The South African Reserve Bank (Sarb) is setting up a dedicated unit to monitor cryptocurrency and fintech developments and inform future regulations and its first job will be to set up a proof of concept (PoC) for DLT-based interbank clearing and settlement.
According to the central bank's banking practice director, Bridget King, cryptocurrencies currently fall outside of its remit for traditional banking and payment services and the new unit will most likely be tasked with a establishing a self-regulatory approach to cryptocurrencies and other related fintech developments.
The self-regulatory organisation (SRO) would be a non-governmental body with the power to publish its own rules, directives and industry standards and would be primarily aimed at preventing systemic risk but enabling enough innovation to keep pace with other jurisdictions.
King also said the new SRO would focus on ensuring it does not over-regulate what is still a nascent area and changing on a daily basis.
“Regulating cryptocurrencies prematurely could have the negative consequence of throttling the growth and innovation of the industry," she said. "In addition, if laws are drafted based on existing technology, which is still in its growth phase, there is a risk that the technology may have moved so much by the time the legislation is enacted, that the legislation is obsolete or requires updating almost immediately to align with the latest technology."
But a hands-off approach would also have to be balanced against the dangers of an unregulated fintech market due to the anonymity of cryptocurrencies and the threat of untraceable hackers, said King.
The first task of the central bank's investigative unit, nicknamed Project Khoka, would be to explore the feasibility of a DLT-based system for processing secure electronic payments. To this end, it is launching a PoC to replicate interbank clearing and settlement using Quorum, an Ethereum-based system.
“The aim of this project is to gain a practical understanding of DLTs through the development of a PoC in collaboration with the banking industry. The objective of the POC is to replicate interbank clearing and settlement on a DLT which will allow the Sarb and industry to jointly assess the potential benefits and risks of DLTs,” stated the Sarb.
The launch of Project Khoka follows the Sarb's establishment of a fintech task force in January and its stated priority of reviewing the central bank's position on private cryptocurrencies and addressing regulatory issues such as clearing and settlement risks, exchange control impacts, monetary policy and financial stability.