Kganyago on digital currency: Reserve Bank will be a 'fast follower'

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Reserve Bank Governor, Lesetja Kganyago, told the World Economic Forum that SA won't be the first mover in issuing retail central bank digital currency (CBDC).
Reserve Bank Governor, Lesetja Kganyago, told the World Economic Forum that SA won't be the first mover in issuing retail central bank digital currency (CBDC).
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  • Reserve Bank Governor, Lesetja Kganyago, told the World Economic Forum that SA won't be the first mover in issuing retail central bank digital currency (CBDC).
  • While it has run a successful CBDC experiment, the Reserve Bank wants to remain "good students" for now and learn from international experience.
  • These digital currencies are a new type of money that exists only in electronic form. 
  • For more stories, go to the News24 Business front page.

The South African Reserve Bank (SARB) is eager to launch its own digital currency, but it won't be signing laws to allow people to walk into grocery stores and pay with that anytime soon.

On Wednesday, Reserve Bank Governor Lesetja Kganyago spoke at the World Economic Forum (WEF) in Davos, Switzerland about central banks' digital currencies (CBDC).

These digital currencies are a new type of money that exists only in electronic form. Instead of printing banknotes, a central bank will issue digital currency which can be transferred electronically. Much like cryptocurrency, "blockchain" technology is used to record transactions and the ownership of the currency. (The blockchain refers to a digital ledger of transactions that appears across a entire network of computer systems.) But unlike crypto, the digital currency will be guaranteed by the central bank.

He said that while central banks must embrace the digital economy and redefine their roles, SARB will tread cautiously about how it moves forward.

"The point of departure about the CBDCs is this: is this a solution looking for a problem, or do we have some real problem that we are trying to solve [with it]?"

SA's central bank was one of the early innovators when it ran the Project Khokha CBDC experiment. The SARB released a report on that experiment in April 2022. Through the experiment, it brought in 90% of the banks that process daily payments in SA and processed 70 000 transactions within two hours.  

Kganyago said this proved to the SARB that CBDC could be done on the wholesale level. But it's another story for retail CBDCs that can ultimately allow ordinary people on the street to walk into a shop and pay with a central bank-issued digital currency. It's likely that cash and bank cards will remain the dominant payment methods for some time.

Fast followers, not leaders

"With respect to retail CBDCs, we cautiously took a decision that we are going to be very good students. We are going to learn with everybody. We are not going to be the first movers. We would rather be very fast followers because of the complexities," said the governor.

Some retailers in SA, including Pick n Pay, have started accepting digital currencies, like bitcoin. But cryptocurrencies remain very risky assets and aren't central bank-issued currencies. In contrast, CBDCs are "smart money" issued by central banks that live only in the digital ecosystem.

In its frequently asked questions document on CBDC, the SARB warned consumers that crypto assets like bitcoin are privately issued and are not backed by any government or centralised authority. Users are exposed to risks as cryptocurrencies are susceptible to significant price fluctuations. It also made it clear that while it has done a feasibility study on the matter, it does not mean it will pursue that route.

There are currently 120 countries studying or experimenting with CBDCs to see if their central banks can adopt them. Kganyago said there was no dispute that CBDCs can solve some real problems that developing countries face, including financial inclusion and the exorbitant cost of cross-border remittances.

READ | Central bank digital currencies are on the rise. That could be bad news for freedom

For this reason, it was understandable that some central banks might be concerned that their regional currencies could be dislocated if they don't adopt CBDCs quickly enough.

But this was not something to rush. There still needs to be discussions about the role of cash and who will have access to central bank money.  

"As we think about the CBDCs, we've got to be thinking about what is it that we are trying to solve; what is the use case for a CBDC," said Kganyago.

One central bank that is ahead in experimenting with retail CBDCs is the Bank of Israel. Governor Amir Yaron told the WEF that their youth engagement experiment in collaboration with Norway and Sweden, called Project Icebreaker, was a huge success.

It was a cross-border CBDC experiment which saw funds from one person paid to the receiver's CBDC wallet in another country instantly.

"It's the first CBDC retail experiment that takes a retail payment that household or merchant in Israel paying in shekels, the local currency, and transferring it back to somebody in Sweden or Norway," he said. "It's important to notice and emphasise that that transaction would be immediate as opposed to several days, which is what happens in today's system," he added.

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