Project Khokha 2 been launched just over a year ago, in February 2021, and the participating financial institutions were Absa, FirstRand, Nedbank, Standard Bank and the JSE. As global financial systems have steadily progressed over the past 50 years from physical ledgers to digital ledgers, the next step is tokenization – where different traditional assets such as money and securities are represented as tokens on distributed ledger technology (DLT) platforms. One of the most popular applications associated with DLT platforms is blockchain technology, which hosts cryptocurrencies such as bitcoin and ethereum.
“Several central banks are exploring the viability of tokenized central bank money in financial markets. Such exploration is important given the growth in technological innovation and the use of new forms of payment instructions,” says Lesetja Kganyago, Governor of SA Reserve Bank (Sarb).
Project Khoka 2 saw the creation of two forms of token currency to enable settlement. The first was a token form of central bank money, which was a liability of the Sarb issued on a specific DLT owned and operated by the Sarb. This was used to purchase Sarb debentures in the primary market.
The second was issued by commercial banks as a stablecoin and used to buy Sarb debentures in the secondary market. A stablecoin is a cryptocurrency tied to a reserve asset such as fiat currency (like the rand), a commodity, or other cryptocurrencies. Kganyago claims that the bond token market has benefited from a risk-free settlement asset in the form of a central bank wholesale digital currency used for settlement. This has reduced the risk of settlement, specifically that the payment may fail or be uncertain due to the risks associated with the settlement asset.
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The main objective of the Khokha 2 (PK2) project was to highlight the political and/or regulatory implications of the application of DLT in the financial markets. The Sarb concluded that building a platform for tokenized security would impact existing participants in the financial market ecosystem, as several functions currently performed by separately licensed market infrastructures could be performed on a single shared platform. This has the potential to reduce both cost and complexity.
“The PK2 report is Sarb’s contribution to broader discussions regarding the regulatory treatment of crypto assets and innovation in financial markets. We hope it will provide meaningful insight into the discussions taking place between policymakers and regulators as they continue to consider the most appropriate way to modify existing national legal and regulatory frameworks,” Kganyago said.
He emphasized that central banks, regulators and policy makers can play an active role in shaping a potential move to DLT-based markets by collaborating, considering the implications of innovation, promoting a accountable for the public good and informing an appropriate policy and regulatory response.
Further afield, at a Tanzanian cryptocurrency conference this week, International Monetary Fund (IMF) Deputy Managing Director Bo Li told delegates that each country’s central banks should determine their own primary objectives before adopting central bank digital currencies, “because there is no there is no general formula for all countries”.
Data from the IMF’s Chainalysis Unit shows that Kenya, Nigeria, Tanzania, South Africa, and Ghana are among the select countries in Sub-Saharan Africa that have seen rapid adoption of crypto assets.
However, there are those who remain skeptical. Speaking at a banking conference in February this year, Rabi Sankar, the Deputy Governor of the Reserve Bank of India, has publicly stated that cryptocurrencies were “specifically developed to circumvent the regulated financial system” and are not backed by any underlying cash flow.
“They have no intrinsic value… They are akin to Ponzi schemes, and may even be worse,” he said. DM/BM