The South African Reserve Bank (SARB) recently unveiled the findings of study which reinforces the growing view that the blockchain technology improves the performance and efficiency of an entire banking ecosystem.
In consortium with seven leading South African commercial banks, the SARB partnered with ConsenSys Solutions to build a proof-of-concept grounded in real-world performance, confidentiality requirements, and diverse bank hardware on the blockchain without a single point of failure.
The conclusions drawn from this study dubbed Project Khokha, fit well with a pattern observed with studies elsewhere. Central banks need to embrace this technology if they wish to become more efficient and stay relevant.
It appears the SARB is now satisfied that it can increase the resilience of interbank payment systems while maintaining or reducing the overall cost of those systems through use of the blockchain. That was the main thrust of the study.
SARB, through Project Khokha, sought to replicate interbank clearing and settlements by deploying a ‘permissioned’ blockchain network.
According to SARB, this exercise was made to assess whether the blockchain technology could significantly improve the performance, scale, and confidentiality of payments in a real world simulation.
SARB’s endorsement of the study findings seemingly runs counter to its previous stance on this technology as outlined in a 2019 consultation paper. SARB asserted then that crypto-assets— or cryptocurrencies as they are widely known—were an innovation that could materially impact on financial services provision in that country. The so-called crypto-assets are underpinned by the same blockchain technology that SARB now favours.
In particular, SARB was concerned with the proliferation of what it termed ‘non-government’ issued digital currencies, which all attempt to emulate Bitcoin, the pioneering and most successful crypto. The entire consultation paper gave a glimpse SARB’s perception of (if not determination against) privately issued cryptocurrencies and their respective blockchain networks.
However, Project Khokha, which SARB is hailing as a success, runs on the Ethereum Quorum blockchain, a ‘non government’ blockchain network. Project Khokha received the ‘Best Distributed Ledger Initiative’ award from Central Banking Publications in 2018 even though it incorporates a non-government blockchain network.
And now the deputy governor of SARB, Francois Groepe, says they are out to know more about the blockchain and its use cases. In comments attributed to him, Groepe says:
“Our goal with Project Khokha is to contribute to the global initiatives which assess the application and use cases of distributed ledger technology (DLT) through this collaborative effort piloted by the South African Reserve Bank (SARB) together with the national banking community.”
These comments may suggest a changed stance or approach by SARB and one which Project Khokha appears to vindicate.
Important Project Khokha milestone
Project Khokha achieves an important milestone, one which effectively makes the blockchain technology more attractive to central banks.
SARB—and indeed many central banks—insist on maintenance of confidentiality when handling financial transactions and that is something permissionless blockchain networks may have failed to achieve. Nevertheless, the same permissionless networks have been proven to be faster at executing transactions than any centralized system.
Project Khokha has apparently proved that both can be achieved when the right technologies are deployed.
According to SARB, this project marks the first implementation of Ethereum Quorum with the Istanbul Byzantine Fault Tolerance (IBFT) and Pedersen commitments to create a distributed ledger between participating banks. The tokenization of the South African Rand (ZAR) enabled a domestic payment system that allowed participating banks to pledge, redeem, and track balances on the blockchain without a centralized central bank system— that is, without a single point of failure.
This combination of technologies provided robust confidentiality while permitting the transaction throughput required.
Central banks more conciliatory towards the technology than before
In the meantime, it appears SARB is not the only central bank to seek a better understanding of the blockchain technology. Recently, it was widely reported that a group of central banks, which includes the Bank of England, Bank of Japan, European Central Bank etc, had created a group to share experiences as they assess the potential uses cases for a central bank digital currency (CBDC) in their respective jurisdictions.
Some of these central banks are already running trials of CBDCs while others plan to do the same in the next few years.
Before this, the Official Monetary and Financial Institutions Forum (OMFIF), working in conjunction with International Business Machines (IBM), unveiled findings of another study touting the potential of retail CBDCs.
This particular study correctly observes that the continuing decline in the use of cash in many developed countries as well as the growing costs and logistic difficulties of handling cash everywhere have spurred much pragmatic thinking about the ability of emergent technologies to enhance materially the cost-effectiveness, resilience and security of both national and international payments infrastructures.
Subsequently, the OMFIF study goes on to encourage central banks to accept and learn from the success of early crypto-assets like Bitcoin. OMFIF advises;
“Whether or not central banks like the sight of these developments – which generate an inherent threat to their senior position in the financial system and to their monetary sovereignty – they must remain alert to shifts in payments habits.”
The reality is that digital currencies, either privately or publicly issued, will be an unavoidable part of the global monetary system. It is in central banks’ best interest that they are neither left behind nor displaced.
In meantime, below we share some of the important findings of Project Khokha that excites the SARB;
- 70,000 transactions executed in less than two hours. This rate achieved the transaction performance target, condensing one business day’s worth of transaction processing time by 75%.
- 95% of block prorogation time in less than one second and 99% propagation in less than 2 seconds. This demonstrated that acceptable performance is achievable, despite the geographical distribution of the banks’ hardware.
- Maintained full privacy while meeting required transaction volumes. This was the first time that the (Istanbul Byzantine Fault Tolerance) IBFT consensus mechanism, Pedersen commitments, and range of proofs for confidentiality were used with Ethereum Quorum. Together these solutions delivered unprecedented scalability, resilience, confidentiality, and settlement finality.