Overcoming Inertia Around Digital Currencies Could Boost Banking Innovation

Digital currencies and blockchain technology have long been the subject of fascination for central banks across the globe. With digital asset infrastructure, such as central bank digital currencies (CBDCs) and unified ledger systems, gaining traction, regulatory bodies are showing increased interest in exploring these technologies. As new CBDC pilots emerge almost monthly, local banks, particularly in South Africa, are taking a more measured approach to adopting this revolutionary technology.

According to the Atlantic Council’s Central Bank Digital Currency Tracker, there are now 44 countries piloting central bank digital currencies. The scope of these projects has broadened considerably, with 134 countries and currency unions—amounting to 98% of the global economy—actively investigating digital versions of their national currencies. Yet, despite the enthusiasm from central banks and a growing appetite among consumers, South Africa’s private banking sector has remained cautious, investing only minimally in digital currencies and blockchain technologies.

This cautious approach might soon need to be reevaluated, according to Sergio Barbosa, the Chief Information Officer at Global Kinetic, a South African software development company specializing in enterprise solutions. “We expected a flurry of activity around digital currencies and blockchain adoption, especially given the possibilities they offer in terms of payments integration and modernisation,” says Barbosa. “But instead, banks are sticking to their core system modernisation projects, with only a few exploring new digital asset infrastructure.”

Banks, Governments, and Consumers: A Disconnect

While local banks may be slow to embrace digital currency innovation, the South African Reserve Bank (SARB) has made clear strides in its efforts to modernise the nation’s payments infrastructure. In April 2024, the SARB released its Digital Payments Roadmap, an ambitious plan aimed at accelerating the uptake of digital payment solutions across South Africa. Project Stimela, SARB’s ongoing initiative, explores the feasibility of issuing a CBDC as electronic legal tender for general retail use, intended to complement, rather than replace, cash.

Retail consumers have already begun showing their willingness to experiment with digital currencies. Pick n Pay, one of South Africa’s largest supermarket chains, has seen monthly crypto currency payments surge from R25,000 to over R1 million in the span of just one year, according to data shared by Luno, a local cryptocurrency platform.

Despite the demand from both regulators and consumers, South African banks have been hesitant to engage fully with digital currencies. Banks such as ABSA and Nedbank have ventured into the space to a limited degree, with ABSA facilitating Bitcoin and Ethereum transactions through Luno, and Nedbank providing services to crypto exchange Ovex. Yet these moves fall short of full-scale blockchain adoption or a more aggressive push toward digital currency integration.

Systemic Risks and Legacy Systems: Barriers to Entry

One of the primary reasons banks remain hesitant to invest in digital currencies and blockchain technologies stems from their entrenched legacy systems. According to Barbosa, banks face significant logistical and financial challenges when it comes to transitioning from traditional systems to new blockchain-based payment rails. “Most banks are deeply invested in their existing core banking systems,” he notes. “There’s a perception that shifting to blockchain will require significant effort and investment, which some banks may be reluctant to undertake, especially when their current systems are functioning, albeit sub-optimally.”

Further complicating matters are the growing number of vendor integrations banks are required to manage. The sheer volume of integrations for systems such as Anti-Money Laundering (AML) services, strong authentication, and various payment rails can overwhelm banks, making it difficult to allocate resources to new, disruptive technologies like blockchain. Barbosa warns that in just a few years, the number of vendor integrations may grow to as many as 100, adding further strain to already overburdened financial institutions.

“There’s not just a capacity issue; it’s also about systemic risk,” says Barbosa. “Banks may hesitate to adopt blockchain and digital currencies due to regulatory uncertainty. While the regulators are doing their best, the landscape is still evolving, and banks are understandably cautious about fully embracing such changes.”

The Cost of Delay: Missed Opportunities for Innovation

While there are valid concerns for banks, those that fail to engage with digital currencies may find themselves at a competitive disadvantage. International companies like Wise and Ripple have successfully integrated crypto-based payment rails to facilitate cross-border transfers and remittances, improving the speed and reducing the cost of these transactions. By not exploring similar technologies, South African banks may be missing out on opportunities to enhance their own offerings, particularly in the areas of cross-border payments and financial inclusion.

For example, Barbosa notes that blockchain-based identity and credit scoring solutions could revolutionise the way banks assess creditworthiness, particularly for underserved and vulnerable groups such as immigrants. These systems have the potential to boost financial inclusion by providing banks with alternative methods of assessing customer credit, allowing them to better serve underbanked populations.

Even for banks that remain focused on modernising their core systems, there are opportunities to lean into blockchain technology to streamline operations and reduce costs. Barbosa predicts that the next few years will see a consolidation of the financial services industry, and banks that do not adapt to new technologies may find themselves left behind. “We see another industry bubble on the horizon,” he says. “Banks that don’t stay nimble could be at risk of being swallowed up.”

To remain competitive, Barbosa advises banks to seek out partners with expertise in both traditional banking infrastructure and emerging technologies. This, he argues, could help banks navigate the complexities of digital currency adoption without compromising their day-to-day operations.

Looking Ahead

The growing interest in digital asset infrastructure represents a critical juncture for South African banks. As consumers, governments, and financial institutions across the globe continue to experiment with digital currencies, the onus will be on local banks to decide whether they want to lead the charge or risk falling behind. For now, the ball remains in their court.

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