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The South African Reserve Bank (SARB) – the central bank of South Africa – has been exploring central bank-issued digital currency (CBDC) since 2016. Yet, many nation-states are further ahead than South Africa. The decision to implement a nation-state digital coin is an inevitability.

On 6 June 2019, the SARB received expressions of interest from prospective solution providers. If the SARB’s feasibility study and expression of interest move through its full lifecycle then the digital currency would be included in the SARB Act and associated Acts – which entitles the SARB to have the sole right to issue or cause to be issued banknotes and coins (and digital currency) in South Africa. Furthermore, the SARB plan to make this new digital currency format to be complementary to cash.

The SARB’s electronic legal tender, as its name suggests, would become legal tender for South Africans. As it stands, every citizen or institution must accept legal tender such banknotes and coins (physical or digital) in respect of payment of a debt.

Firstly, retailers would have to receive digital currency for payment of goods. Secondly, employers can pay wages in this new nation-state digital coin. Lastly, payment of property rates and income taxes can also be enabled.

The man-on-the-street doesn’t pay much attention to every-day payment innovations. But new currency formats – like digital currency – are different. They don’t happen very often, if at all, in our lifetimes. The last major introduction of a currency format was the paper note and last century’s electronic money.  (Using a clearinghouse and central bank settlement system for retail and wholesale payments).

Before moving on to the latest form of digital currency we need to look at and briefly understand the recent history of electronic money globally and in South Africa.

Background to Electronic Money

Prior to the introduction of computers and databases, there was an archaic system of manual accounting to keep score of your bank balance in written format. The balance of your account would be entered onto a physical booklet and this was reflective of your bank account.

Credit cards started making their mainstream entrance to payments in the 1960s. Fast-forward to the 1970s and technology (using networks, software, and hardware) brought us electronic money allowing banks and central banks to store balances and transact electronically.

Next cheques became a popular form of payment. The cheques introduced the need for clearinghouses. Clearinghouses include all issuers of cheques (normally banks) that would meet up daily. Bankers will swop all cheques they receive from other banks and receive their bank’s customers’ cheques deposited at other banks. The bankers cleared the gross (overall) debts in the clearinghouse, consequently making the necessary accounting in their own bank accounts. The final settlement happens when these debits and credits are settled in the books of the central bank.

The role of retail banks

Banks started to introduce additional electronic formats in the form of electronic file transfers (EFT), instant payments, salary payments, and more. The ability to credit-push and debit-pull (deduct) money from accounts e.g. debit orders, cheques, and credit cards became possible.

Debit-pulls in the payments system allowing a third party to deduct (debit) from someone’s account lead to many problems including debit order and credit card fraud. Institutions implement systems like DebiCheck in South Africa albeit at exorbitant costs. The intention is to try to protect citizens from this flaw in the system – the debit flaw.

The banks and partners of payment providers have created massive ecosystems and investments in infrastructure. They do this to make sure all the credits and debits flow securely and efficiently. From tapping your card at a terminal in a store to receiving money on your smartphone.

Nation-State Digital Coins / Digital currency – Electronic Legal Tender

Now nation-states are stepping in with a new form of money that either bypasses all intermediaries (banks, clearinghouses, etc.) or requires them all to change their aging systems. The likely result is that incumbents will resist change. While other nimble innovators in the wings will welcome disruption and innovation.

The central bank is the grandmaster in this equation because it supervises licensed banks and it controls all the big players in the payment landscape through policy and position papers. In a nutshell, the SARB can do what it wants within its ambit, which is ensuring the cost-effective availability and integrity of notes and coins.

Leading up to the feasibility study there will be too much focus on the technologies that the SARB may test in its sandbox. The media duly mentions blockchain and cryptocurrency in its hype.

Security will be the main feature. The SARB also likes to retrofit its technology and will want to have a mechanism that is analogous to how the currency management department currently requires the SA Mint and SA Bank Note to create, distribute and then destroy the currency.

A National Debate About a Nation-State Digital Coin

This introduction of a new currency format is a big deal for all South Africans and other citizens globally. New forms of currency don’t come along every day.

Importantly cash (banknotes and coins) are citizens’ only private and uncensored means of payment currently.

A national debate needs to begin in South Africa and globally on the principles of a Nation-State Digital Coin.

The technological choices of how digital currency is delivered are mostly irrelevant for citizens. It is the defining principles like privacy and censorship (who controls when the currency can be confiscated) that need democratic participation and privacy protection.

we must debate the principle to make the digital currency a credit-push only. Debit-pulls are ridden with problems.

The principles of censorship and privacy are of paramount importance. How much surveillance, social engineering, and control should we give to the government? Should we allow the state to digitally surveil or confiscate money based on moral decisions for the following circumstances (and many more):

  • “What if a citizen wanted to pay a membership or make a donation to an opposition party. What if such action is not to the liking of the current voted party?”
  • “If a citizen wanted to pay someone for cannabis for their sick grandmother”
  • “What if a disabled citizen wants to pay for a massage by an unregulated sex-worker?”
  • “How will it work if a citizen uses his monthly limit to buy alcohol, gamble, or play the national lottery”

The design of digital currency should be influenced by how we as a society feel about a central bank, or government being in control of the answers to these ‘what if’ questions, and others.

Possible solutions

There are often limits on daily withdrawals for cash at bank branches or ATMs. Once the cash is in the pocket of the citizen it is private and uncensorable.

  1. We can place limits on digital currency balances and the size of payments.
  2. Institutions can flag contentious payments as problematic based on societal rules which we can present randomly and anonymously. A jury-like mechanism asking ten citizens to vote (swipe left or right) before making their own payment. If at least seven citizens vote to allow the payment then it goes through.
  3. The possibilities of citizen involvement in solutions to centralized decision making are only limited to our imagination.

Note: Digital identity will as a corollary need to become a national agenda and talking-point.

Many citizens nationally and globally have suffered under unjust and inhumane laws. Consequently, citizens must be wide awake as they protect their rights to privacy and censorship. We have to find a balance between citizens and the state.

The time for public debate on the digital currency has arrived.

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Disclaimer Notice:

This article is intended to educate and should in no way be seen as investment advice or an enticement to use the platform. Bitcoin is highly volatile with big profit opportunities but you should also remember that you could lose part or all of your investment whenever you take part in any high risk investment. Bitcoin trading is not a regulated industry in South Africa, which in itself carries additional risks. IF YOU ARE NOT AN ASTUTE BITCOIN TRADER, SEEK INDEPENDENT FINANCIAL ADVICE BEFORE MAKING ANY INVESTMENTS.