Blockchain technology is with us and we should embrace it, regulate it and take advantage of what it offers. If we don’t, the Facebooks and Amazons of the world will do so, and an opportunity to make it work for the informal economy and the poor may be lost.
South Africa is on lockdown level 4, easing the economy into a gradual start-up after an almost complete lockdown for five weeks. President Cyril Ramaphosa announced a massive R500-billion rescue package for the South African economy on 21 April 2020 to deal with the economic risks created by the lockdown. However, these relief measures have been mired in controversy.
For instance, the R350 on offer to unemployed South Africans is being distributed using inefficient systems that appear to function poorly, making it difficult for the five million intended beneficiaries to secure the meagre grant. While these efforts are to be applauded, these inefficiencies beg the question – is there an easier and better way to distribute money that ensures that it reaches its targets and gives the beneficiaries more bang for their buck?
The answer may lie in the Fourth Industrial Revolution (4IR) digital technology, specifically in novel money exchange systems. 4IR digital solutions rely on innovative ways of using blockchain technology that can benefit society and the economy.
It differs from digital banking that is offered by commercial banks as it uses secure digital cash and provides almost instant transactions and efficiencies that only blockchain technology can offer. Digital cash transactions use a digital token, which can be tied to a national currency, making it equivalent to physical cash.
The simplest way to create digital cash is for the central banks to issue the digital cash, but it can be issued by commercial banks, with permission from the central bank, or by a digital platform where the cash is backed by money in a bank or by bonds. Digital cash should be easily exchangeable for physical cash at any point that the owner wishes.
Many countries and central banks around the world have been considering the introduction of digital cash that acts as a complement to physical cash, even before the Covid-19 crisis.
The Financial Times reported in November 2019 that “China’s central bank has been working on a project called “DC/EP”: Digital Currency/Electronic Payments.”
It further reported that:
“The Governor of the People’s Bank of China said the plan was not to create a new currency, such as Bitcoin or Facebook’s Libra project, but to partially digitise China’s existing monetary base, or cash in circulation, and that the new digital currency would not replace other parts of the money supply, such as deposits held in bank accounts, and balances held by payment apps such as WeChat and Alipay.”
Announced in April 2020, the People’s Republic of China is conducting four pilot schemes for digital Yuan development, testing it in partnership with China’s state-owned banks. While this does not mean that China will finally adopt a digital cash alternative, it is an indication of how seriously it is taking this technological innovation.
China is not the only country considering this option. Sweden is investigating the introduction of an e-Krona through its central bank Riksbank, mainly because only 13% of purchases in 2018 were made with cash, raising concerns that cash will disappear from the Swedish payment system.
Riksbank has published two reports on the possibility of the Central Bank issuing digital cash that provides a more secure method of transaction than physical cash, with the digital convenience of swipe and pay. Riksbank’s own reports warn of the possible need to change Sweden’s Banking Acts in order to regulate and accommodate the e-Krona.
Independent research by a UK-based non-profit called Positive Money, raises some interesting points. In its April report titled Money We Trust, it notes that the banking system could be disrupted by the introduction of digital cash.
It can do this in two ways; firstly, it could remove the intermediary role of banks in the payment system, affecting their profitability. Secondly, because digital cash might be perceived as being more secure than money in a bank, in a crisis it could result in a bank run.
Positive Money suggests that if the digital cash were issued by a central bank, this risk would be eliminated. On the plus side, Positive Money suggests that a digital cash alternative may encourage banks to develop revenue models that are more competitive than the existing ones.
In South Africa, a digital rand, or e-ZAR, could augment physical notes and coins in circulation, as an easy means of exchange for both the banked and unbanked. However, to work effectively, this requires a digital platform with scale; the more users, the more utility and the more effective it is. Existing digital platforms like Facebook and Amazon already have billions of users and hence have an advantage if, and when, they introduce a digital payment option.
Unless a digital platform has the backing of a national government and its central bank, it is unlikely to succeed. The race is on and the South African government should step-up quickly to avoid the potential damage to its sovereign currency by a cryptocurrency offered by one of the big private players like Facebook’s Libra.
There is a drawback – digital cash loses the anonymity of physical cash, as all the transactional history is recorded on a digital ledger, a blockchain. There are obvious merits in this transparency to regulators, who could deduct taxes on transactions and prevent capital flight. However, this may be seen as a reduction of existing rights and could take away an important functionality of physical cash, which is anonymous and free to use.
