South African policymakers, legislators and regulators need more engagement with the fintech industry before distributed ledger technology can be incorporated into the nation’s financial markets, according to a new report by the central bank and the Intergovernmental Fintech Working Group.
A distributed ledger is a digital record of transactions and contracts maintained in a decentralised form across different locations. The technology underpins cryptocurrencies such as bitcoin and is being experimented with in large parts of the global financial system.
With legislative reforms in the payment system under way in South Africa, it’s an opportune time to consider how to treat distributed ledger-based platforms and the use of tokenisation in financial markets, though efforts should be made to ensure rules are technology neutral, principles-based and borne out of collaboration, the Reserve Bank and the working group said in a statement on Wednesday.
The two bodies have completed a joint proof-of-concept project exploring the policy and regulatory implications of distributed ledger-driven innovation in financial markets.
Under the experiment dubbed Project Khokha 2, the central bank and working group, issued, cleared and settled debentures using distributed-ledger technology and tokenised money to inform policy and regulatory reflections. The working group included South Africa’s top four banks — Absa, FirstRand, Nedbank and Standard Bank — and the JSE.
To operate a distributed ledger and technology-based financial system, new capabilities are needed across all role players and new platforms will need to be integrated with legacy systems, the central bank and working group said. The costs of such a move — that ought to be borne by all market players — will have to be offset against potential benefits, new standards, best practices and a supporting ecosystem will also have to be put in place.
“A transition to a DLT-based system requires careful planning and execution and may involve running a DLT-based system in parallel to the existing system for a while, perhaps indefinitely,” they said. — (c) 2022 Bloomberg LP