Blockchain technology and the centralised interbank payment system in South Africa

Abstract

Technological innovation in the financial industry has evolved immensely over the past decade. The innovation in the payment space has grown leaps and bounds with online and mobile payments. The South African Multiple Option Settlement System (SAMOS) which is a subset of the general ledger of the South African Reserve Bank (SARB), is the solitary settlement system in South Africa and is owned and operated by the SARB since 1998. Under the National Payment System (NPS) Act, any entries passed are final and irrevocable. The messages of SAMOS are based on the standards and message types of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) (CPSS, 2012). Recent technological innovation in Blockchain which is a type of Distributed Ledger Technology (DLT) based system has assured enhancement in payment systems without the need for extensive networks and centralised administrators. DLT enables the direct exchange of tokens of value and allows real-time messaging and clearing within a cryptographically secure and resilient environment (Patel, 2017). There are numerous Central Banks around the world that have or are developing prototypes for their domestic interbank settlement systems using DLT. The first phases of the projects were proof of concepts that explored opportunities for DLT to improve the existing payments systems or Real-time Gross Settlement Systems (RTGS) infrastructure (Zhao, Zhang, Rutter, Thompson and Wan, 2018). Many Central Banks that have completed proof of concepts have documented that that their projects were successful. The aim of this research was to identify the perceived obstacles to the adoption of Blockchain technology for interbank payments in South Africa as numerous successful proofs of concept projects have been concluded by various Central Banks globally including South Africa. A qualitative research paradigm was used for this research and semi- structured interviews were conducted to collect data. The process of purposive sampling of iii non-probability sampling method was applied. This allowed the researcher to use his experience and ingenuity to deliberately select the participants in a manner that the sample was regarded as being representative of the relevant population. The data collected was analysed and interpreted through thematic analysis. The data analysis revealed that Blockchain technology can work for interbank payments in South Africa however the biggest obstacles are the negative perception around Blockchain technology due to the volatility of Bitcoin cryptocurrency, the central authority fear of losing control, the lack of a compelling business case, business continuity risk, challenges in terms of the interoperability of Blockchain based DLT systems with Banking legacy systems, the cost benefit of a Blockchain based DLT system and the lack of technology maturity and skills in South Africa. The Central Banks globally together with the Bank of International Settlements should meet to compile a payments systems business case. Technologist must be excluded from this meeting. The business case must be based on the requirements and need for a Blockchain based DLT payment system. The Principles for Financial Market Infrastructures (PFMIs) should be the one of the main focus areas as it helps to adopt the appropriate platform for a Blockchain based DLT system. Once a compelling business case is derived, the South African Central Bank should organise a meeting with the South African financial services industry to discuss the Governance and Regulation of a Blockchain based DLT system.