Why the cash of the future will be digital and decentralized
hen South Africa’s biggest banks released their year-end financial results last month, it became clear that Covid-19 has sped up the move to digital. Each bank saw an increase in digitally active clients and more transactions were done via online banking.
But online banking as we know it is only a small step towards the future of finance, experts say. And for financial institutions, Covid-19 has made this future — in which technology used by cryptocurrencies makes banking faster and central banks dole out digital money — seem even more imminent.
Dominique Collett, a senior investment executive at Rand Merchant Investments and the head of incubator AlphaCode, said Covid-19 has “accelerated customer acceptance of digital financial services”.
In the past, South African customers resisted making digital payments, Collett said. “This is probably because the existing system has been so well entrenched. And the hardest thing is to change what people are used to,” she added.
“But suddenly with Covid people are being forced to sit at home and for the first time they were embracing e-commerce … Obviously to shop online you have to make digital payments and so people became more comfortable using digital payment methods. Then people were more comfortable embracing digital financial services generally.”
Collett said this acceptance of digital transactions is likely a permanent offshoot of the pandemic and has caused mainstream institutions to push forward with innovation.
Tyme and Discovery Bank have experienced a rapid acceleration in customer numbers, Collett noted. “But what it has done is that the incumbents that are going to compete, like FNB and Capitec, have responded very aggressively … The banks and insurers that don’t have a very clear digital strategy are going to be the losers in this race.”
Banking and the blockchain
Covid-19 has also boosted interest in cryptocurrencies. Recently cryptocurrency has become more mainstream, Collett said. “People are saying: ‘This is an asset class that is a force to be reckoned with.’”
Luno, South Africa’s largest cryptocurrency exchange, has doubled its number of accounts between last year and now, Collett noted. “Especially in emerging markets, where people are seeing their currencies are volatile, and they are looking for alternative sources of value, cryptocurrencies are just exploding.”
According to research by Luno, South Africa ranks third globally in cryptocurrency ownership.
Unlike other currencies, crypto is created, distributed, traded and stored using a decentralised digital ledger called a blockchain.
Collett explained that in the early days of bitcoin, the biggest cryptocurrency, there was interest in how blockchain technology can revolutionise the way payments are done.
“People felt that because of the instant settlement that you are allowed to do on blockchain, and the fact that all transactions are traceable, the bitcoin rails could be used for anything from doing international remittances really cheaply to doing property deeds in a different way.”
In 2018, South Africa’s Intergovernmental Fintech Working Group launched Project Khokha, which replicated interbank clearing and settlements using a blockchain network.
If successfully implemented, a distributed ledger could be used to make real-time interbank transfers by bypassing the central bank as an intermediary. The results of the project showed that the typical daily volume of the South African payments system could be processed in less than two hours with full confidentiality.
Earlier this year, the working group announced the second phase of the project which will issue, clear and settle debentures — a type of debt instrument companies issue to raise capital — on a distributed ledger using tokenised money. Absa, FirstRand, Investec, the Johannesburg Stock Exchange, Nedbank, Standard Bank and Strate are all participating in Project Khokha 2.
Devon Krantz, the chief executive and cofounder of Linium Labs, a blockchain software development studio, said it is vital for banks to stay ahead of what is happening with blockchain.
“More and more people are starting to explore options for a more free financial world and breaking down borders for international banking and infrastructure,” she said.
“Blockchain provides opportunities for the unbanked, which could be interesting for South Africans specifically. At least with crypto and blockchain, all you need to interact with the decentralised world or the blockchain financial world is an internet connection.”
Krantz expects it will be some time before blockchain technology is fully integrated into day-to-day financial practices. “But I do think in the long term it will be very, very important for the banks to stay ahead of the curve, at least because historically those that are least willing to adapt usually are the first to become irrelevant,” she added.
“With the current rate of innovation accelerating through blockchain at the moment, it’ll be important for them to at least keep their finger on the pulse. If they don’t at least offer de-fi [decentralised finance] products they may become irrelevant.”
Monica Singer agrees. Singer, who is the former chief executive of Strate and the current South Africa lead for blockchain company ConsenSys, worked with the South African Reserve Bank (Sarb) on Project Khokha’s first phase.
Banking in its present form will quickly show itself as “insufficient and antiquated” as the blockchain era snowballs, Singer said.
Singer adds that the current uses of blockchain are “just the tip of the iceberg”. “If you apply the concept of bitcoin to the future of money and the future of finance, your head would explode with ideas,” she says.
For example, the bitcoin concept could totally change the future of money with the development of central bank digital currencies (CBDCs).
Counting on digital coins
The concept of CBDC is inspired by bitcoin, but is different insofar as it is backed by a country’s government. Instead of printing money, a country’s central bank will issue electronic coins. Cash will effectively be replaced with homegrown cryptocurrency, Singer explained.
has its own digital currency and Brazil has plans to launch its CBDC in 2022.
In March 2019, Sarb invited bids from private companies to develop CBDC infrastructure.
The Reserve Bank later announced it was looking into the feasibility of a digital currency, but it did not respond to the Mail & Guardian’s request for an update.
“For the first time, the public will be able to hold a currency directly, without having to use a bank,” Singer explained.
Singer said capitalism committed “a great crime” by excluding millions of people from the mainstream financial system. According to a 2019 FinScope report, 19% of South Africans are unbanked.
Central banks should implement CBDCs “in a hurry”, Singer said.
“It is a crime that people cannot open an account. It is also a crime that we don’t care about poor people. Now for the first time we have technology that can prevent money from ever being stolen or lost, new money that can be backed by the central bank and money that is accessible to everybody.”