading of bitcoin and cryptocurrencies caters to. 

With Rand-based digital currency, many South Africans would have access to basic financial services from their mobile devices. This way, the rate of poverty could be reduced drastically, which would in turn also stimulate more economic growth. Additionally, a financially inclusive system would promote further innovation in the finance sector and beyond. 

CBDC will reduce fraud and bank transaction fees

A Rand-based cryptocurrency would make life easier for South Africans by reducing the fees spent on transactions and eliminating fraud. Rand-based CBDC is aimed at helping citizens reduce the rate at which bank customers get charged to access their money by banks.

According to Capgemini’s World’s Retail Banking Report, it is not a secret that South African banks charge their customers more than the global average rate. The report shows that both savings and current account holders are being charged twice the global rate. It is reported that due to the high cost of operations and rise in cyber-crimes, South African banks charge 4X more for banking services than countries like Germany, Australia, and India. 

The good news is, according to SARB, the use of a Rand-based digital currency would imply that bank charges could be significantly lowered.

A rand-based digital currency would reduce the rate of fraud in South Africa. CBDC will be traceable, centralized, transactions would be recorded on an open ledger database that the government can easily track. With a centralized database, the authorities would have the means to permit or prevent transactions from taking place. They’d also be able to freeze and backlist any transactions that appear to be fraudulent or even suspicious. 

Source of income for the government

South Africa is one of the countries where cash is widely used for transactions. Hence there is no proper tracking for the collection of tax. The adoption of a Rand-based cryptocurrency will generate more income for the government. This is because the system is based on a centralized database, making it difficult to evade tax or participate in money laundering.

This has been demonstrated in countries like Kenya where they predominantly use mobile money i.e. M-Pesa and Ecuador, where digital money is widely used. Using a Rand-based cryptocurrency will make it nearly impossible for individuals, businesses, and organizations to hide financial activities from the SARB or the government. This way, the government will be able to track more financial activity and tax them appropriately. 

While most people purchase bitcoin or other crypto assets to gain financial freedom either through trading or simply investing, CBDCs are poised to generate more money for the government and not the regular citizen.

CBDC could improve cross-border payments 

There have been several discussions about the problem of cross-border payments. This problem has serious implications for emerging economies and developing countries in particular. Remittance payments today are still very costly and recently the UN reported the biggest decline in remittances worldwide. CBDCs may be used for cross-border settlements but it’s more likely that CBDCs like a Rand-backed cryptocurrency would only be used within South Africa’s borders but with a bilateral agreement between nations, using a digital currency might be possible.

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