South Africa’s Central Bank Demos Tokenized Fiat Through an Ethereum Based Blockchain

South Africa’s Reserve Bank(SARB) has demoed a Proof of Concept (PoC) implementation of tokenized fiat through Quorum, an ethereum based, enterprise grade, private blockchain.

Eight South African banks participated, including Absa, Capitec, Discovery Bank, FirstRand, Investec, Nedbank and Standard Bank, with ConsenSys as the technical partner and PricewaterhouseCoopers Inc. (PwC) as the support partner.

South Africa’s Central Bank says in a report that all their testing goals were successfully achieved, with the aim being a realistic blockchenization of South Africa’s Real Time Gross Settlement System (SAMOS).

That being the system commercial banks use to settle their obligations on an immediate real-time basis in central-bank money.

They do not intend to replace SAMOS with blockchain technology, but Francois E. Groepe, Deputy Governor of the Central Bank, said earlier today during a question and answers session that the blockchenized system could potentially act as a back-up fourth layer.

SARB has a special minting function in the set-up. Fiat money, currently, is mostly a digital number on a database at the central bank. It is created through a debt system whereby the bank in effect prints out say 100 rand to pay for a commercial bank’s asset, such as a residential mortgage.

In the blockchenized system, they would mint tokens instead of entering a number in a database. Once the token is given to the commercial banks, they can then transact with each other without SARB’s involvement in the payment processing.

Range proofs and Pedersen commitments are fairly new concepts. A representative from ConsenSys said it’s a method to hold balances in a random number format so that you can not tell the balance of each participant.

The central bank would of course have a decrypting key, so they would be able to see everything for the purpose of liquidity monitoring.

This new method of confidential transactions was chosen because it is a lot faster. Zero Knowledge Proofs, for example, take around 4 seconds for one proof. While with Peterson commitments you can have 10 proofs a second, with other techniques potentially increasing it further.

One of the goals of this test was to handle the daily volume of the central bank’s clearing system. Something which the blockchain set-up can do successfully within two hours, so handling 70,000 transactions in that period. Thus making it viable, at least as a back-up.

Once we have created tokenized money, the central bank is no longer at the centre of settlement, Deputy Governor of SARB said before further adding that if the central bank is down, settlement can continue, so making this set-up potentially useful as a business continuity solution.

The benefits are, he said, just how quick it all is, something which would significantly drop collateral capital tie-up. If we proceed, he added, these are some of the benefts we unleash, benefits for our own institution.

Another representative from the central bank told a story where a boy ties up the chicken’s legs to carry it home, once it is home, he unties the chicken’s legs, but the chicken doesn’t run because it hasn’t realized that its legs are now untied.

We can do this, he said, something which was one of the most important end result of the test. The tech is there, the tech consntraints are being addressed, but the issue of Central Bank Digital Currency (CBDC) gives rise to policy questions which central banks are pondering, the Deputy Governor said.

That includes a “disintermediation of the banking sector,” as it has potential to “fundamentally change the financial sector and the structure of the financial system.”

The set-up here, however, is merely an upgrade of the current system as only commercial banks were able to participate, with SARB maintaining its role of creating fiat money and having visibility on liquidity moves.

The difference is that if one bank wants to pay another bank with central bank money, they need not involve the central bank as the blockchain can undertake the verification and validation of transactions through an Istanbul Byzantine Fault Tolerant consensus system which can tolerate the failure of 25% of the nodes.

The ConsenSys representative said in the current set-up all nodes keep a record and validate transactions, but do not know balances save for their own, with sharding potentially applicable but not necessary for the inter-bank payments level. More widely, and looking towards the future, the report says:

“Understanding the technology is the first challenge, then collaborating, then going into production. If one starts from the point where money is tokenised (as is done in this project) and then represented on a DLT system, then this system can be developed to enable other uses beyond wholesale settlement.

Examples include the exchange of tokenised money for other tokenised assets, like bonds or securities. These may exist on the same system or on different blockchains. Such a system has considerable implications for other industries, like asset management.

Access to the payments system could also be widened to include large companies, small companies, and even retail customers. It would need to be established whether these parties have direct access via their own nodes or as clients of existing node owners and, if they operate nodes, then the role that those nodes play in the consensus process.”

You’d think the way the chicken realizes it can run is by first trying to crawl. This, arguably, is what the central bank has done here in a very interesting set-up which effectively announces blockchain technology is now ready to be used for inter-bank payments, at least as a back-up.

Once this is tested perhaps even in actual production, then the system could be widened to include even securities, with other bigger and fundamental questions, particularly whether it should be open to citizens, likely a decision to be made by the public, perhaps even in a referendum.

One such binding referendum is to take place in Switzerland this very Sunday where the people there will decide whether the benefits of interest accrued on newly created money should be enjoyed by all or just commercial banks.

Those, of course, are not tech questions, but even within the current system it appears some significant benefits can be gained, with the initial incremental implementation then potentially gradually evolving towards a widening of access.