Lower costs and better access to investment are fundamental for growth and jobs. Those advantages become reality when you apply the appropriate technologies. But technology can be risky, and everyone prefers a stable hand to help guide the process.
The South African Reserve Bank knows this, which is why it pioneered Project Khokha to drive consensus and adoption of blockchain systems in South Africa’s financial sector. It is a highly proactive action, similar to other astute emerging markets such as Dubai and Singapore.
Blockchain or distributed ledger systems are fairly new. Setting aside all the buzz around cryptocurrencies, at its root a blockchain system is a fantastic trust authority that is based on a transparent smart contract. Many different systems maintain a ledger independently from each other, so a transaction can be vetted automatically by simply comparing ledgers. In other words, no cooking the books because, as has been famously quipped, a computer can’t take an envelope!
What is so special about this?
Blockchain is a new way to enforce trust. It disintermediates the middlemen and instead uses a ledger replicated between many different machines to underwrite something’s veracity. This increases the speed of agreement between parties and, when designed properly, drastically reduces the costs involved. Through smart contracts, it can protect lenders and borrowers alike, creating an optimised environment for entrepreneurship. It also combats corruption and disables patronage networks.
But that isn’t the story here. The real headline belongs to the Reserve Bank’s proactive attitude. Through Project Khokha, it is helping guide South Africa into a hi-tech future that benefits everyone. It creates the stability that others can build upon, leading to more innovation and job creation. This has long been the crucial role of the Bank: it maintains the course so that others can flourish on the stability it provides.
It’s no wonder that the World Economic Forum recognised South African banks as the second most sound globally. Despite significant body blows in recent years, the South African economy has maintained much of its resilience and remains attractive to investors. That is not by accident — it has everything to do with sound policy and vision from the Reserve Bank.
South Africa has some of the best industry self-regulation bodies. Basa, Pasa and numerous subcommittees continue to do excellent work, unhindered by external influence. In the capital markets, the JSE and Strate are solid institutions that facilitate efficient trade and capital flow.
But it’s a culture that can only thrive if the Reserve Bank remains politically agnostic. In recent months, calls for nationalising the Bank have grown. There is a view that a central bank controlled by the government is the best way to create gains for South Africa’s people. But both theory and real-world examples don’t agree. The Bank’s track record proves that a non-public-sector entity can take on those roles to the benefit of all.
Recently, some have jumped on the Bank’s shortcomings as a reason for wanting to end its independence. Indeed, the Bank doesn’t have a spotless record. Other than more recent examples such as African Bank and VBS, it also stumbled on the Tier II banking shutdown and the 1998 mini-crisis. But no institution is perfect.
It’s impossible to regulate comprehensively to avoid utmost greed, such as at African Bank, and graft as we saw at VBS. There is also no proof that nationalised banks are any more effective at preventing such extreme abuses. The Reserve Bank is actually very effective. Consider how decisively it acted with African Bank, managing to turn it around in just two years. There are banks in developed countries that still haven’t quite recovered from the 2009 crisis. We really undervalue the effectiveness and stability we get from the Reserve Bank.
By supporting blockchain technologies, the Bank is saying it supports self-regulation by consensus, based on transparent contracts as a hi-tech addition to normal bank regulation. It’s demonstrating it is willing and able to move with the times while remaining solid in the execution of core responsibilities.
Technology is creating positive change. In the wake of the Tier II crisis, new challenger banks used technology to fill the vacuum and upset incumbents. Those challengers became Capitec and Discovery and now include Bidvest and Sasfin. They were able to take risks in good faith, knowing that the right policies and support were in place.
Such support doesn’t materialise out of thin air. They require an institution of vision and drive to back them, as the Bank is doing. Blockchain is just one example: the world is changing fast through numerous digital technologies and the countries that can’t adapt will become the paupers of the 21st century. A technologically progressive and visionary Reserve Bank holds the keys to South Africa’s future.
This is not possible if the Bank isn’t independent of politics.
South Africa to remain self-regulated and properly regulated by independent and excellent institutions such as the Bank is an economic imperative. Those uncomfortable about all the tax-funded bailouts of rogue banks should support an independent Bank because it stands for innovation, trust and value. A state-run Reserve Bank will result in the opposite: Venezuela.
- Andries Brink is CEO of Andile Solutions