As the Bank enters its second century, political threats and technological change will determine how it goes about its business and whether it will be around at all. With multiple state organ failures, an economy struggling to grow, high unemployment, and increasingly tumultuous politics, there has to be a question about its future existence, and certainly as a body with constitutionally entrenched independence.

Inflation controlled

The best that can be said of the Bank is that it has contained inflation, rather than prevented the heavy destruction in the value of the Rand.  The cumulative effect of inflation means that the Rand today is worth less than six percent of its value at the time of its creation in 1960. On other scores the Bank has done well in creating a stable financial system upon which the economy could grow. Compared to many other countries, there have been few bank collapses in South Africa and none, so far, of major financial institutions. 

An end to the Bank’s independence would end its credibility, as the heavy hand of politicians wanting to spend more to win elections would be seen in all its decisions. In what is an international quirk, the Bank has a stock exchange listing and is privately owned. This is a trip wire, and while nationalisation would not on its own mean it was no longer independent, it would justifiably ring alarm bells.

About three years ago, President Cyril Ramaphosa won his power play within the Africa National Congress with its (now suspended) Secretary General, Ace Magashule, on the issue of Reserve Bank nationalisation. There has been quiet on the matter since, but it is still a cause for the radical economic transformation wing in the party.

Grabbing the ability to print money and spend foreign exchange reserves is a cause that could easily find mass appeal. There is also a growing support for “modern monetary theory” with its promise that blow-it-all money creation creates sustained growth. If independence goes, the Bank’s ‘lender of last resort’ function to bail out banks for the sake of the financial system could also be compromised.

Threat from cyber currencies

Even if the Bank remains independent, the threat from cyber currencies is certain. Any compromise to its independence has to increase the threat to its role from private virtual money.  While the Bank could use tighter exchange controls to prevent South African residents investing in private digital currencies, it is not clear that this can really be that effective. While the internet facilitates monitoring, there will always a cyber arms race to counter this and prevent prying eyes.

Like many other central banks around the world, the Reserve Bank is looking into establishing a central bank digital currency (CBDC). This is a digital form of money aimed at providing the attributes of cash and electronic payments for consumers for general retail purposes.

Central banks around the world are in a race to establish digital currencies to prevent the private cryptocurrencies from gaining further traction.  The threat of massive monetary value creation without proper regulation horrifies central banks. Cryptocurrencies threaten the very role of central banks in regulating economies and could in time disrupt payment systems and financial markets. Making it easy to choose what currencies to hold and use prevents central banks from playing God.

If people are free to choose currencies, the financial system will be taken back to the era of Italian city states or Scotland. prior to the era of central banking. Private banks were able to issue money so long as they retained confidence that their money was backed by holdings of gold.

Cue from China

Many countries are likely to take a cue from China, which has forced its bank to shut down all cyber currency activity. The US will soon come up with a regulatory framework for virtual currencies that is likely to allow greater scope for them in their financial system.

If they cannot obtain information on the distributed blockchain ledgers of cryptocurrencies, central banks would be denied vast amounts of information. The move by central banks to create virtual currencies is as much as anything a move to obtain detailed information on transactions.

In theory investment in a virtual currency should require the most rudimentary form of digital identity, but in practice use of central bank digital currencies is likely to require much more than a number. The bet would have to be that the Reserve Bank will require full personal details with ID numbers and tax numbers. It is almost inevitable that digital money from the central banks will be heavily about social control. After all, central banks will have their centralised blockchain ledger on a server, which they can share with other big private and official bodies. In the blockchain ledgers is real data on price movements, individuals, industries – a real treasure trove.

Rates and taxes, fines, and much more will be deducted from your balance with Big Brother. And should the government wish to spread helicopter or “programmable” money about, a bit of code can be written which will allow deposits into the accounts of those whose income is below a certain amount. No need for forms or waiting in queues. Retail banks will still exist to extend credit but will be part of comprehensive data sharing arrangements with the Big Brother Bank.  And don’t think your data is safe with the non-government virtual currencies issued by either the big technology platforms or the virtual currencies.

With more accurate and real time data, the hope would be that monetary policy decisions can be taken with greater precision. Machine learning algorithms that are tested and refined are likely to rule monetary policy decisions. But giving machines the final decision will always present risks.

The promise of digital currencies will lure many central banks into terminating physical money.  India’s experience in trying to restrict the role of physical money should be a lesson for economies, like ours, with large informal sectors. To reduce crime and corruption the Indian government withdrew large denomination notes, representing nearly 90 percent of cash in circulation. The replacement of these with smaller denominated bills was uneven and delayed, resulting in an economic crash. 

Like all central banks, the Reserve Bank will increasingly have to fight its corner to remain relevant. If its independence is eroded, it is almost certain that offshore cyber currencies will supplant its key function. While libertarians might celebrate, it is almost certain that our growth would be hobbled by reliance on inflows of cryptocurrencies alone.

First published by the Daily Friend. The views of the writer are not necessarily the views of the Daily Friend or the IRR.

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Jonathan Katzenellenbogen

Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also...

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