Positive Money argues against the withdrawal of all cash in the economy for these reasons. It also raises considerable concerns about the ownership and use of the valuable data captured on the blockchain. These concerns about digital cash, including the possibility of it destabilising existing banking systems, need to be scrutinised carefully.
How could this innovation help us right now during the Covid-19 crisis?
At this present moment, SASSA is attempting to enrol an additional five million users onto its system in order to provide them with R350 per month cash, or a voucher with equivalent value. To do this, users need to send an email, call a WhatsApp number or request a USSD code. Reports indicate that the system is not functioning efficiently because the technology is clunky.
In comparison, a digital platform using blockchain technology can handle, at the minimum, 10,000 transactions per second and vouchers can be issued rapidly once validation is complete.
Such a digital platform has the capacity to integrate data sets from anywhere, within minutes, making validation through SARS, Home Affairs, SASSA and other data points almost instant. Geolocation and biometrics can be used as additional validation sources and could make the need for addresses and paperwork redundant.
Grants could be issued within hours, rather than weeks.
The system could work for all government portals, providing one entry point making access simple for all users and for all purposes. The grant funds could be held by the central bank, or commercial banks, or any government entity with a bank account. However, the beneficiary would not need a bank account, they would only need a digital account on the digital platform. Given that people are hungry now, there is no excuse for delays.
But is the technology available to do this?
There is an interesting South African initiative, called FORUS, which has an operational digital platform and a proposed digital cash option tied to the South African rand, that provides free transactions and a way for modest savings. It has been tested in the Eastern Cape, but thus far has not had much exposure. As sign-on is digital, it can be rapidly rolled out and can provide a means to deliver digital cash into the informal sector where it is most needed, as explained. A card option is available for those who do not have access to smartphones.
The FORUS digital platform founder, Sonny Fisher, explained that the digital platform has taken years to design and to bring together the right partners with cutting edge expertise and experience. Transactions between any user in the system is possible, including large box retailers, spaza shops and even tipping your car guard by tapping his/her phone.
FORUS has designed an interest-free lending scheme for SMMEs with payback through an affordable charge per sale, with most of the surplus directed into a Wealth Fund for future loans. The charge per sale uses an automatic smart contract, that reduces risks and costs for both lenders and borrowers. FORUS has calculated that its platform can generate a surplus of hundreds of billions of South African Rands that can be further lent out to SMMEs.
However, the system needs scale to reach these goals. The FORUS digital platform can integrate any and all databases, including marketing and communication tools. Much of its income comes through targeted opt-out advertising, with the permission of its partner user groups.
FORUS does not need a banking licence as it is pre-funded with deposits raised through a bond instrument, keeping it outside of the banking regulatory system, but allied to, and using, the existing banks in the system. Perhaps the most interesting aspect is that FORUS has designed its platform so that the users will own 80% of the national FORUS digital platform, thus sharing in the benefits.
Searching for alternatives to compare with the FORUS digital platform has not been fruitful, largely because other systems use cryptocurrencies, not a digital token tied to the national currency. These cryptocurrencies compete with the South African rand rather than augment and support it. All other digital platforms are designed to maximise returns to shareholders, not their users, unlike the FORUS digital platform.
Before it commits to supporting these innovations, the South African government would need to evaluate what regulation, if any, is needed to protect users and prevent destabilisation of the existing banking system. Sonny Fisher of FORUS, says:
“I am open to discussing ways in which we can work together with the South African government and the Reserve Bank to provide liquidity to the informal sector that is free and secure, and which complements the existing banking system.”
FORUS intends to submit an application to join the National Treasury’s “Regulatory Sandbox”, where rules are temporarily relaxed, so that systems can be tested with oversight provided by government regulators. This process is open for others to also apply, and it is hoped that this will open the way for these digital innovations to be available to South Africans.
On the international front, the Libra Association, set up by Facebook, announced in mid-February 2020 that it is pulling back on its original vision of a digital currency. This was to appease global regulators that need time to evaluate the impacts of these innovative solutions before being launched on the market.
The influential magazine, The Economist, on 12 May 2020 reported that the expansion of Chinese ambitions into digital platforms, for use outside of China, replacing the dollar and the SWIFT system, will be tempered by how much trust people would have in a Chinese offering. The same will apply in South Africa – trust is the heart of all successful money systems.
One thing is certain, blockchain technology is with us and we should embrace it, regulate it and take advantage of what it offers. If we don’t, the Facebooks and Amazons of the world will do so, and an opportunity to make it work for the informal economy and the poor may be lost. DM/MC