As digital currencies gain momentum globally, the banking sector is facing increasing pressure to innovate and adopt emerging technologies. Despite central banks worldwide piloting central bank digital currencies (CBDCs), local banks in South Africa remain hesitant, potentially missing out on substantial opportunities to drive innovation and efficiency in the financial sector.
Sergio Barbosa, Chief Investment Officer at Global Kinetic, highlights that 44 countries are currently piloting CBDCs, with over 130 nations actively exploring the potential of digital versions of their national currencies. Despite this growing interest, local banks appear reluctant to embrace the full potential of digital currencies.
“The reasons for the incongruous response are varied, but banks should be aware that they could be missing out, and that playing catch-up later could prove difficult,” Barbosa cautioned.
The Rise of Central Bank Digital Currencies
The South African Reserve Bank (SARB) has already made significant strides in this area. In April 2024, the SARB unveiled its Digital Payments Roadmap, aimed at accelerating the uptake of digital payments in the country. Project Stimela, a SARB initiative, is exploring the feasibility of a CBDC as electronic legal tender for general-purpose retail use, complementing traditional cash transactions.
The growing consumer interest in digital currencies further underscores the need for banks to act. Luno, a cryptocurrency exchange, reports that Pick n Pay customers are now spending over R1 million per month on groceries using cryptocurrencies, a significant rise from just R25,000 a year ago.
Banks’ Cautious Approach
While some South African banks have begun to engage with cryptocurrency and blockchain technology, their involvement remains limited. ABSA, for example, enables Luno customers to buy and sell Bitcoin and Ethereum directly from their ABSA accounts. Nedbank provides banking services to crypto exchange Ovex and has been involved in SARB’s CBDC trials.
However, these efforts have not yet resulted in widespread adoption. “We expected there to be a flurry of activity around putting better settlement rails in place using blockchain technologies or latching onto the CBDC efforts from central governments,” Barbosa remarked. “But core modernisation projects remain the focus at the moment with just a sprinkling of digital asset infrastructure projects.”
Barriers to Adoption
One of the key obstacles to adopting digital currencies and blockchain technologies is the heavy investment banks have made in their existing core banking systems. Transitioning to new crypto-based payment rails would require significant resources, and banks may be reluctant to undertake such efforts if their current systems, although suboptimal, are still functioning.
In addition to the financial costs, banks are also concerned about managing the growing number of integrations required for anti-money laundering (AML) compliance, strong authentication, and payment rails. According to Barbosa, banks currently manage between 10 and 20 such integrations, a number expected to balloon to 100 in the coming years.
Regulatory uncertainty also plays a role in banks’ cautious stance. While regulators are actively managing emerging technologies, the evolving nature of the regulatory landscape may make banks hesitant to fully embrace digital currencies.
Missing Out on Opportunities
Despite the challenges, Barbosa warns that banks risk missing out on significant opportunities by not embracing digital currencies and blockchain technologies. Companies like Wise and Ripple are already using crypto rails to facilitate cross-border transfers, improving speed, cost, and accessibility. By not adopting these technologies, banks could fall behind in the race to offer efficient, cost-effective cross-border payments.
Blockchain-based identity and credit scoring solutions also offer a potential solution to the challenge of assessing creditworthiness for customers with limited credit history, particularly for vulnerable groups like immigrants. These technologies could help banks improve financial inclusion and better serve underbanked populations.
For banks focused on core system modernisation, blockchain technologies could still play a role in streamlining operations, reducing costs, and improving efficiencies. Barbosa predicts that banks that fail to stay nimble and explore these new technologies may face consolidation pressures in the coming years.
“By not actively exploring and adopting digital asset infrastructure technologies, banks may be missing out on opportunities to radically drive innovation, improve operational efficiencies, and overall competitiveness,” Barbosa concluded.
The banking sector faces a critical juncture as digital currencies and blockchain technologies continue to reshape the financial landscape. Banks that embrace these innovations could position themselves as leaders in the digital economy, while those that remain cautious risk being left behind.
