A rand-backed cryptocurrency – here’s how it could work

Cryptocurrencies, such as Bitcoin and Ethereum, have become well known for their volatile value.

In contrast to this, ‘stablecoins’ are cryptocurrencies that have been specifically designed to have a stable value, notes Seshree Govender, a senior associate at Webber Wentzel, who questions whether a rand-backed stablecoin could work.

Stablecoins are crypto assets which are backed by the value of a ‘stable’ asset, or a basket of assets.

As the value of the backing asset will not necessarily be subject to the same fluctuating circumstances applicable to the value of cryptocurrencies, pegging a stablecoin to an asset can stabilise the value and inherent purchasing power of the stablecoin cryptocurrency so that it may be used as a viable and economic medium of exchange as opposed to a speculative asset.

While stablecoins can be stabilised by various types of backing assets, the most widely recognised is fiat currency. Such stablecoins are backed on a 1:1 ratio with a particular fiat currency value (e.g. the rand).

Fiat-backed stablecoins are thus, able to operate as a form of digital cash that is issued and circulated through a decentralised economy and payment system.

Introducing the rand-backed stablecoin

A rand-backed stablecoin would be a cryptocurrency with a stable value and purchasing power equal to that of the rand.

For a rand-backed stablecoin to operate as an effective and sound medium of exchange, the issuing/minting and the redemption/burning of the rand-backed stablecoin must be carefully administered.

The issuing/minting of a rand-backed stablecoin should only occur upon the issuer receiving a fiat rand to back the coin’s value.

The stablecoins in circulation at any given time must be backed on a 1:1 value basis with the fiat rands received and held in trust by the issuer.

Once an issued rand-backed stablecoin is presented by the bearer to the issuer for redemption of the fiat rand value backing the coin, the issuer must give effect to the redemption and burn the stablecoin(s) redeemed by removing it from circulation.

A rand-backed stablecoin can be issued on a decentralised payment network comprising of the relevant merchants and consumers that will utilise the stablecoin as a method of payment; the stablecoin service providers; and the issuer, all of whom will serve as the verifiers and authenticators of stablecoin based transactions.

This decentralised payment network will be built on a distributed ledger that will serve as an immutable record of the circulation of the rand-backed stablecoins, the collective coin value and/ or stablecoin transactions.

Is this deposit-taking?

Setting aside the cryptocurrency debate as to whether a fiat-backed stablecoin is a true cryptocurrency where the custodian of the fiat reserves and issuance of the coins itself are centralised, a more pertinent legal question to be asked is whether the issuing/ minting and redemption/ burning of a rand-backed stablecoin can be regarded as deposit-taking which is the business of bank.

A “deposit” is defined in the Banks Act as an amount of money paid by one person (the depositor) to another on the condition that the value of such money will be repaid by the latter person to the depositor, on the demand.

As the act of deposit-taking is the business of the bank, this raises the question as to whether the issuer of a rand-backed stablecoin may only be a registered bank under the Banks Act.

Is this e-money?

In a position paper published by the South African Reserve Bank in 2009, “e-money” has been defined as “monetary value represented by a claim on the issuer.

This money is stored electronically and issued on receipt of funds, is generally accepted as a means of payment by persons other…” The definition of e-money aligns quite closely to the economic operation of a rand-backed stablecoin.

As such, the introduction of a rand-backed stablecoin, within the current South African payments environment, may be regarded as e-money taking the form of a cryptocurrency.

Importantly, while e-money currently flows through the established South African payments clearing and settlement system, a stablecoin version of e-money would not necessarily do the same and would instead utilise a decentralised payment network for clearing and settlement.

Is this legal tender?

In asking the deposit-taking and e-money questions pertaining to the introduction of a rand-backed stablecoin, it’ noteworthy that the concept of “money” or “monetary value” is an inherent requirement to both the meaning of a “deposit” and the “e-money” payment instrument.

Essentially, before asking whether only banks can issue rand-backed stablecoins or whether stablecoins can perform the same payment function as that of e-money, one must first ask whether a rand-backed stablecoin will be regarded as legal tender.

In terms of the ‘Consultation Paper on Policy Proposals for Crypto Assets’ issued by the Intergovernmental FinTech Working Group in 2019, the regulatory working group has taken the view that crypto assets would not be regarded as legal tender.

Based on the manner in which the regulatory working group has defined a crypto asset in the policy paper, a stablecoin would fall directly within the ambit of a crypto asset despite being backed by fiat currency.

As such, on the current stance taken by the regulator, a rand-backed stablecoin will not be regarded as legal tender despite serving the same purpose as that of e-money, (albeit moving through a different payment system).

Arguably the issuer of rand-backed stablecoin will not need to be a bank as the issuance of a coin may not necessarily be regarded as deposit-taking.

Furthermore, rand-backed stablecoins will not necessarily be required to move through the established South African clearing and settlement payments system as it is not a recognised payment instrument such as e-money.

Minding the gap

Enabling the issuing and circulation of a rand-backed stablecoin may open an interesting avenue of innovation in the South African payments industry by providing a decentralised means of issuing monetary value and clearing and settlement payments using such stablecoins.

The introduction of a rand-backed stablecoin may be able to achieve financial inclusion in the payments industry through its nature as a decentralised value and payment system.

However, it will only be able to achieve such innovation if such stablecoins can be regarded as legal tender.

As South Africa is currently transitioning from a traditional and financially exclusive payment regulatory regime to a more innovative and inclusive regime, the introduction of a rand-backed stablecoin, which it not regarded as legal tender as yet, may bring with it systemic risk and potential detriment to the payments industry if done without sufficient regulatory consideration and supervision.

The recent auditing concerns surrounding the US Dollar-backed “Tether” stablecoin and its fiat currency reserves illustrates the potential risk that can arise in the instance where the custodian of the fiat currency reserves and issuer of the fiat-backed stablecoin are not institutions subject to regulatory oversight.


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A rand-backed cryptocurrency – here’s how it could work