South Africa concludes technical Proof-of-Concept for its CBDC settlement system
The South African Reserve Bank would conduct further studies on the project's findings to inform the masses about CBDCs and DLT
By Shashank Bhardwaj
South Africa reached another milestone in its central bank digital currency (CBDC) implementation journey as it concluded a technical Proof-of-Concept (PoC) for its wholesale CBDC settlement system. The project will further be used by the South African Reserve Bank (SARB) to highlight the implications of distributed ledger technology [DLT] adoption in financial markets.
For the CBDC settlement system, two platforms have been developed under the PoC: The first served as a decentralised trading platform and the other was used to manage CBDC. Besides these two projects, a bidirectional bridge was also built to allow easy portability of the CBDC between the two platforms. This bidirectional bridge is similar to those built in DeFi for sending cryptocurrencies across different blockchains.
The project is called Project Khokha 2 (PK2), and constitutes the second phase of the Khokha (PK1) project launched by SARB in 2018. The PK1 project had experimented with DLT technology for interbank payments’ settlement. The project had been successful in replicating SAMOS—the real-time gross settlement system of the banks.
In February 2021, the second phase (PK2) of the Khokha project was launched. The project involved testing DLT with trading and settlement in a PoC environment. There were several names from the industry as a part of the project: FirstRand, JSE Limited, Absa, Standard Bank and Nedbank together formed the Intergovernmental Fintech Working Group (IFWG).
SARB also tested how debt instruments could be issued using the technology. The central bank enabled two payment options as settlement tokens—wCBDC as the wholesale central bank digital currency and wToken as the wholesale settlement token. SARB pointed out that the new DLT platforms will have to be integrated with the legacy bank systems for the implementation of the technology. The cost of this implementation and integration will fall on the banks. The need to establish new standards and support systems for the DLT infrastructure would also arise, and for the time being, the DLT systems may have to run side-by-side with the legacy systems.
The project findings also highlighted the regulatory, operational, and business impact of DLT on the market. Nevertheless, the new technology would be used to streamline multiple infrastructures onto a single platform, thereby reducing the cost and complexities involved. In this regard, SARB also noted the technical risks involved in the reliability and security of the bidirectional bridge. It flagged the issue of CBDC use on the networks beyond the two platforms as a matter for further consideration.
SARB concluded that it would continue to study and work on the findings of the second phase. It will also consider the legal status of wCBDC to frame policy and regulatory responses to DLT and CBDC and its role in the financial markets. Another area of research that SARB has probably been focused on is the ‘desirability and appropriateness’ of a retail CBDC. Currently, no date has been marked for the completion of this study, but SARB confirms that it will happen in 2022.
Shashank is founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist.