Regulations governing the weighting and capital treatment of cryptoassets and tokenised deposits should come into effect by January 1, 2025, financial sector regulator the South African Reserve Bank (SARB) senior financial technology (fintech) analyst Gerhard van Deventer has noted.

"[Prudential regulation of banks global standards body] the Basel Committee on Banking Supervision brought out a paper in 2009 about the treatment of cryptoassets by commercial banks, and the paper deals with the weighting of different types of cryptoassets and the capital treatment thereof," he noted during the Africa Blockchain Conference 2023, on March 17.

"In South Africa, and other countries, we have to convert this into regulation. This is important because there are currently significant discussions surrounding tokenised deposits and commercial banks are thinking about stable coins," he said.

Tokenised deposits could potentially be treated as an existing asset. However, there is a need to think about some of the risk inherent in the technology and the innovation that enables it.

South Africa's commercial banks are thinking about these risks and concerns, he pointed out.

However, there are other considerations such as the US Federal Reserve's experiments with a regulated liability network, which is a distributed ledger technology (DLT) platform on which different regulated liabilities are issued, including, potentially, central bank money and commercial bank money and regulated stable coins.

Further, international central banks financial institution Bank for International Settlements GM Agustín Carstens has called for a “unified programmable ledger in a public-private partnership” because, to fully realise the potential of new financial technologies like central bank digital currencies (CBDCs), tokenised deposits and fast payments systems, there needs to be some way to bring them together, Van Deventer highlighted.

The SARB and the financial services sector in South Africa have been experimenting, through successive projects, with DLT and digital money technologies to understand the risks and benefits of their use.

Through Project Khokha and Project Khokha 2, in partnership with commercial banks, the SARB and the industry explored wholesale CBDCs and, in Project Dunbar, multi-CBDCs.

Multi-CBDCs do not differ from either retail or wholesale CBDCs, but refer to the issuing of multiple CBDCs on a single platform. These typically facilitate or improve crossborder payments.

"At the SARB, we recently completed a project that explored the feasibility, desirability and appropriateness of a retail CBDC for South Africa. We are currently progressing with an internal project to consider the way forward," said Van Deventer.

However, lots of work remains for the SARB, the Financial Sector Conduct Authority (FSCA) and the financial industry in South Africa, including needing further developments surrounding prudential treatment, as well as more work required from the national payments department and how national payments will be managed in a decentralised finance environment.

Additionally, when regulations are promulgated, the declaration that cryptoassets are considered financial products in South Africa, in line with the recommendations of the Crypto Assets Regulatory Working Group, is only the first step and an intermediary one, and more regulations are set to follow, he added.

"Some of the key outcomes of Project Khokha 2 include that further work is required in terms of cost-benefit. We did not come to a conclusion of whether we need to move forward. This was an exploratory project and, among other reasons, regulators typically follow the market, and there are questions about whether we should set a direction.

"Further, there are questions about whether there would be a direct change-over to wholesale CBDCs and stable coins, or whether deployment should be in parallel," he noted.

However, the Intergovernmental Fintech Working Group's team did realise value from using DLT, as a shared ledger provides one version of the truth, and the SARB's financial markets department benefitted from the operational data generated during Project Khokha 2, he noted.

"We are technology-neutral, but we are not technology-blind. Technology does impact on risk and, therefore, potential regulations," Van Deventer highlighted.

"In Project Khokha 2x, which will focus on wholesale CBDCs and stable coins, we are thinking about the governance of the platform. Its design will consider interoperability with wholesale CBDCs and it follows decentralised, autonomous organisation principles."

One of the first use cases the project is tackling, as approved by the Khokha council, is commercial bank-issued stable coins for the regional transfer of value. For example, using one bank in South Africa to settle with a bank in Kenya. A question that remains on whether such a settlement can happen on a private platform or whether it would need to interface with the national real-time gross settlement system, he noted.

A second business use case that the project will consider is that of trade finance platforms.

"We are thinking more broadly than just money on a platform and trade finance is one of the use cases put forward where DLT would be of value because of the multiple roleplayers and documentation, and all the processes involved," he highlighted.

Project Khokha 2x will also consider how wholesale CBDCs, aside from being used officially for settlements, could also serve as collateral. This could mean that a smart contract could serve as a letter of credit, Van Deventer said.

A further use case that the project will explore is bank industry stable coins. These are similar to wholesale CBDCs issued by a central bank; however, stable coins can serve in different use cases, including retail use cases and how banks can retain their relationships with their customers in this world, he added.

"We think the potential future is a multi-DLT world; hence, interoperability is quite important and had to be part of the design," he noted when describing the design of Project Khokha 2.

Specifically, the current silo-based financial market is by design and, hence, discussions about interoperability must look at the principles of financial market infrastructure.

"Different risks in this environment are managed by placing them into silos, and each silo is then focused on managing a particular risk."

However, through the interoperability created, this siloed approach is done away with, as decentralised technology centralises operations and centralises functions on one platform, and the SARB must consider the benefits and risks introduced, he added.

"We need to think about the potential overlap between cryptoasset regulation and the regulation of existing financial markets through the Financial Markets Act," Van Deventer said.

WHOLESALE CBDC
Meanwhile, South Africa's banking industry and financial sector have highlighted the benefits of the potential use of CBDCs to facilitate secure interbank clearing, which can help to facilitate cross-border settlements and payments.

Wholesale CBCDs are potentially useful and could exploit the self-verifying properties of blockchain to simplify inter-bank clearing, said financial services firm Standard Bank CE Sim Tshabalala at the Standard Bank African Central Bank Conference on March 16.

The SARB said that it, in collaboration with financial services industry stakeholders and other statutory bodies such as the FSCA, was continuing to explore the evolution of money, including wholesale and retail CBDCs, said Van Deventer.

Further, retail CBDCs could serve a social purpose, particularly by increasing participation in the formal financial system, and by reducing opportunities for tax evasion and other forms of financial crime, said Tshabalala.

"However, it is not clear at this stage how retail CBDC balances held with commercial banks differ from other deposits, or how CBDC balances held by an individual or a firm directly with the central bank differs from the central bank turning itself into a retail bank," he noted.

“The key question is whether the retail banking arm of the public sector is subject to the same kinds and levels of regulation as its private sectors competitors. If not, then this does nothing to mitigate the risk and moral hazards that an unfairly regulated institution could introduce into the financial system," he said.